“Time and Tide (and changes to insolvency legislation) wait for no man…”

Changes are being made to the legislation governing insolvency matters in Scotland. On 30 May 2014, the Insolvency (Scotland) Amendment Rules 2014 came into force altering the Rules which regulate administrations, liquidations and receiverships in Scotland. Significant changes are also to be made to the personal insolvency regime in terms of the Bankruptcy and Debt Advice (Scotland) Act 2014, which will be implemented by supporting regulations and is expected to come into force on 1 April 2015.  As a result the Scottish Government has put the planned Bankruptcy Consolidation Bill on hold to allow the reforms to ‘bed in’.  

4th July 2014

Changes are being made to the legislation governing insolvency matters in Scotland. On 30 May 2014, the Insolvency (Scotland) Amendment Rules 2014 came into force altering the Rules which regulate administrations, liquidations and receiverships in Scotland. Significant changes are also to be made to the personal insolvency regime in terms of the Bankruptcy and Debt Advice (Scotland) Act 2014, which will be implemented by supporting regulations and is expected to come into force on 1 April 2015.  As a result the Scottish Government has put the planned Bankruptcy Consolidation Bill on hold to allow the reforms to ‘bed in’.  

The purpose of this article is to highlight the main changes and what impact they might have on the conduct of insolvency cases. 

Insolvency (Scotland) Amendment Rules 2014 (“the 2014 Rules”)

The 2014 Rules will amend the Insolvency (Scotland) Rules 1986 (“the 1986 Rules”) which apply to the corporate insolvency procedures in Scotland.  There have also been small changes to the Court of Session and Sheriff Court Rules to reflect the amendments made in the 2014 Rules.  

It should be noted that the “old Rules” will continue to apply to receivership appointments made before 30 May 2014 and in relation to liquidations, where the winding up petition was presented or the winding up resolution was passed, prior to 30 May 2014.  

While these amendments are to be welcomed, the Insolvency Rules 1986 which govern corporate insolvency procedures in England are soon going to be replaced with the Insolvency Rules 2015.  The changes made to the rules regarding administrations are likely to be made UK-wide, however it would be unfortunate if again the modernisation of the English Rules in relation to liquidations is not reflected in the Scottish Rules.

The key changes are summarised below:

Removal of references to the Bankruptcy (Scotland) Act 1985 (“the 1985 Act”)

Block Transfer Applications

Limit Disclosure of Statement of Affairs

Liquidation Committee

Electronic Submission and Delivery

Content of Notices

Removal of references to the Bankruptcy (Scotland) Act 1985 (“the 1985 Act”)

The 2014 Rules amend the 1986 Rules by removing the various references to the 1985 Act.  On the whole, the relevant provisions of the 1985 Act have simply been restated but there are a couple of minor changes to what was previously in the 1985 Act.  For example, the period for making an appeal against a determination of the liquidator’s remuneration and outlays is amended to 14 days after the issue of the determination rather than 8 weeks from the accounting period end.     

Removal of references to the Bankruptcy (Scotland) Act 1985 (“the 1985 Act”)

It is unfortunate that the opportunity to change the length of the accounting period (currently six months) has not been taken.  Nor have steps been taken to address the fact that it is simply not cost effective in many liquidations to lodge accounts and make a claim for remuneration after every six month accounting period.  The opportunity has also been missed to make it clear that the Court can approve an interim claim for remuneration. As currently drafted, the legislation only appears to allow a liquidation committee to approve an interim claim, although the Court of Session has suggested that this is probably an omission and that the Court should also be able to approve an interim claim.  

The rules relating to adjudication of claims, entitlement to vote, draw dividends and power to cure defects in procedure have all been restated within the Rules.   

Block Transfer Applications

It will now be possible to make just one application to the Court of Session to transfer the appointment of an IP in relation to a number of cases, even where this is across a number of Sheriff Courts.  The changes to the Court Rules provide that the Court of Session must then notify the relevant Sheriff Courts of any order so that the change can be reflected in the Sheriff Court process. 

Limit Disclosure of Statement of Affairs 

It is already possible in an administration for the IP to apply to the Court to limit the extent to which the Statement of Affairs has to be disclosed to creditors. The same power will now be available to a receiver and a liquidator. 
  
Liquidation Committee 

The initial meeting of a liquidation committee must now be held within six weeks of the committee’s establishment rather than the current three months. There are also minor amendments to the rule relating to the termination of membership of a liquidation committee and the composition of a liquidation committee where creditors are paid in full.  

Electronic Submission and Delivery 

The 2014 Rules allow for the electronic submission and delivery of forms, notices and other documents in receiverships and liquidations. This brings Scotland in line with England, which has had this ability for a number of years now.  If a party has given permission to receive notices electronically and provided an address for this, the IP can send notices electronically rather than by mail. Unfortunately, rules relating to the use of a website and remote attendance at meetings of creditors or liquidation committees are not included, despite the fact that these have also been available in England for a number of years.   

