Bankruptcy reconstructed

It would be optimistic, in times of economic uncertainty, with the recent vote in favour of leaving the European Union, to believe that an area of law such as bankruptcy could be tidied up by legislators and put to bed for a generation.

However, the Bankruptcy (Scotland) Act 2016, the first consolidation Act in Scotland since 2003, is an attempt to do just that.

Bankruptcy law has witnessed significant developments over the last 30 years, partly through having to address the needs of a changing society, with an increase in the availability of consumer credit, but also as parliamentary time has been more readily available in the Scottish Parliament.

Plans to consolidate bankruptcy law began in 2012, with a consultation by the Scottish Law Commission and a bill being drafted. However, when the Scottish Government announced its intentions to consult on a new bill, the Bankruptcy and Debt Advice (Scotland) Bill 2013, these were postponed.

A new, and much expanded, framework

The 2016 Act introduces a new framework, the aim being to make bankruptcy legislation less cumbersome and easier to use by those who do not have an intimate knowledge of it or of the developments since the Bankruptcy (Scotland) Act 1985. It includes, amongst others, the changes introduced by the:

• Bankruptcy (Scotland) Act 1993;
• Debt Arrangement and Attachment (Scotland) Act 2002;
• Bankruptcy and Diligence etc (Scotland) Act 2007;
• Home Owner and Debtor Protection (Scotland) Act 2010; and
• Bankruptcy and Debt Advice (Scotland) Act 2014.

The increased complexity of this area of law can be seen by a simple comparison between the 1985 and 2016 Acts, with the former comprising 78 sections whilst the latter contains 238.

Areas that have seen a dramatic increase in the number of provisions include protected trust deeds, now contained in part 14, which comprises 33 sections compared with four in the amended 1985 Act. One reason behind this increase is the steady growth in regulations over the years, now included in the primary legislation.

Other new parts of the Act include part 6, which relates to debtor contributions and the new common financial tool that must be used across all formal debt remedies in Scotland to calculate debtor contributions (except in relation to time to pay directions and orders), and part 15, which relates to moratoriums on diligence, both introduced primarily by the 2014 Act.

The other 15 parts relate to more traditional areas that were included in the 1985 Act, but have since been substantially amended. These are now organised under more accessible headings such as part 1 (debtor applications and creditor petitions for sequestration), and part 2 (awards and recall of sequestration).

Where the new legislation will be most useful for practitioners will be in making it easier to understand where power now lies in relation to decision making, as both the 2007 and 2014 Acts have resulted in a substantial transference of powers from the courts to the Accountant in Bankruptcy (AiB).

An example can be seen in part 2 and the recall of sequestration, which is now primarily a function exercised by the AiB, except where the debtor wishes to apply for a recall on the basis that they were not apparently insolvent, in which case the decision whether to make a recall remains with the sheriff.

Equally, in relation to bankruptcy restrictions orders (part 13), introduced by the 2007 Act but amended in 2014, the power to grant these rests with the AiB where the order is for a period of up to five years, but for longer periods remains with the sheriff.

More legislation in prospect

Whether the integrity of the new Act can be maintained for long remains to be seen, but it seems unlikely, with the Scottish Government planning a review of diligence in the coming years.

Land diligences will feature highly in any such review, including the diligence of land attachments, which although introduced by the 2007 Act, have yet to be brought into force.

It is likely that some additional protection will be introduced to appease concerns, so principal dwellinghouses are protected where there is de minimis equity – protections that will more than likely be extended to homes in sequestrations and protected trust deeds.

However, the 2016 Act is to be welcomed as a piece of legislation that will make this complex and increasingly regulated area of law easier for practitioners to access and understand.

The Scottish Government has indicated the 2016 Act will commence in the second half of 2016. It will repeal the 1985 Act in full.