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Restructuring and Insolvency

Bankruptcy Reforms

The bill proposes a number of changes to the administration of bankruptcy in Scotland.

The Interim and Permanent Trustee

Under the current law it is an interim trustee who holds office in the period prior to the meeting of the creditors. The trustee elected at the meeting of the creditors is the permanent trustee and the functions and powers of the two trustees are slightly different.

It is now proposed that an interim trustee will only be appointed if an appointment is sought in the period prior to the award of sequestration. In all other cases the practitioner appointed will simply be known as the trustee. A review of standard form documentation will need to be undertaken to ensure that all in house styles properly refer to the interim trustee or trustee as appropriate.

The Functions of the Trustee

The bill introduces provisions to modify the functions of the trustee and to provide that he only has a duty to carry out certain functions if it would be of financial benefit to the estate and in the interests of the creditors. The functions which have been modified include the obligations :

  • to recover, manage and realise the assets of the estate
  • to distribute the estate to creditors
  • to ascertain the reasons for the debtor's insolvency.

These new provisions will enable trustees to take a pragmatic approach to the administration of an estate and to draw a line under certain enquiries if the trustee concludes that they are simply not cost effective.

The Debtor's Petition

Both the creditors of a debtor and the debtor himself can presently petition for sequestration. Until now the decision on whether bankruptcy, with the severe consequences that flow from it, was appropriate, was a matter for the courts. It is now proposed where a debtor is looking to apply for his own sequestration, this will no longer be a court process.

The bill proposes that debtor applications will be made to the AIB by way of a standard form and the award of sequestration will be made by the AIB. The AIB will appoint the nominated trustee (if one is nominated) or the AIB herself can be appointed as trustee. The exact procedure is to be laid down in regulations and further information will be made available at a later date.

Petitions for Recall

Until now all petitions for recall of sequestration have been presented to the Court of Session. It is proposed that the exclusive jurisdiction of the Court of Session will be removed and when the bill is enacted petitions for recall will be able to be dealt with in the local sheriff court. This should make dealing with certain types of recall petition i.e. where the debtor has sufficient funds to settle all debts in full, quicker and cheaper to finalise.

14 January 2006

Reform Update

Under the current law, at the date of sequestration the debtor's estate vests in the trustee. The debtor will in due course obtain his discharge but there has been no question of any assets reverting back to the debtor. The bill proposes certain amendments to the current position, which will have a material impact on the approach taken to asset realisation in any bankruptcy case.

The Family Home

In many bankruptcies the debtor's interest in his home can be one of the most valuable assets in the sequestration. In practice, however, it can be one of the most difficult assets to realise and negotiations for the sale of the debtor's home are often delayed by the debtor and his family, for understandable reasons. While best practice would require all assets to be realised as quickly as is practicably possible, until now the trustee has been able to take comfort from the fact that any delay in selling or agreeing terms for transfer of title have not been prejudicial to the interests of the creditors. The increase in property prices seen in almost every area of Scotland in recent years has often offset any prejudice to creditors.

The changes proposed by the bill introduce for the first time the notion that assets can revest in a debtor. The bill provides that unless the trustee takes prescribed steps to deal with the family home within a period of 3 years from the date of sequestration, the asset will cease to form part of the debtor's estate. It is therefore important that practitioners review their procedures and manuals to ensure that adequate steps are taken to deal with the family home and to ensure that this is realised for the benefit of creditors, where it is appropriate to do so.

The bill proposes that revesting in the debtor will not occur if the trustee has taken certain action, including :

  • recording a Notice of Title
  • concluding missives for the sale of the property
  • commencing court action
  • renewing the abbreviate.

The bill does however include provisions to protect the estate in cases where the debtor fails to disclose his interest in the property. In that case the period of three years will run from the date the trustee became aware of the property.

The bill also allows a trustee to abandon an interest in a heritable property by giving written notice. If notice is given by the trustee it is proposed that the notice is treated as sufficient evidence that the debtor is free to deal with the property.

Legacies/Life Policies

The bill also proposes new rules affecting certain assets where the debtor has an entitlement but he will not be vest in the asset until a later event. For example, a debtor may be named as a beneficiary under a will but will not be entitled to receive the legacy until the death of the individual. Another example would be life policies taken out by spouses in joint names. The policy may provide for a pay out in the event of the death or critical illness of one of the parties. Until now the debtor's interest formed part of the estate and remained part of the estate ,whether or not the debtor was discharged.

The bill proposes that on discharge these non-vested interests will revest in the debtor.

14 January 2006