Back to the Scottish Parliament Enterprise and Culture Committee Report
Archive Home

Business Bulletin 1999-2011

Minutes of Proceedings 1999-2011

Journal of Parliamentary Proceedings Sessions 1 & 2

Committees Sessions 1, 2 & 3

Annual reports

SP Paper 559 EC/S2/06/R7
  Volume 2     Next

7th Report, 2006 (Session 2)

CONTENTS

Volume 1

INTRODUCTION AND BACKGROUND

PART 1 – BANKRUPTCY

PART 2 – FLOATING CHARGES

PART 3 – ENFORCEMENT

PARTS 4 TO 15 – DILIGENCE

SUBORDINATE LEGISLATION

POLICY AND FINANCIAL MEMORANDUM

CONCLUSIONS AND RECOMMENDATIONS

ANNEXES

A – GLOSSARY OF TERMS

B – EXTRACT FROM THE MINUTES

Volume 2

Remit and membership

Remit:

To consider and report on matters relating to the Scottish economy, business and industry, energy, training, further and higher education, lifelong learning and such other matters as fall within the responsibility of the Minister for Enterprise and Lifelong Learning; and matters relating to tourism, culture and sport and such other matters as fall within the responsibility of the Minister for Tourism, Culture and Sport.
 
Membership:

Alex Neil (Convener)
Shiona Baird
Mr Richard Baker
Susan Deacon
Murdo Fraser
Karen Gillon
Mr Michael Matheson
Christine May (Deputy Convener)
Mr Jamie Stone

Committee Clerking Team:

Clerk to the Committee
Stephen Imrie

Senior Assistant Clerk
Douglas Thornton

Assistant Clerk
Seán Wixted

Stage 1 Report on the Bankruptcy and Diligence etc. (Scotland) Bill

The Committee reports to the Parliament as follows—

introduction and background

1. The Bankruptcy and Diligence etc. (Scotland) Bill (SP Bill 50) ("the Bill") was introduced on 21 November 2005 by the Deputy First Minister and Minister for Enterprise and Lifelong Learning, Nicol Stephen MSP. The Parliamentary Bureau agreed that the Enterprise and Culture Committee ("the Committee") should be the lead Committee1.

2. Under Rule 9.6 of the Standing Orders, the lead committee has the responsibility to report to the Parliament on the general principles of the Bill. This report summarises the views of the Committee on the general principles of the Bill and completes our work at Stage 1.

3. The Finance Committee took evidence on matters relating to the Financial Memorandum accompanying the Bill. Its report is attached as Annex F. The Committee’s views on the report received from the Finance Committee are set out in paragraphs 229 to 233.

4. The provisions of the Bill that confer powers to make subordinate legislation were referred to the Subordinate Legislation Committee under Rule 9.6.2. The Subordinate Legislation Committee’s report is attached as Annex G. The Committee’s views on the report received from the Subordinate Legislation Committee are set out in paragraphs 225 to 227.

5. This bill deals with a complex and particularly technical area of law. Therefore, a glossary of terms has been set out as Annex A.

Adviser

6. The Committee is grateful to Nicholas Grier of Napier University for his services as our adviser during the course of the Bill.

Preamble

7. In the early 1970s, the UK Parliament passed the Consumer Credit Act 1974. Then consumers had a choice of two or three credit cards and one of the few outlets for a loan was via high street banks. Today, there are over 1,300 different credit cards on offer and in addition to the banks, consumers and businesses can approach building societies, finance companies and even supermarkets to borrow money.

8. Recent estimates suggest that the level of UK personal debt now stands at over £1.1 trillion and Citizens Advice Scotland now estimates that the average debt owed by its clients is now in excess of £13,000 – a 64% increase in the average level of client debt in Scotland since 20012.

9. The consequences of this level of debt are obvious. According to the Scottish Executive, the number of sequestrations (bankruptcies) has risen from 2,701 in 1997/98 to 3,521 in 2004/05. In terms of personal insolvencies, the figures have risen from 3,591 to 9,662 over the same period. Meanwhile, UK repossessions by mortgage lenders rose from 6,030 in 2004 to 10,250 in 2005. Bank and other forms of arrestments are on the rise, from 86,374 in 1996 to 155,432 in 2003.

10. Outwith consumer debt, businesses are also facing challenges. Although recent figures published by the UK Department of Trade and Industry show that the corporate failure rate in Scotland fell by 9 per cent to 128 in the past year3, the level of company liquidations has risen in Scotland from 477 in 1997 to 621 in 20044. The Committee recognises, however, that the bill has no impact on corporate liquidations.

11. The reasons for such increases in personal and business-related debt are complex. In part, some suggest that credit is too easy to come by and there are too many examples of irresponsible lending. Clearly, there are a number of wider societal issues about debt that need to be addressed.

