4th December 2013

The Bankruptcy and Debt Advice (Scotland) Bill: A Financial Health Service

The Bankruptcy and Debt Advice (Scotland) Bill was introduced in the Scottish Parliament on 11 June 2013.

The bill follows the consultation on Scottish bankruptcy reform led by the Accountant in Bankruptcy (the government agency responsible for administering the process of personal bankruptcy in Scotland).

It has been said that the purpose of the bill is to deliver significant reform to Scottish Bankruptcy legislation and, according to the Accountant in Bankruptcy (AiB) ‘will modernise debt management and debt relief in Scotland to ensure that they are fit for the 21st century, taking account of the recent credit crunch and recession and the increase in pay day lending.

The bill reflects the AiB’s vision of a ‘financial health service’ providing rehabilitation to individuals and organisations in relation to their financial affairs.

The bill introduces a number of new concepts, most noticeably:

Compulsory Money Advice

The bill proposes that debtors considering applying for their bankruptcy (or any other debt relief regime) first require to receive certain financial advice from a money advisor.

Moratorium of enforcement

Where notice has been given to the AiB by a debtor intimating that they intend to apply for either sequestration (bankruptcy), a protected trust deed or debt payment programme under the Debt Arrangement Scheme legislation, creditors will be prohibited from either serving a Charge for Payment on the debtor, this being a necessary precursor to many diligences (diligence being the method of enforcing a court decree, e.g. an earnings arrestment) or, if a Charge for Payment has been served prior to such notice having been given, from carrying out any form of diligence.

Compulsory Financial Education

In addition to pre-bankruptcy money advice, the bill also proposes mandatory financial education for those who need it, for example, those debtors who have been bankrupt more than once, to try to help them avoid ending up in financial difficulty again in the future.

Common Financial Tool

The bill proposes the introduction of a ‘common financial tool’, which is a single Scottish-specific tool for money advisors to use in determining the balance of a debtors income and outgoings.  The logic behind the tool is that it will, in theory, ensure that the debtor’s ability to pay a contribution towards their debts is assessed in a way that is consistent and sustainable.

While the primary aim of the bill is to establish a ‘financial health service’, the bill does not solely cater for the needs of debtors and there are, in fact, a number of provisions which work in favour of creditors with the view to maintaining the balance between effective enforcement and debtor protection. For example:

  • The bill extends the period in which an asset acquired post-bankruptcy by the debtor will vest in the trustee to four years. At present, such assets generally revert to the debtor after only one year.
  • The bill proposes that, where a debtor cannot be traced, the debtor’s automatic discharge after one year be deferred indefinitely. Accordingly, should a debtor fail to engage in the process, he shall not be released from his debts.
  • It is further proposed that, in the event that assets belonging to the debtor are discovered following his discharge and those assets would have formed part of his bankrupt estate, the AiB will have the power to re-appoint a trustee with a view to realising that asset for the benefit of the debtor’s creditors.

The most radical aspect of the Bill is, however, the enhanced role of the AiB in the Bankruptcy process in Scotland. It is proposed that a number of functions that had previously been exercised by the Courts be transferred to the AiB, in particular:

  • A debtor who is able to repay all his debts can apply to the AiB for a recall of sequestration (as opposed to the Sheriff Court).
  • The AiB shall be able to remove a trustee from office and appoint a replacement directly.
  • The AiB shall have the power to convert a protected trust deed to a sequestration.
  • The AiB shall have power to cure defects in procedure in certain circumstances.

Of all the proposals contained in the bill, the transfer of certain powers traditionally exercised by the Courts to the AiB is coming under the most scrutiny, particularly from the legal profession.  The Law Society of Scotland has questioned this move, stating that matters of a legal nature, involving fundamental rights, should receive judicial scrutiny.  The Society is also concerned about proposals in the bill which would allow the AiB to review its own decisions, highlighting the serious potential for conflicts of interest.

On a final note, under the provisions of the Bill, creditors will have a period of 120 days to submit their claims from the date of receipt of notice from the Trustee.  In order to avoid disappointment, creditors will have to be organised to ensure their claims are received within the statutory 120 day period.

The Bill is presently at an early stage, however, it is anticipated that Stage 1 will be completed by the 20th December 2013 and, given the criticism the bill has received to date, it will be interesting to see whether or not it progresses to Stage 2 unscathed.

Ryan McKay
Partner – Dispute Resolution  

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