THE
BANKRUPTCY AND DILIGENCE ETC. (SCOTLAND) ACT 2007
Changes Ahead
Consultation, much of which continues in respect of various
aspects of the new legislation, has produced the Bankruptcy
and Diligence etc. (Scotland) Act 2007 “the Act”.
The Act is with us but the introduction of many of the sections,
particularly those relating to diligence, may take many
more months before being brought into force. The “etc.”
in the Act’s title is somewhat unusual and was inserted
to cover proposed legislation on floating charges as well
as some matters which did not spring readily to mind when
the subject of diligence was first debated.
This newsletter concentrates on the bankruptcy sections
of the new Act and whilst it was thought that they would
be brought into force on Monday 3 December 2007, it seems
that ongoing discussions regarding issues such as internal
procedures, format of documentation and reporting frameworks
mean that it is not likely to become law until April 2008
at the earliest.
The sections relating to revisals to protected trust deeds
are somewhat bland because the ongoing consultation exercise
is forecast to continue into 2008 (and perhaps beyond?).
It would appear that the Scottish Executive are not yet
clear on what focus the Act should have in this regard.
So what has changed?
In general terms, there will be a closer involvement from
the accountant in bankruptcy “AIB”, the removal
of the court of session for nearly all aspects of sequestration
matters, and a reduced involvement from sheriff courts.
Thus, as the AIB’s involvement increases, court involvement
decreases which perhaps demonstrates the State’s desire
for closer control. Clearly, practitioners in private practice,
other advisers and the public cannot be trusted to deal
with personal insolvency matters on their own!
What
are the key changes?
Some of the more significant changes introduced by the Act
are summarised as follows:
1. The period of sequestration will be reduced from 3 years
to 1 year.
2. There are changes to both the debtor and creditor application
procedure for securing an award of sequestration.
3. A trustee will be appointed at the commencement of a
sequestration and will not have to convene a meeting of
creditors or seek election as trustee.
4. A student loan existing at date of sequestration will
not be written off (currently it is).
5. The introduction of a Bankruptcy Restriction Order and
a Bankruptcy Restriction Undertaking.
6. The introduction of an Income Payment Order and an Income
Payment Agreement.
7. The proposal that a Low Income Low Asset individual will
be able to obtain an order of sequestration by less formal
means.
8. The introduction of time restrictions to deal with the
debtor’s home and the easing of the process for a
trustee to remove his interest in the debtor’s home.
9. The ability of a trustee to ignore certain duties required
by the Act if it is not beneficial to undertake them.
10. The residency requirement for a trustee in a Scottish
sequestration (currently one has to be resident in Scotland,
the new Act removes this).
11. The introduction of a 28 day rule in respect of the
vesting of heritable property after date of sequestration.
12. An increase in the credit limit allowed to a bankrupt
from £250 to £500 on any one transaction, with
the introduction of a higher limit of £1,000 for a
series of smaller transactions as long as no one transaction
exceeds £500.
One Year Period of Sequestration
In England the one year period was brought into force on
1 April 2004 and Scotland is merely following such lead.
Thus, if a person is sequestrated on 1 October 2007 and
the new legislation comes into force on 1 April 2008 such
person will find that their automatic discharge is brought
forward from 30 September 2010 to 31 March 2009. Good news
for some.
A number of commentators have suggested that the one year
period will give rise to a flood of sequestrations, a sharp
increase in bad debts for credit card companies, banks,
trade suppliers etc, and a more feckless approach to handling
personal debt. Time will tell but the initial suspicion
is that this will not occur because, to date at least, the
Act retains the same hurdles for individuals to address
in order to prove apparent insolvency before being able
to petition for sequestration.
Presentation of a Sequestration Petition:
Debtor
The Act requires the debtor’s petition to be presented
to the AIB i.e. there is no court involvement. Total debts
must be a minimum of £3,000. If the estate is that
of a deceased debtor, the executors will present the petition
to the AIB.