Purpose of the Bill

12. According to the Scottish Executive, the Bill implements the Partnership Agreement5 commitment to legislate on personal bankruptcy and diligence to modernise the law, strike a better balance between creditors and debtors and promote an entrepreneurial culture by recognising the need to support risk-taking as a means of growing the economy6.

13. The Committee has identified four main areas within the Bill, namely—

  • Bankruptcy (part 1 of the Bill)
  • Floating Charges (part 2 of the Bill)
  • Enforcement (part 3 of the Bill)
  • Diligences (parts 4 to 15 of the Bill)

14. The key policy provisions within each of these four areas are to—

Bankruptcy

  • reduce the bankruptcy period from three years to one year;
  • protect the public and business interests through the introduction of bankruptcy restrictions orders and undertakings placed on potentially fraudulent or culpable debtors;
  • encourage a responsible attitude to debt by continuing to require debtors to contribute towards their sequestration where possible by introducing income payment orders and agreements;
  • reform the requirements for "apparent insolvency";
  • reform restrictions and disqualifications on debtors;
  • introduce increased transparency in and monitoring of protected trust deeds;
  • streamline the bankruptcy process and reduce court involvement;
  • take bankruptcy proceedings out of the Court of Session and consolidate them in the sheriff courts;

Floating charges

  • reform generally the regime for floating charges by setting up a new Register of Floating Charges and reform how they work in practice;

Enforcement

  • establish a Scottish Civil Enforcement Commission to operate as the sole regulatory body to determine and oversee all matters relating to enforcement;
  • disband the existing Advisory Council of Messenger-at-Arms and Sheriff Officers;
  • merge the existing offices of messenger-at-arms and sheriff officers;

Diligences

  • Reform main types of diligence used against heritable (immoveable) property by—

    abolishing adjudication for debt and replacing it with two new diligences, known as land attachment and residual attachment (Part 4 of the Bill);

    reforming the law on inhibition, both on the dependence and in execution (Part 5 of the Bill);

  • Reform main types of diligence used against moveable property by—

    reforming the law of arrestment, both on the dependence and in execution (Part 6 and Part 10 of the Bill);

    introducing a new diligence on the dependence to attach moveable property in the hands of a debtor, as a potential preliminary diligence to attachment (introduced by the Debt Arrangement and Attachment (Scotland) Act 2002) to be known as ‘interim attachment’ (Part 7 of the Bill);

    introducing a new diligence to attach money in the hands of a debtor, known as ‘money attachment’ (Part 8 of the Bill);

    reforming the law of diligence against earnings (Part 9 of the Bill);

  • Reform of less commonly used forms of diligence by—

    abolishing outdated forms of diligence, such as actions of maills and duties, sequestration for rent and adjudication in security (Part 6 and Part 11 of the Bill);

    amending the law governing the Landlord’s Hypothec (Part 11 of the Bill) by introducing restrictions;

    amending of the law on the arrestment of ships and cargo (Part 14 of the Bill);

  • Introduce a system for enabling the courts to obtain information about a debtor’s assets to facilitate more efficient and effective use of diligence (Part 15 of the Bill).

15. We return to some of these provisions in subsequent sections of this report.

Adequacy of the consultation

16. Part of the Committee’s role at Stage 1 is to consider whether the Scottish Executive has consulted appropriately at the pre-legislative stage. To date, there have been three consultations carried out by the Executive7. The first, in April 2002, covered the enforcement of civil obligations in Scotland8. 68 responses were analysed by the Executive as part of its report published in November 2002.

17. Second, in November 2003, the Executive published a consultation entitled, Personal Bankruptcy Reform in Scotland: a modern approach9. In March 2004, the Scottish Executive published its analysis of the 84 responses received.

18. Finally, in July 2004, the Executive consulted for a third time with a document on modernising bankruptcy and diligence in Scotland, which included a draft Bill10. 102 responses were analysed by the Scottish Executive.

19. Additionally, throughout the process, the Executive has held a series of external public meetings11. In the Committee’s opinion, external bodies and the general public have, at least in theory, had an opportunity to comment on these particular matters.

20. We would like to encourage the Executive to make more use of "working groups" and other participative forms of engagement that try to resolve problems and ‘road test’ ideas before legislation is published. This would mean that there would be less likelihood of amendments being required at stages 2 and 3 and more consensus built on the detail of a Bill. The difficulties with the practical implementation of money attachment (referred to at paragraphs 175 to 185) are one such area where a different type of consultation could have solved problems before the Bill was introduced.

21. The Committee is aware that there have been some complaints about the fact that some of the Executive’s consultations are still ongoing, for example, on protected trust deeds, and that, in effect, the Committee is being asked to agree the general principles of the Bill without knowing the detail of the proposed statutory instruments that will give effect to the provisions in these areas12. Whilst this is not uncommon, it is a practice that the Committee considers less than desirable. The Committee also reiterates its preference that there needs to be an appropriate balance struck between those provisions written into primary legislation and those left to ministers to make by order or secondary legislation.

