Now six months old, the new bankruptcy regime has raised questions of practice which still await an answer
The Bankruptcy and Diligence etc (Scotland) Act 2007 provisions on bankruptcy came into effect on 1 April 2008. Many questions surround implementation and remain to be answered. Many of the changes bring sequestration back into line with bankruptcy in England, as amended with effect from 1 April 2004 by the Enterprise Act 2002.
The period of bankruptcy is reduced to one year from the former three years, but those who fail to co-operate with their trustee, or have misbehaved, will be made subject to the new regime of bankruptcy restriction orders and undertakings which, like directors’ disqualification, may impose restrictions of between two and 15 years notwithstanding discharge. Applications for such orders can be made only by the Accountant in Bankruptcy (“AIB”) to a sheriff.
Obtaining contributions from the debtor’s income during (and after) sequestration is formalised by income payment orders and agreements which will normally last for three years.
Trustees are now required to take action on a debtor’s family home within three years of sequestration, failing which the home will automatically revest in the debtor. Now that the housing market is in turmoil and the landscape is somewhat different from that when the Act was passed in 2007, how many debtors will be keen on trustees seeking to take immediate action to sell their interest? Yet another example of legislative poor timing in addressing a perceived wrong.
Debts and assets
Perhaps most noticeable for practitioners will be the changes in jurisdiction. The Court of Session loses almost all its jurisdiction in sequestration, while the sheriff courts lose jurisdiction in debtor petitions, which now require to be taken to the AIB and can be done online. A debtor petition requires a minimum of £1,500 debt, whilst a creditor petition will require an aggregate £3,000 of debt due by the debtor – but do not confuse either requirement with the minimum of £750 required to petition for liquidation of a company!
One of the difficulties of the old situation was that many debtors with few assets were unlikely to be sequestrated by creditors because of the expense and risk, but were unable to petition for their own sequestration because they were unable to prove apparent insolvency. To address this, we now have low income low asset (LILA) cases, which will apply where the debtor’s weekly income on the date of application does not exceed £100, they do not own any land, and the total value of assets (ignoring liabilities) does not exceed £1,000. The takeup of LILA cases already far exceeds initial estimates, and soundings indicate that in many areas money advisers have not yet begun to put forward the cases which were believed to be stockpiling waiting on the new regime. We also hear (apocryphally) that the AIB has been granting sequestration in cases where the debtor has equity in a family home, which is of course a breach of one of the conditions for being able to take a LILA petition.
Theory and practice
Changes have also been made to the protected trust deed regime. The AIB has been given more oversight and the trustee now has to deal with seven new statutorily prescribed forms in the Protected Trust Deeds (Scotland) Regulations 2008, in addition to the 23 new forms prescribed by the Bankruptcy (Scotland) Regulations 2008. These regulations are a triumph for clarity of expression. Regulation 17 for example provides that “at intervals of not more than 12 months” the trustee is to send to the debtor, each creditor and the AIB a statement of his accounts in administering the trust deed, and to report “at intervals of not more than 12 months” on his management within “the previous 12 month period”. We understand the intention is (sensibly) to move from the often ignored six monthly reporting cycle to a 12 monthly one, but it is difficult to see how the new regime is to be applied and enforced.
All in all, we live in interesting times. We hear that the AIB has approved a debt payment plan under the Debt Arrangement Scheme for a 90 year old debtor to pay off her debts over a 10 year period, and other stories circulate which suggest that this is not a unique case. The AIB is apparently looking into her approval processes! All in all, practitioners should read the new regulations carefully and keep their wits about them over the next few months.
Alistair S Burrow, Head of Recovery, Tods Murray LLP
(Published in the Journal, November 2008, 51)
[Alistair Burrow writes regarding the above briefing]:
In my article last month, I fell into the trap of quoting the provisions of the legislation when describing the requirements for a low income, low asset (LILA) sequestration. The statutory provisions provide for other amounts as may be prescribed and that has already happened. The weekly income limit for a LILA application is now the amount of the national minimum wage (currently the equivalent of £229.20 a week). In addition, the total assets limit is £10,000 with no single asset worth more than £1,000. This is all contained in the Bankruptcy (Scotland) Act 1985 (Low Income, Low Asset Debtors, etc) Regulations 2008 (SSI 2008/81). Note that pensions and maintenance payments will count as income, but income support, working tax credits, income based jobseeker’s allowance and any other social security benefits are ignored even if these bring actual income to more than £229.20. They may however be taken into account when considering contributions to be made whilst bankrupt.
In relation to the statement suggesting that the Accountant in Bankruptcy (AiB) has awarded bankruptcy through LILA in cases where the debtor has equity in a family home, the AiB’s office has asked us to clarify that the AIB considers all debtor applications, not just those where the debtor applies through LILA. A debtor cannot meet the LILA criteria if they own any land or single asset valued at more than £1,000, regardless of the equity situation. Debtors who own property and who apply to the AiB for bankruptcy will be refused unless apparent insolvency has been demonstrated. There will be some cases where AiB has awarded bankruptcy through apparent insolvency where the debtor owns property.
The AiB office adds: “The final paragraph of the article states that the AiB, as administrator of the Debt Arrangement Scheme (DAS), has approved a debt payment plan (DPP) under DAS for a 90-year-old woman to pay off her debts over a period of 10 years. This is not correct. In all applications for DAS, creditors are given the opportunity to consent or object to a proposed DPP. Regulations provide that where no objections are made or creditors fail to respond, the creditors are deemed to have consented and the DPP is automatically approved without further scrutiny by the DAS administrator.”