Presentation of a Sequestration Petition: Low Income Low
Asset Debtor
Current consultation contemplates a low income (initial
guidelines suggest under £100 per week but this figure
is likely to be amended in light of the matters such as
national minimum wage etc), and low asset (perhaps less
than £1,000) threshold that will allow qualifying
individuals who do not own heritable property to petition
for their sequestration more quickly and easily. Feedback
on the consultation process can be reviewed at www.scotland.gov.uk/consultations/closed.
Presentation of a Sequestration Petition:
Creditor
Creditors will be required to submit a sequestration petition
to the sheriff court in which the debt is located. There
is no recourse to the court of session. A creditor must
aver in the petition that he has checked the register of
insolvencies (which is a chargeable event) and demonstrate
that he has provided a debtor with a Debt Advice and Information
Package to allow the debtor access to appropriate advice.
Intriguingly, where a sheriff is satisfied that the debtor
will pay the debt requested by a creditor no later than
42 days from the date that the individual is instructed
to appear before the sheriff for sequestration to be granted,
the sheriff can continue a petition for a period of up to
42 days. Thus, if a person appears in court and asks for
up to 42 days to pay (and presumably evidences an ability
to do so) the sheriff will not grant sequestration until
such 42 day period has elapsed.
A loophole to exploit by a debtor in terms of remaining/hiding
assets, spending cash and generally ensuring that one’s
estate is outwith a creditor’s reach?
A further potential frustration for a creditor is that if
a person advises a sheriff that they have applied for a
DAS (Debt Administration Scheme) programme that is either
not yet approved or rejected, or that a DAS programme will
be applied for howsoever that might be demonstrated, the
sheriff is empowered to postpone the award of sequestration
for as long as he thinks fit: with no set time limit!
Appointment of a Trustee
Whilst the Act envisages the ability to appoint an interim
trustee if immediate preservation of an estate is deemed
vital on the basis that the debtor might abscond with assets,
the likely scenario is that the award of sequestration will
appoint a person who will act as trustee throughout the
whole sequestration process. This person can be the AIB
or a private practitioner if such practitioner consents
to act. Vesting of a debtor’s estate will be effective
from the first date of appointment of a trustee and, in
a move that will help contain costs, the Act removes the
requirement to hold the statutory meeting of creditors.
That said, if a trustee believes that such meeting would
be helpful in terms of obtaining information regarding a
debtor’s circumstances, there is no reason why the
meeting cannot be held.
Student
Loan
It seems to have been a source of irritation to the State
that a student loan is written off in the event of sequestration.
Thus, the State has decided that whilst amounts due to banks,
credit card companies, suppliers and other providers of
money will be written off, a student loan is not. Isn’t
it great when you can create your own rules!
Further, as a result of fairly intense lobbying, there is
a Credit Union consultation paper, also viewed at www.scotland.gov.uk/consultations.closed
because Credit Unions consider that they are a special case
and should be treated differently from other providers of
credit. It is not known when the Scottish Executive will
finalise their view on the matter but if Credit Unions are
successful in their plea to retain their debt, like a student
loan, a further degree of complexity will arise. Indeed
one might suggest to a prospective debtor that he should
re-finance his Credit Union debt on a credit card overdraft
in order that the debt will be written off upon sequestration.
Banks and credit card companies beware!
Restraining
a Debtor’s Activities
The Act anticipates something similar to that which is currently
within a liquidator’s armoury when dealing with a
delinquent director. A trustee can contact the AIB if he
believes that a debtor’s conduct merits the issue
of a “Bankruptcy Restriction Order” and if the
AIB agrees, the AIB will submit a BRO application to the
appropriate sheriff court. A BRO can continue for up to
15 years. The Act is specific about the grounds for making
a BRO and a sheriff has the power to vary or annul a BRO
upon just cause being shown.
If the debtor and trustee agree, a Bankruptcy Restriction
Undertaking “BRU” can be entered into voluntarily,
and one suspects that it will be committed to writing lest
the trustee wishes to use it in subsequent proceedings.
The trustee can present a note to court extending the period
of sequestration and with the advent of the one year sequestration,
such note will have to be presented no later than 9 months
from the date of sequestration: which many contend is far
too soon to determine if a debtor is being suitably co-operative
and all assets have been identified.
