Due diligence

The Bankruptcy and Diligence etc (Scotland) Bill was introduced into the Scottish Parliament on 21 November. Its 187 pages comprise 16 parts, 204 clauses and six schedules. The “etc” in the title covers proposed legislation on floating charges as well as miscellaneous matters such as admiralty actions, arrestment of ships, and maills and duties.

The headline amendments to bankruptcy effectively reflect the changes already in place in England. The automatic bankruptcy period is to be reduced from three years to one (with power to the Scottish Ministers to change the period); individuals sequestrated when the section comes into force will be discharged not more than one year from that date.

Sanctions for the debtor

Bankruptcy restriction orders (“BROs”) and undertakings (“BRUs”) will provide new ways of imposing restrictions on debtors after discharge. The regimes will apply only to natural persons. Application for a BRO can only be made by the Accountant in Bankruptcy (“AiB”), to a sheriff. The grounds include failure to keep or produce records, making gratuitous alienations, creating unfair preferences, insolvent trading, incurring excessive debts, any gambling or extravagance which may have materially contributed to the debts, and failing to co-operate with the AiB or trustee.

The application will require to be made after sequestration and before discharge. A BRO may be for a period of between two and 15 years. Debtor and trustee may agree a BRU without involving the sheriff. BRUs can last for the same length of time as BROs and will have the same force and effect.

The offices of interim and permanent trustee will be amalgamated. Trustees will no longer require to live within the jurisdiction of the Court of Session. The statutory meeting of creditors which must currently be called within 60 days becomes optional for all trustees.

New orders and powers

Creditors seeking sequestration will still petition the sheriff, but jurisdiction in debtor applications is transferred to the AiB. The Court of Session will lose its jurisdiction in sequestrations (but will continue to deal with reduction and suspension). Sheriff courts will have exclusive jurisdiction in appeals against refusal to award sequestration and petitions for recall.

The bill proposes to introduce income payment orders (“IPOs”) and agreements (“IPAs”). An IPO will require the debtor to pay to the trustee a proportion of any income received after the award of sequestration, or a third party to pay to the trustee income due to the debtor. It must be applied for before the debtor’s discharge and can run for up to three years. An IPA is a formal agreement between the debtor and trustee to the same effect but without court involvement.

Provision is made to reinstate a debtor’s family home ownership rights if the trustee has not taken any action in relation to that property within three years of sequestration (or discovery of the property if later). Actions which would prevent the home revesting in the debtor include disposal or other realisation, conclusion of missives to do so, recording a notice of title, or commencing proceedings for authority to sell, division and sale or obtaining vacant possession.

Affirming the view that the Executive does not like protected trust deeds, and falling into the “watch this space” category, clause 18 proposes amendments to give the Scottish Ministers power to set out the conditions for a trust deed to become protected, and to extend the powers of the AiB to audit the accounts and fix the fees of the trustee of a protected trust deed without prior request from creditors.

The legislation governing student loans is amended to provide that debtors will be obliged to continue paying student loans despite sequestration (they are currently written off).

Floating charges

The bill proposes the creation of a Register of Floating Charges, kept by the Keeper of the Registers; a charge will be created only when the document granting the charge is registered in that register. It will be competent to register advance notice of a floating charge, to assist the settling of secured transactions by allowing priority of ranking from the date of the advance notice provided the charge is registered within 21 days. An advance notice will not be capable of registration unilaterally. Various other provisions are designed to clarify existing law such as on the assignability of floating charges.

The messenger of court

Part 3 of the bill establishes the Scottish Civil Enforcement Commission, and creates the office of messenger of court, combining the functions of messengers-at-arms and sheriff officers. The Commission will authorise or commission messengers of court, with power to operate throughout Scotland, after being satisfied as to the suitability of the applicant. Existing messengers-at-arms and sheriff officers will be “grandfathered” into the new arrangements as messengers of court. Scottish Ministers are given power to regulate the functions of messengers of court, the types of business associations they may form, and their fees and charges. The Commission will act as a disciplinary, supervisory and regulatory body.

New diligences

Land attachment. Adjudication for debt will be abolished; the Register of Inhibitions and Adjudications will become the Register of Inhibitions. The bill creates a new diligence over land to be known as land attachment, with detailed provisions on priority of ranking of securities, notices of attachment, the effect on subsequent leases, the effect of the debtor’s death whether before or after attachment and the methodology for selling attached land.

