INTRODUCTION
Insolvency is where a person or company can't pay their debts. An insolvency practitioner is appointed as trustee to sell all the available assets, and pay as much as possible to the creditors.
The winding up, liquidation and receivership of limited companies and limited liability partnerships are largely reserved to the UK Parliament.
Insolvency of individuals, ordinary partnerships and some public bodies (such as Universities) is devolved to the Scottish Parliament.
There are two forms of 'devolved' insolvency in Scotland. They are sequestration (usually called 'bankruptcy') and the protected trust deed. The main legislation that controls insolvency in Scotland is the Bankruptcy (Scotland) Act 1985, as reformed by the Bankruptcy and Diligence etc. (Scotland) Act 2007. The 2007 Act is not yet in force.
Sequestration
In a sequestration the court orders that the assets of a debtor are transferred to a trustee, on the application of either the debtor or one of their creditors. The debt must be £1500 or more, to be raised to £3000 by the 2007 Act when in force.
In most cases the debtor must be 'apparently insolvent', which in most cases means that a creditor has tried to enforce a debt without success. The 2007 Act introduces a new right for low income/low asset debtors to apply for their own bankruptcy when they are not apparently insolvent.
When sequestrated the debtor is subject to various restrictions, including a bar on asking for more credit without disclosing the bankruptcy to the lender.
At the end of the sequestration the debtor is discharged from the obligation to repay the balance of the debt due at the date of sequestration. At present the debtor is discharged three years after the sequestration, but the 2007 Act will, when in force, change the standard discharge period to one year.
The legal restrictions affecting bankrupts are lifted when the debtor is discharged. In most cases that will continue to be true when the 2007 Act is in force, but in some cases there will be a new power to apply bankruptcy restrictions after the date of the discharge. The planned bankruptcy restrictions undertakings/orders will last for between 2 and 15 years.
The practical effects of sequestration can last for a lot longer tha one year. For example, it may be many years before the debtor can get another mortgage.
Protected trust deed
In a trust deed the debtor signs a contract (trust deed) to pay the creditors as much as the debtor can afford. The trustee then gathers in assets and pays a dividend in much the same way as a sequestration. The debtor does not need to be apparently insolvent.
A trust deed does not stop creditors from taking enforcement action. It can become 'protected' if most of the creditors don't object to the planned payment. In that case all creditors are bound to accept the payment offered and can't enforce their debts except in very limited circumstances.
There are few restrictions on a debtor who grants a trust deed, and it is therefore a humane alternative to bankruptcy. Indeed, the main sanction for breaching the conditions of the trust is that the trustee can sequestrate the debtor.
In most cases a trust lasts for three years. As with sequestration, the practical effect can last a lot longer.
The Executive intends to reform the way trust deeds work, in order to ensure that the benefit to the debtor is balanced by higher payments for the creditors than they would get in a sequestration. A consultation in that respect closed in April 2006.
The 2007 Act gives Scottish Ministers the power to make regulations specifying the conditions which must be met if a trust deed is to become protected, and related matters. A further consultation on the impact of trust deeds on credit unions is planned for the first half of 2007.
The Accountant in Bankruptcy
The Office of the Accountant in Bankruptcy www.aib.gov.uk is an Executive agency that oversees the insolvency process in Scotland.
If you are considering applying for your own bankruptcy, or believe you are in a situation where a creditor might apply for your bankruptcy, you should seek free and independent advice. There are many money advice centres in Scotland that can provide free and independent help and assistance with debt problems. See below for further information.
Modernising Insolvency
On 28 May 2003 the First Minister agreed that the Executive would legislate to modernise the laws of personal bankruptcy and diligence in Scotland to strike a better balance between supporting business risk and protecting the rights of creditors.
You can learn more about the Executive's first consultation for the reform of bankruptcy legislation in Scotland in the 2003 consultation paper.
You can learn more about the Executive's proposals for Modernising Bankruptcy and Diligence in the 2005 consultation paper and draft Bill.
You can learn more about the Bankruptcy and Diligence etc. (Scotland) Act 2007 by visiting the Scottish Parliament's website.
You can learn more about the Executive's proposals for modernising protected trust deeds by reading the 2006 consultation paper and partial regulatory impact assessment http://www.scotland.gov.uk/Topics/Justice/Civil/17868/Deeds/Introduction.
Further information
Please note that neither the Scottish Executive nor the Office of the Accountant in Bankruptcy can provide specific advice on whether or not to apply for sequestration.
The Scottish Executive has produced an advice and information package, called Dealing with Debt: finding your feet. The package contains contact details for free and independant local money advisers.
If you have any queries or questions please email mailto:bandd@scotland.gsi.gov.uk