Significant changes to Scottish insolvency regime

Laura Borland, senior solicitor, and Rachel Grant, partner, outline the recent changes to Scottish bankruptcy law.

As of 1 April, significant changes to the personal insolvency regime in Scotland came into force, with the introduction of the Bankruptcy and Debt Advice (Scotland) Act 2014.

The aims of the act are to:

  • help the financially vulnerable
  • make the bankruptcy process (‘sequestration’ in Scotland) more streamlined
  • ensure that debtors engage with the process
  • remove some of the administrative burden on the courts

The main changes brought in by the act include:

  • Debtors must obtain advice from an approved money advisor before applying for sequestration.
  • A trustee must require a debtor to complete a financial education course if certain conditions apply, such as if the debtor had been sequestrated within the last 5 years, and the trustee believes it appropriate for that debtor.
  • A common financial tool has been introduced as a standard mechanism to calculate any surplus income available to a debtor, to allow a contribution to be made towards repayment of debts.
  • An income contribution order will be fixed for a debtor to make contributions from income for a period of 48 months. If a debtor fails to comply with the order, the trustee may instruct the debtor’s employer to pay. A debtor can seek a payment break or variation of contributions.
  • A 6-week moratorium has been introduced preventing certain enforcement action, including creditor petitions for sequestration. The moratorium applies where a debtor has given notice of intention to apply for sequestration to the Accountant in Bankruptcy (AiB). The AiB has a supervisory role in respect of personal insolvency in Scotland, along with the courts. Only one moratorium period is available in any 12-month period.
  • A new minimal asset process (MAP) has been introduced, replacing the current low income low asset (LILA) procedure. To be eligible, a debtor must meet a number of conditions, including having debts of between £1,500 and £17,000, being unable to pay a contribution, and total assets not exceeding £2,000 or any single asset worth over £1,000 (excluding motor vehicles, which can be worth up to £3,000). A debtor will usually be automatically discharged from a MAP after 6 months.
  • The discharge of debtors from sequestration will no longer be automatic (other than MAP). The trustee must report to the AiB without delay 10 months after the award of sequestration and, depending on the debtor’s conduct, the AiB will grant a certificate of discharge.
  • A creditor must lodge a claim within 120 days of being given notice by the trustee, or risk losing out on a dividend, unless there are exceptional circumstances that prevent the claim being lodged in time.

The AiB’s new functions

Several functions previously dealt with by the court have been transferred to the AiB:

  • Applications for recall of sequestration must be made to the AiB where the ground for recall is payment of debts in full. The court will continue to deal with recall on other grounds.
  • An application by a trustee for directions must be made to the AiB, although the AiB can refer the matter to the court before making a direction.
  • Applications for the removal and replacement of trustees are now made to the AiB.
  • The AiB can make bankruptcy restriction orders of between 2 and 5 years. The court continues to deal with orders for longer periods.
  • Applications to cure defects in procedure will be made to the AiB where there is a clerical or incidental error or waiver of a time limit is sought. The AiB cannot interfere with any order made by the court.
  • Where a person wishes to appeal a decision of the AiB, application for review must first be made to the AiB. Thereafter, the AiB’s review decision can be appealed to a Sheriff.

While the intentions of the act are commendable, it remains to be seen how it will work in practice, and if its aims will be achieved.

About the author

Laura Borland is a senior solicitor, and Rachel Grant is a partner, in the corporate restructuring and insolvency team at Brodies LLP, @BrodiesLLP.