The Bankruptcy and Diligence (Scotland) Bill (the ‘Bill’) was introduced to the Scottish Parliament on 27 April 2023. The Bill is expected to come into force in Summer 2024.
The Bill brings together a number of areas from the ongoing stakeholder review into the operation of existing statutory debt solutions and the recent review of diligence (Scotland’s formal debt recovery mechanisms). As well as making technical changes to bankruptcy legislation, its aim is to help improve the lives of people who are struggling with problem debt and serious mental health issues. Other matters identified for improvement during the review are be taken forward in secondary legislation or through guidance.
The Bill contains provisions that are broadly divided into three categories. It:
(1) provides an enabling power to establish a mental health moratorium on debt recovery action.
(2) makes minor and technical modifications to the Bankruptcy (Scotland) Act 2016 to provide clarity and improve the operation of bankruptcy processes set out in the legislation.
(3) makes technical modifications to the law of diligence to improve the debt recovery processes for creditors by making them more efficient whilst also maintaining protections for those subject to diligence.
Section 1: Moratorium on diligence: debtors who have a mental illness
This provision of the Bill introduces an enabling power which will provide the platform for future regulations establishing a mental health moratorium on debt recovery action for those who are experiencing serious difficulties with their mental health as well as having problem debt.
What this mental health moratorium will ultimately look like has not been finalised. The process will be set out in secondary legislation. Discussion with stakeholders is ongoing and a working group has been established to make recommendations as to the form of the moratorium. The areas currently being considered cover four key aspects:
1) Entry criteria.
2) Period of protection.
3) Level of protection.
4) Exit from moratorium.
Sections 2-5: Modification of the Bankruptcy (Scotland) Act 2016 (the ‘Act’)
The proposals in sections 2-5 are minor or technical fixes that have been identified as necessary to the above Act. The amendments relate to bankruptcy recall legislation, award of bankruptcy, gratuitous alienations and appeal time periods as follows:
- Process for applying for recall of an award of sequestration
The Act provides that where the debtor has paid, or is able to pay, their debts in full, an application can be made to the Accountant in Bankruptcy (‘AiB’) for recall of bankruptcy. The process for doing so differs depending on who initiates the process and whether the trustee is the AiB. There are three scenarios:
1) Where the AiB is not the trustee.
2) Where the AiB is the trustee and another party makes the application.
3) Where the AiB is the trustee and acts on its own accord.
The current provisions in section 35 of the Act are unclear as to the appropriate process for the AiB to follow in these scenarios. The amendments made by Section 2 of the Bill seek to clarify.
- Award of bankruptcy
Where a debtor application is made for bankruptcy, section 22 of the Act provides that the AiB must award bankruptcy where all relevant criteria have been met. The Act presently only cross references to the section which refers to full administration bankruptcy and there is no cross reference to a similar provision for a Minimal Asset Process bankruptcy. The Bill rectifies this.
- Gratuitous alienations: right acquired in good faith and for value
Section 98 of the Act includes provisions related to gratuitous alienations (the voluntary disposal of a debtor’s assets by the debtor to another person for no value or less than full value) which can be challenged by the trustee. If successful, the court must grant decree of reduction, or for such restoration of property to the debtor’s estate, or such other redress as may be appropriate. The intention of the section was that where a court does grant such a decree, it would not affect any right acquired by a third party where that party acquired in good faith and for value through the transferee. However there is an error in the cross referencing. The Bill will rectify this error so that section 98(7) refers to subsection (5) which obliges the court to grant a decree, and not the exceptions that would prevent the court from granting such a decree.
- Time periods for appeals against decisions by AiB
The Bill rectifies and introduces the missing time periods within which appeals against decisions by AiB are to be made to the sheriff in sections 69 and 134 of the Act.
Sections 6-10: Diligence provisions
The Bill also proposes a series of amendments to the current law of diligence in Scotland identified as measures to modernise debt recovery mechanisms and to streamline and improve processes. Diligence is the technical term for enforcement in Scottish law and covers the steps that a creditor can take to recover their money from the debtor by taking court action.
The amendments are covered in sections 6-10 of the Bill in relation to the following:
- Arrestee’s duty of disclosure
Section 6: Arrestment and action of furthcoming(1)
Arrestment is a form of diligence which can be used to recover debt owed by a debtor to a creditor. There is currently a duty on an arrestee (being the legal person who holds assets on behalf of the debtor) to disclose to an arresting creditor, the existence and value of assets attached by an arrestment (Section 73G of the Debtors (Scotland) Act 1987 refers). “Arrestee” also includes a person who is a potential arrestee. The changes made by this section are such that if there is no property to attach, the arrestee is required to confirm to the creditor the reason for this.
There is also proposed a change in the sum to be paid in the event of failure to make the appropriate disclosure.
Section 7: Diligence against earnings
This covers the changes in respect of notification duties placed on an employer to the creditor or the sheriff clerk.
- Diligence on the dependence
Section 8: Provision of debt advice and information package
Diligence on the dependence is a provisional or protective measure which may be used by a creditor whilst a court action is ongoing. It allows the creditor to take steps to preserve the debtor’s property so that it will be available to satisfy any claim eventually upheld by the court. The court has the power to grant a warrant for diligence on the dependence with or without an initial hearing. In both these cases, Section 8 of the Bill requires the creditor to provide the debtor (where they are an individual) with a debt advice and information package (referred to in section 10 (5) of the Debt Arrangement and Attachment (Scotland) Act 2002). If the creditor fails to do so, the warrant will not be granted or in the case of a warrant granted without a hearing, the court will recall the warrant.
- Exceptional Attachment
Section 9: Notice and redemption periods
Exceptional attachment is a form of diligence which can be used, in specific circumstances, to recover debt owed by a debtor to a creditor using a procedure which allows the attachment of non-essential assets within a debtor’s home. If the asset is not immediately removed, the debtor or any other person holding that asset must be given a minimum notice period of seven days. This Section puts the current notice period into primary legislation. Presently, the debtor may redeem non-essential assets within 7 days of the date on which they were attached. Section 9 modifies the timescale to 14 days if the article was not removed immediately.
Section 10: Money attachment when premises are open
This section has the effect of modifying earlier legislation with respect to money attachment to enable a money attachment to be executed in relation to premises in which a trade or business is carried on, on any day and at any time the premises are open for the purposes of the trade or business.
Final provisions
- Section 11 Ancillary provision
This enables Scottish Ministers to make any ancillary provision appropriate for the purposes of, in connection with, or for giving full effect to the Act.
The Bill has been referred to the relevant Parliamentary Committees for consideration with the Stage 1 debate expected to take place later this year. The Bill is expected to come into force in 2024.
External Links
The Bankruptcy and Diligence (Scotland) Bill
Business and Regulatory Impact Assessment
(1) An action raised to recover property which has been arrested in the hands of a third party.