Content of Notices 
  
Required information to be included in notices in the Gazette or newspapers in a liquidation or receivership is being brought into line with the requirements already in place for administrations.   

Bankruptcy and Debt Advice (Scotland) Act 2014 (“the Act”) 

The Act amends an already heavily amended Bankruptcy (Scotland) Act 1985 (“the 1985 Act”).  The Act received royal assent on 29 April 2014 but it is not anticipated that it will come into force until the early part of next year.  

The key changes are summarised below:

Key Changes for Creditors
Key Changes for Trustees
Key Changes for Debtors

Key changes for Creditors 

Moratorium on Diligence 
  
In order to receive the protection of the moratorium, a debtor needs to be given written notice to the AiB of his intention (a) to make a debtor application for sequestration; (b) to seek to fulfil the conditions required in order to enter a protected trust deed; or (c) to apply for the approval of debt payment programme under the Debt Arrangement Scheme. Creditors can often be frustrated by successive applications for a DAS and will be relieved to see the provision stating that only one notice can be lodged in each 12 month period.  The moratorium stops service of a charge for payment or the execution of any diligence by creditors for a period of six weeks from the publishing of the notice by the AiB.   

Requirement for creditors to submit claims within 120 days 

Creditors will have to submit their claims within 120 days. The period will run from either the date when the Trustee gave notice to that creditor of the statutory meeting or where there is no such meeting, notice to the creditors inviting submission of claims. Failing to submit a claim within the 120 days will not be entitled to receive a dividend unless there were exceptional circumstances which prevented the claims from being submitted.   

Notice to Banks 

If a Trustee knows of funds in a bank account which vest in them as part of the sequestration, notice is to be given to the bank.  The Trustee has no remedies against the bank in relation to a banking transaction which was entered into before receipt of that notice.  This appears to be the case even when the bank was aware of the sequestration.  This does not in fact alter the current position under the 1985 Act but the express provision in the Act will give greater comfort to Banks in respect of those transactions that take place between the date of the first order and the date they were notified of the debtor’s sequestration.   

Key changes for Trustees 

Debtor Contribution 
  
The extent of a debtor’s contribution to the sequestrated estate is to be assessed in every case using the Common Financial Tool.  It is the AiB who approves and varies the level of the debtor’s contribution.  It should be noted that the contribution can be assessed at zero and a maximum six month payment break can be allowed on cause shown.  The period in which the Trustee can collect contributions from the debtor has been extended to four years, which will bring? the sequestration regime back in line with the Trust Deed regime.   

Acquirenda extended to four years 
  
Property or rights acquired or received by the debtor after the date of sequestration which would have vested in the trustee had it been part of the estate on the date of sequestration, vest in the trustee for up to 4 years from the date of sequestration.  Non-vested contingent interests e.g. legacies under a will, also vest up to 4 years after the sequestration.   

Trustee can be reassumed into office

If assets worth more than £1,000 are discovered within five years of the sequestration (even if after the Trustee’s discharge) the Trustee can be reassumed into office to realise these.     

Discharge of Debtor  

There will be no automatic discharge of the debtor from his sequestration. Instead the Trustee will submit a report to AiB within ten months of the sequestration on debtor’s conduct during the sequestration.  The AiB will then decide whether to grant discharge.  

Replacement provisions   

Where the Trustee is changed at a creditor’s meeting, the outgoing Trustee informs the AiB rather than the Sheriff.   

Where the Trustee acts in more than one sequestration and is to be replaced, the application is made to the AiB for the removal from office of that Trustee and the AiB can now also appoint the replacement trustee. The application can be made by any person having an interest. The applicant must notify all interested persons of the application. Thereafter, all interested persons are notified by the AiB of the determination (of removal) and the appointment (of the replacement). 

Removal of powers from the Court to the AiB

  • Power to make and vary the Debtor Contribution Order
  • Where the Trustee is not the AiB, the trustee can apply to the AiB for a direction on any matter arising in the sequestration
  • Recall of sequestration will be granted by the AiB where the debtor can pay their debts in full; 
  • Power to remove commissioners
  • Power to extend the period by which a Trustee must adopt/refuse a contract
  • Power to make Bankruptcy Restrictions Orders
  • Power to convert a protected trust deed to a sequestration
  • Power to cure certain defects in procedure
  • Power to value contingent debts

Key changes for Debtors

  • There will now be mandatory money advice before a debtor can apply for sequestration. Financial Education can be prescribed for certain debtors                 
  • There will be no automatic discharge and the debtor will require to sign a Statement of Undertaking at the outset of the sequestration which makes it clear that non-compliance     with the Trustee may delay their discharge from sequestration                  
  • Low Income Low Assets (LILA) sequestration will be replaced with Minimal Assets Protection (MAP).   
  • The provisions which allowed a debtor to be discharged following an offer of composition in respect of his debts is to be abolished                 
  • The debtor will now have the ability to apply for recall of sequestration from the AiB rather than the court when the debtor can pay their debts in full