Debtor’s Home
This area is probably the area which generates most angst
in a sequestration. The Act clarifies a number of issues
and, for example, where a trustee wishes to abandon the
heritable property to a debtor e.g. substantial negative
equity or sufficient funds provided from other sources to
settle creditors’ claims, he will be able to complete
a form which will constitute sufficient evidence of abandonment.
Further, and in a step which enshrines current best practice,
the Act makes it a requirement that a trustee deals with
the debtor’s home within 3 years of date of sequestration,
although this period can be extended upon application to
the sheriff by a trustee upon just cause being shown. Thus,
in normal cases, at the end of the 3 year period referred
to above, the trustee’s interest in a debtor’s
family home will cease to be part of the debtor’s
sequestrated estate and will re-vest in the debtor without
the need for a disposition, conveyance, assignation or other
formal transfer.
Encouragingly, if the debtor does not inform his trustee
of an interest in the family home or other heritable property
within 3 months of the date of sequestration, the 3 year
period does not commence until the date that the trustee
becomes aware of the debtor’s interest. Clearly, the
act anticipates cooperation from the debtor in this regard.
Finally, as a result of the title difficulties that were
highlighted in the House of Lords case of Burnett’s
trustee, the Act makes it clear that it is not competent
for the trustee, or anyone deriving title from a trustee,
to complete title to heritable estate in Scotland which
would vest in the trustee by virtue of his appointment,
earlier than 28 days from the date that the award of sequestration
is recorded in the Register of Inhibitions and Adjudications.
This allows a fair value heritable property transaction
in the course of being completed at date of sequestration
to conclude in the normal manner rather than being overturned
by a race to the register or other means. Sensible, and
good news.
Ignoring Certain Aspects of the Act
If the trustee does not consider it financially beneficial
to the estate and/or creditors, he can dispense with recovering,
managing and realising part, or all, of the debtor’s
estate, paying a dividend, ascertaining the reasons for
a debtor’s insolvency and enquiring in detail into
a debtor’s assets/liabilities. Further, the Act makes
it clear that a trustee does not have to take action with
regard to a debtor’s heritable property unless he
believes that it is in the best interests of the creditors
to do so e.g. there is equity. Whilst a trustee will always
take into account feedback from creditors, the debtor and
the AIB, the ability to exercise professional judgement
and not waste money on pointless tasks is welcomed.
Contributions from Debtor
It is a frequent feature of a sequestration that a debtor
pays a monthly sum to the sequestrated estate, the amount
being calculated on the basis of a debtor’s ability
to pay having due to regard to regular income and essential
outgoings. In keeping with the terminology used in England,
a court order can be obtained for a net sum to be paid by
a debtor: known as an Income Payment Order “IPO”.
There is no AIB involvement in the process and, as with
the BRO, the application to court must occur before a debtor’s
discharge takes affect. An IPO can last beyond the debtor’s
discharge with a maximum length of 3 years. As with a BRO
an IPO can be revoked or varied by a sheriff.
An Income Payment Agreement “IPA” formalises
what many practitioners have been doing for years. A standard
document will be signed in order to document an IPA which
can be for a maximum period of 3 years and allows the debtor
to enhance his credibility in the eyes of his creditors
by entering a voluntary agreement to pay a contribution
at a set level. The Act envisages that an IPA will be sent
to the AIB and can be enforced through court if necessary.
Conclusion
This newsletter seeks to highlight some of the principal
changes in the new legislation which will affect personal
insolvency in Scotland. As the consultation process continues,
documentation is finalised and introduction dates for the
various sections of the Act are known, further notification
will follow.
We hope that this newsletter is helpful in terms of a broad
summary of the key changes to the personal insolvency sections
of the Act but if you have any specific queries please do
not hesitate to contact either Michael Reid or Michelle
Byrne at this office.
This newsletter is not meant to be a definitive guide and
should not be relied upon as such. If you wish to pass this
newsletter to a colleague or photocopy it for transmission
elsewhere, please feel free to do so.
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