01 April 2015 - SZM, SI
The Bankruptcy and Debt Advice (Scotland) Act 2014
Today marks the commencement of the Bankruptcy and Debt Advice (Scotland) Act 2014 (“the New Act”) which aims to strike a balance between treating debtors fairly and ensuring creditors have the strongest recovery prospects possible.
Moratorium on Diligence
Under the New Act, no enforcement action can be taken against a debtor for a period of six weeks from the point they notify the Accountant in Bankruptcy (AIB) in writing that they intend to; (i) apply for sequestration; (ii) apply for a debt payment programme under the Debt Arrangement Scheme (“DAS”); or (iii) enter into a Trust Deed. The six week period commences from the date the AIB publishes the relevant notice in the Register of Insolvencies.
Only one such application may be made by a debtor in any twelve month period which means that the procedure cannot be used repeatedly by disingenuous debtors to frustrate the recovery process.
Creditors should note that attached articles may still be auctioned and earnings arrestments, current maintenance arrestments and conjoined arrestments are unaffected by this moratorium provided the attachments/arrestments were in place prior to the commencement of the moratorium.
Notice to Banks
Under the New Act, a Trustee must provide written notice to a debtor’s bank of their sequestration. A bank will face no liability at the hands of a Trustee in respect of any transactions entered into between the date of a debtor’s sequestration and the date on which it receives notice of it from the Trustee.
This development provides welcome statutory clarification of the liability faced by banks in circumstances where its customers become insolvent.
Under the New Act, the AIB must assess what proportion of a debtor’s post sequestration income must be paid into the insolvent estate. Once the AIB has identified the amount to be paid, it will make a debtor contribution order. Contribution orders can now extend up to four years beyond the date of sequestration, rather than the period of three years prescribed under the old Act.
The increase to the period in which a debtor requires to contribute to their insolvent estate is a welcome development as this may serve to inflate the funds capable of being realised by the Trustee for subsequent distribution to creditors.
Common Financial Tool
Under the New Act, the AIB must use the new “Common Financial Tool” to assess what debtor contribution is appropriate having regard to the debtor’s assets, income, liabilities and expenditure.
This measure is expected to ensure consistency and fairness in assessing a debtor’s contribution as the same calculation will be used by the Accountant in Bankruptcy in each individual case.
Creditors Claims Deadline
Under the New Act a creditor requires to submit a claim in a debtor’s sequestration within 120 days of being invited to do so.
It is important that creditors lodge their claim timeously. A failure to do so could result in a creditor losing their right to claim in the sequestration.
While a claim received at least eight weeks prior to the end of the first accounting period may still, in exceptional circumstances, be adjudicated upon, there is no judicial guidance as yet clarifying what “exceptional circumstances” will justify the submission of late claims.
Debtors will no longer be discharged from their sequestration automatically after a period of one year. Instead, the Trustee will submit a report on the debtor’s conduct to the AIB within ten months of the sequestration commencing.
The AIB will then determine whether it is appropriate to discharge the debtor from sequestration, having regard to all of the circumstances of each particular case. If debtors fail to co-operate with their Trustees or are evasive, their right to automatic discharge is likely to be lost.
It is to be hoped that this reform will encourage debtors to engage in the sequestration process and offer whatever assistance they can to the incumbent Trustee.
Under the current law, any property or right acquired by the debtor after the date of sequestration but before the date of discharge is capable of being realised by the Trustee for the benefit of creditors.
Under the New Act, any assets which a debtor acquires within the four year period from the date of sequestration will automatically vest in the Trustee (irrespective of whether the debtor had been discharged from sequestration within that period).
This is a welcome development for creditors as it has the potential to increase the pool of assets capable of being realised and distributed by the Trustee.
Financial Health Service
A Financial Health Service website was launched on 3 December 2014. It refers debtors to organisations offering free information and advice on debt, managing money, housing, homelessness and ethical lending. Debtors must now receive mandatory money advice before they can apply for sequestration and financial education will be prescribed for certain debtors.
The New Act improves the remedies that are available to creditors in four main ways;
- It extends, by one year, the period in which a debtor’s contribution to their insolvent estate can endure.
- It extends the period in which a Trustee can realise assets acquired by the debtor post sequestration (irrespective of the date of discharge).
- As debtors will no longer be automatically discharged from sequestration, it is to be hoped that this will encourage them to co-operate and engage in the sequestration process.
- The limit applied to the statutory moratorium should serve to prevent debtors from frustrating recovery efforts by presenting vexatious applications for statutory debt relief.
While it will take time for the benefits offered by the New Act to be realised by creditors, it is to be hoped that the scope it offers to inflate the value of insolvent estates will serve to benefit creditors in the longer term.
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