Residual attachment will affect property which is transferable and which cannot be attached by any other diligence, including property owned in common by the debtor and a third party. Residual attachment will be available only in execution, not on the dependence, and must be sanctioned by the court. Enforcement is by application to court for a satisfaction order which may authorise the sale of the attached property, its transfer to the creditor, transfer of income derived from the property or the granting by the creditor of leases or licences of the property. The attachment will have effect for five years, extendable by the court.

Interim attachment will allow attachment of corporeal moveables on the dependence of an action for payment. Exempt items include those inside the debtor’s home; equipment reasonably required for profession, trade or business to a value of £1,000 (or other sum prescribed); any vehicle reasonably required up to the same value; a mobile home if the debtor’s principal residence; money; and goods whose value is liable to deteriorate quickly. Application for warrant may be made at any time during which an action is in dependence; unless recalled an interim attachment will remain effective for six months (or longer as the court may specify) after conclusion of the action, provided the creditor has obtained a final interlocutor for payment.

Money attachment will be capable of use only to enforce payment of a debt if: the creditor holds a decree or other enforceable document constituting the debt; a charge to pay has been served; the creditor has on or before service provided the debtor with a debt advice and information package; and the period set out in the charge has expired without payment. Money in a dwellinghouse cannot be attached. Attachment is not competent when the money is capable of being arrested. Money can only be attached once to enforce a particular debt: if the money is released to the debtor for any reason, it cannot be reattached.

Inhibition on delivery

Extract decrees for payment will automatically carry a warrant for inhibition; letters of inhibition will be abolished. Inhibition is to be restricted to heritable property. It remains to be seen how it will work in practice, but the bill proposes that property will be treated as acquired on the day the deed transferring the property is delivered, even if title has yet to be registered. However inhibition executed before that day will not affect the property. An inhibition which comes into force after the creation of a floating charge will not be an effective diligence – though administrators now have extensive powers to deal with property subject to charges. Liquidators are also given power to sell property irrespective of inhibition.

On the dependence

A new regime for diligence on the dependence will give the Court of Session and sheriff court equivalent powers to grant warrants for arrestment and inhibition on the dependence. Diligence on the dependence will be competent in relation to a future or contingent debt such as aliment, or financial provision claimed in a divorce action. The court may grant warrant without an initial hearing if the creditor satisfies the court that it is justified. If recall or restriction is sought, the onus will remain on the creditor.

Arrestment and its variants

An earnings arrestment and a current maintenance arrestment will rank equally where a debtor’s net earnings are not sufficient to allow each to be met in full. Currently an earnings arrestment takes priority.

Changes to the existing diligence of arrestment will provide debtors with a minimum balance (related to earnings arrestment provisions) within bank and other accounts which cannot be attached by arrestment, and limit funds attached to the lesser of (i) the sum held by the arrestee for the debtor or (ii) a sum arrived at by a formula broadly covering the principal sum, interest to the date of arrestment and for the year following, and expenses to date plus the likely expenses chargeable in an action of furthcoming. The arrestment will attach all moveable property of the debtor held by the arrestee if what is arrested is not enough to cover the formula sum. The new limit applies only to an individual and only to accounts which are not trading accounts. New disclosure obligations are introduced where arrestment is successful. A creditor will be able to obtain arrested funds automatically after 14 weeks from service of the schedule of arrestment or the copy final decree. At this point the formula can be recalculated to reflect actual interest and expenses. Automatic release will be blocked by arrestee or debtor giving notice of objection, an action of multiplepoinding being raised or any other situation in which arrestment ceases to have effect.

Other reforms

Sequestration for rent and the diligence of maills and duties are abolished. The landlord’s hypothec is preserved as a real right in security, but will no longer confer security over property kept in a dwellinghouse or on agricultural land, nor will it arise in relation to property not owned by the tenant. It will be security for any rent for which the date for payment has passed without payment being made, overriding the common law rule.

Summary warrant debts will be subject to charges for payment and the court will be able to make a time to pay direction where the debt relates to rates, council tax or council water charges (though not for other taxes and social security contributions). A charge will also be required before the creditor holding a summary warrant can proceed by earnings arrestment.

Space precludes further detail on the bill. There are lengthy amendments and repeals of existing legislation which will require detailed consideration of their consequences and it is to be hoped that the bill will be subjected to sufficient scrutiny during its passage. The profession has interesting times ahead as it comes to terms with a legislature with the time and inclination to effect profound reform of Scots law.

Alistair S Burrow,

Tods Murray LLP, Glasgow