Calman proposal on corporate insolvency rejected by Westminster

Almost 18 months after the publication of the Calman Commission's report, a new Scotland Bill has been published by Westminster.  The media have predictably focused on tax-raising powers, but the Bill also deals with the tricky question of whether Westminster or Holyrood should have responsibility for corporate insolvency in Scotland. 

The Bill, which was published, fittingly, on St Andrews Day, disagrees with Calman's recommendation to leave responsibility where it currently lies, proposing instead re-reservation to Westminster.

So what are the potential implications of this for the insolvency industry?

Background

The Calman Commission was given the remit of reviewing the Scotland Act 1998 ten years on from devolution.  In relation to trade and commerce, Calman recommended that matters presently reserved to Westminster – such as company law, competition, consumer protection - should continue to be reserved.  However, there was one area Calman struggled with: corporate insolvency.  At present, certain aspects of corporate insolvency are Holyrood's responsibility (e.g. the process of winding up) and others are Westminster's (e.g. administration). 

Both ICAS and R3 gave evidence to the Commission that the updating of the corporate insolvency rules in Scotland had lagged behind England since devolution, with insufficient legislative time and resources devoted to the task.  Both bodies suggested re-reservation to deal with the problem but whilst Calman was persuaded that the present position was unsatisfactory, they declined to recommend re-reservation.  Instead they recommended a third way: there should be no formal change to the devolution/reservation boundary but Westminster's Insolvency Service should assume responsibility for laying down the corporate insolvency rules to be applied on both sides of the border.

Comment

Westminster appear to disagree with Calman, preferring the solution suggested by ICAS and R3.  There's a plain logic to their thinking.  After all, if company law is to remain fully reserved to Westminster, why not corporate insolvency law?   Moreover, re-reservation will enable a uniform approach to be taken to corporate insolvency across the UK – an important consideration in these days of cross-border insolvency cases. 

If Westminster get their wish, they will have to be alive to the uniquely Scottish implications of any changes to the legislation.   The rules on corporate insolvency are inextricably interwoven with the substantive Scottish law that applies to the assets, liabilities, rights and obligations that the IP has to manage in an insolvency.   Consider the recent issues that have arisen in relation to landlord's hypothec, a purely Scottish security right that nevertheless requires to be recognised as a "security" for all purposes under the Insolvency Act 1986. 

What are the implications for the insolvency industry?

It remains to be seen what the official Scottish Government view will be in relation to this proposal.  At the recent AiB Stakeholder event, there was a suggestion that the Scottish Ministers may not accept the re-reservation proposal and may fight to keep this within Holyrood's competence. 

The question for the insolvency industry is what the real-world consequences of these proposals will be.  That is not a question that is capable of being answered in the abstract. 

How does Westminster propose to resource its Scottish responsibilities if matters are re-reserved, particularly in light of the cuts announced in the Comprehensive Spending Review?  Do they intend to replicate how matters were dealt with pre-devolution or will they devote more resource to this, possibly extending the reach of the Official Receiver into Scotland?  It would seem unlikely given that the Department of which the Insolvency Service is part faces cuts of 25% under the CSR.

Similarly, if responsibility is to remain with the Scottish Government, what will they do to address the problems identified by Calman?  Will they introduce a Scottish Official Receiver?  That was certainly one of the questions posed to stakeholders by the AiB at the stakeholder event.

The implications of these proposals for the insolvency industry could be of major significance.  The next stage must be an informed debate that focuses on the real-world consequences, one that involves both the Westminster and Scottish Governments as well as the insolvency industry as a whole.

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