Insolvency: Bill brings in mental health moratorium

The Bankruptcy and Diligence (Scotland) Bill was introduced by the Scottish Government on 27 April 2023.

While many of the provisions are technical in nature, in some cases tidying up errors in previous legislation, there are some headline-grabbing provisions.

Mental health moratorium

Amongst the most important is the introduction of a mental health moratorium. The current moratorium regime applies where a debtor notifies the Accountant in Bankruptcy of their intention to enter a statutory debt solution, such as the debt arrangement scheme. In that instance, the moratorium allows breathing space for the debtor to gain advice, by preventing creditors from taking certain actions while the moratorium is in place. Originally six weeks, the moratorium period was increased to six months during the pandemic, and this change in timescale was later made permanent. Only one moratorium can be applied for in a 12-month period.

The bill introduces a power to create a moratorium aimed at those struggling with serious mental health issues. The precise details of how this moratorium will operate are subject to future regulations by ministers. Notably, there is a similar scheme in place in England & Wales, which applies primarily to those with particularly acute mental health issues requiring treatment. The proposal received broad support during the Scottish Government’s consultation on statutory debt solutions, and it is understood that further consultation will take place before the detailed regulations are laid before the Parliament.

Diligence

While the introduction of the moratorium is a key development, it’s important not to overlook that the bill also introduces important changes to the diligence regime.

For arrestments, there is already a duty on the arrestee to report if funds have been caught by the arrestment. The new bill introduces a duty to report if no funds have been arrested, and the reason why. While this seems a minor amendment, it will certainly save time, as creditors and their agents routinely check in with arrestees to confirm that the arrestment was unsuccessful and has not simply been missed.

As the reasons for the unsuccessful arrestment will be given, this provision will also assist creditors in considering their next steps. Creditors will know, for example, if there are simply no funds in a bank account or if the debtor doesn’t have an account at all.

In relation to earnings arrestments, similar duties will apply. This means an employer will now be required to report to the creditor where the earnings arrestment is unsuccessful and the reasons for this – for example, where the debtor earns below the minimum threshold of earnings.

When introducing these new duties, the bill also changes the penalties for non-compliance. For failure to report on arrestments, the arrestee might now be found liable to pay to the creditor a sum of up to £500. For earnings arrestments, the penalty might be to pay the sum due by the debtor to the creditor, or £500, whichever is the lesser.

Changes are also made to diligence on the dependence. It will now be mandatory to provide the debtor with the statutory debt advice and information pack in advance of any hearing on an application for diligence on the dependence. If the court is dissatisfied that the pack has been provided to the debtor, they may not grant the warrant. If warrant was granted in advance of the hearing, and the pack is not issued prior to the hearing, the warrant must be recalled.

Again, this provision was broadly supported in the Government’s consultation. It’s a measure that appears to maintain a balance, whereby urgent applications can be made and assets secured, but the debtor is given access to information on how to gain debt advice before any hearing takes place.

Commentary

The bill’s major innovation is the introduction of the moratorium for mental health. The precise mechanism as to how that will work is yet to be seen. However, there appear to be data from England & Wales suggesting that there is demand. The Government’s policy memorandum suggests that they are planning for 200 to 500 applications per year, depending on the exact parameters of the scheme.

While that is the flagship policy, there are traps for the unwary in the changes to the diligence regime. In particular, litigators will need to ensure that they can evidence provision of the debt advice pack prior to any hearing on diligence on the dependence. Likewise, those routinely served with arrestments, such as banks, will require to ensure that they have procedures in place to add in notices where the arrestment is unsuccessful.