What do you need to know about the new bankruptcy regime in Scotland?

16 Jun 2014

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What will proposed changes to bankruptcy legislation in Scotland mean for the insolvency sector? James Lloyd of Harper Macleod considers the proposals and says the provisions regarding contributions and acquirenda will, hopefully, result in a better return being made to creditors.

Original news

The Bankruptcy and Debt Advice (Scotland) Act 2014 (BDA(S)A 2014) makes provision for the Scottish Parliament to amend the Bankruptcy (Scotland) Act 1985 (B(S)A 1985). Its provisions include mandatory advice to be given to debtors from an approved money adviser before making an application to enter into sequestration, and for a specific group of vulnerable debtors to receive targeted financial education, to help improve their awareness of the underlying causes of financial hardship.

What are the key changes made to B(S)A 1985?

The changes come in two parts. The first part is intended to bring about a ‘Financial Health Service’ for Scotland providing a modern system of debt advice and debt management that properly balances the rights of debtors and creditors and is fit for purpose in today’s economic environment. For example, debtors must receive compulsory money advice from a debt advisor before applying for their own sequestration or where, again for example, they have been sequestrated and have been previously sequestrated in the preceding five years. A moratorium on enforcement action is introduced to protect debtors while they make applications for their own sequestration

Debtors will become more accountable and will be expected to make a contribution to their debts where they can. Liability for such a contribution will be assessed using a common financial tool to ensure consistency of approach, and contributions will last for four years, rather than three as at present. The period in which acquirenda (assets acquired after the date of sequestration but before the date of discharge) can be claimed for the estate is extended to four years from the date of sequestration. If debtors fail to cooperate with their trustees, they can lose the right to be automatically discharged after one year, as can debtors who cannot be traced.

The second part makes structural changes to the bankruptcy process with a view to streamlining and reducing the costs of certain aspects of procedure. One of the key changes made is that the Accountant in Bankruptcy (AIB), who is responsible for supervising the bankruptcy process in Scotland, has devolved to herself and her staff a number of powers that were previously only exercisable by the Sheriff. For example, applications by private trustees for directions or by all trustees to cure certain defects in procedure must now be made to the AIB. Bankruptcy restriction orders for less than five years may also be imposed by the AIB.

There are also a number of provisions that tidy up anomalies and deal with practical problems that have arisen since the last major changes were introduced in 2008. One significant change is that discharge by means of composition, a procedure that was tortuously complicated and rarely used, has been abolished completely.

What practical effect will BDA(S)A 2014 have for insolvency practice in Scotland?

It is hoped that the financial education provisions will have the effect of changing attitudes of people in relation to their personal finances and promote a more responsible approach to the use of credit. Whether it will actually have that effect in a culture that has become used to easy credit and instant gratification remains to be seen, although the AIB cites seat belt and drink driving laws as examples of legislation changing previously entrenched attitudes for the better.

The more practical effects on a day-to-day basis are to be found in the procedural changes which should simplify and reduce the costs of routine matters that previously required the intervention of the courts. The provisions regarding contributions and acquirenda will, hopefully, result in a better return being made to creditors.

BDA(S)A 2014 as a whole really picks up where the changes introduced in 2008 by the Bankruptcy and Diligence etc (Scotland) Act 2007 left off, resulting in a bankruptcy and debt relief system that can be tailored to the individual needs of debtors rather than being a ‘one size fits all’ process.

Are there any concerns around the provisions of BDA(S)A 2014?

As is often the case, the concerns that have been raised vary depending on which side of the debtor/creditor/trustee fence that the critic sat on. The increases to the periods of time that a debtor must now make a contribution from his or her income and during which acquirenda is caught, drew criticism from the pro debtor lobby, whereas the obligations surrounding financial education have been received with some skepticism by insolvency practitioners.

The provisions that attracted universal criticism were those giving the AIB powers that were previously exercised by the courts. Concerns about the AIB’s impartiality and competence to deal with such matters have not been allayed by the fact that there does remain an ultimate right of appeal to the Sheriff, which right of appeal goes beyond points of law but includes matters of fact and the merits. While in principle such concerns about potential injustice are valid the reality is likely to be more mundane.

Does BDA(S)A 2014 highlight any particular differences of approach between Scottish insolvency law and the law in England and Wales?

BDA(S)A 2014 has to be seen in a wider context than simple insolvency law. The Scottish system of bankruptcy and debt relief has undergone major change in the past six years or so. The financial crisis and the changing face of personal credit, for example the emergence of ‘pay day lenders’ and companies such as Wonga, have given impetus to the reform of a system that was not radically different from that which was first introduced at the turn of the last century. BDA(S)A 2014 is designed to fit into and improve upon an holistic system that offers a number of debt relief products aimed at providing protection for debtors but at the same time ensuring, so far as possible, that creditors receive a fair return. As part of the consultation process to BDA(S)A 2014, the AIB investigated various bankruptcy regimes throughout the world with a view to taking the best bits and formulating a system that was world leading and fit for the twenty first century.

Against this wider background, the key difference between the approaches of the two jurisdictions is the ability of the Scottish system to better tailor remedies to the particular circumstances of each case. The provisions in relation to financial education are particularly innovative. The English system, unchanged since the introduction of the Enterprise Act 2002 is, with respect, rather blunt by comparison.

What should lawyers be paying attention to in BDA(S)A 2014?

Lawyers advising debtors should be paying attention to the new time limits in BDA(S)A 2014, particularly those relating to contributions and acquirenda. One example of this is that currently debtors who have personal injury claims can avoid compensation payments falling to their creditors by delaying raising court action until after their discharges on the first anniversary of their sequestration. The four year period will mean that debtors must decide to raise actions and have the compensation paid to the trustee or lose the claim altogether by virtue of prescription.

Lawyers who act for creditors should also note that there is now a time limit of 120 days from that date of notification of sequestration by the trustee to submit claims otherwise they will not be entitled to do so and the right to claim in the sequestration will be lost. Provision is made for late claims in ‘exceptional circumstances’ although there is currently no guidance as to what is meant by that.

The procedural changes relating to how applications for directions and to cure defects should be remembered so as to ensure that such applications are sent to the correct authority and within the correct time scales, especially if appeals to the Sheriff are contemplated.