22. Despite these caveats, the Committee considers that the pre-legislative consultation undertaken by the Scottish Executive has been adequate for the purposes of consulting on this bill but would encourage a more imaginative approach in the future with greater participative engagement with people and organisations.

part 1 - bankruptcy

Introduction

What is bankruptcy?
23. Borrowing money to pay for regular purchases, to buy major capital items such as a car or a house or to finance a business is a common feature in today’s society. However, for a proportion of those consumers or business that do so, things can go wrong and they may become unable to repay these debts. In some circumstances, this can lead to sequestration, also known as bankruptcy.

24. The current legal framework for bankruptcy is set out in the Bankruptcy (Scotland) Act 1985 (the "1985 Act") as amended by the Bankruptcy (Scotland) Act 1993 (the "1993 Act"). The 1985 Act provides for two types of bankruptcy – sequestration and protected trust deeds.

25. Sequestration is the legal process whereby the court transfers the assets of a debtor to a trustee for the benefit of the creditors. The appointed trustee first safeguards the assets and then realises the assets and repays the creditors as much as possible of the amount that they are owed. The appointed trustee must be a licensed insolvency practitioner (IP) or the Accountant in Bankruptcy (AiB). The AiB is both an agency of the Scottish Executive's Justice Department and the Chief Executive of the Agency.

26. A protected trust deed (PTD) is a voluntary and less formal agreement whereby a debtor agrees with the trustee an affordable contribution without the court being involved. It should be noted that, whilst sequestration can apply to both individuals and partnerships, a PTD can only apply to an individual.

27. The incidence of both types of bankruptcy has increased in recent years: sequestrations from 2,701 in 1997/8 to 3,521 in 2004/5; PTDs from 890 in 1997/8 to 6,141 in 2004/5. At the same time, the amounts paid to creditors have declined: sequestration from 25.5p in the pound in 1999/2000 to 18.4p in 2004/05; PTDs from 34.1p in the pound in 1999/2000 to 22.2p in 2004/0513. It is important to note that the overwhelming majority of bankruptcies relate to consumer debt and not to business failure.

What does the Scottish Executive intend?
28. According to the Deputy Minister for Enterprise and Lifelong Learning, the policy intent of the Bill is not, as some have argued, to make bankruptcy a soft option14. The Executive intends to make changes to what happens both during and after a sequestration15. One means of this is to give the Executive the necessary powers to make what it believes are overdue changes to protected trust deeds16.

29. Secondly, in the Executive’s view, the one-size-fits-all system is no longer the answer17. The minister noted in his evidence to the Committee that Scotland’s business start-up rate is lower than that of its competitors18. In his view, the Bill offers a chance to make Scotland a better place in which to do business19. He also noted that, as a result of the change to bankruptcy law in England in April 200420, there is no longer a level playing field21. The Executive believes that there is a need to ensure that businesses in Scotland are not put at a disadvantage22.

30. In summary, the Executive considers that the current laws, made 20 years ago, are in need of reform as they are no longer fit for purpose23. In the minister’s view, they do not strike the right balance between the interests of debtors, creditors and the public; they make it too hard for people and businesses to start again, which is an important part of the entrepreneurial cycle and, in addition, the current law does not do enough to protect the public from reckless, feckless and, indeed, criminal debtors24.

31. In light of the above, the Executive has introduced the Bankruptcy and Diligence etc. (Scotland) Bill, which promotes a series of reforms to the current legislative framework. The main provisions have been set out in paragraph 14 above. The sections that follow give the Committee’s opinion on the main issues arising in relation to the key reforms to bankruptcy contained within this bill.

Period of bankruptcy

32. The 1985 Act sets a three year period of bankruptcy, during which time an undischarged bankrupt is subject to restrictions and disqualifications. The Scottish Executive wants to encourage personal and business restart whilst upholding a ‘can pay, should pay’ principle. To help encourage individuals to move on with their lives, a reduction in the duration of bankruptcy is proposed but with safeguards and provisions for payments to creditors beyond the date of discharge. The Executive also states that the bulk of the work related to bankruptcy is carried out in the 6-12 months following bankruptcy. In the Executive’s view, a reduction to one year is necessary as this will bring the duration of bankruptcy in Scotland into line with England and Wales following the passing of the Enterprise Act 2002, which amended the Insolvency Act 1986 and came into effect on 1 April 200425.

33. Most of the evidence received by the Committee indicated general contentment with this proposal. However, many questioned whether in relation to business restarts and the promotion of entrepreneurialism more generally, the Bill will make any difference at all. For example, Stephen Lawson of R3, the association of business recovery professionals across the UK, told the Committee that he "seriously" doubted "whether the changes that have been made in England and Wales, or the proposals to change bankruptcy law in Scotland, will do an awful lot to encourage entrepreneurship"26. On the other hand, Mike Norris of the Insolvency Service in England and Wales noted that "there is strong evidence that the severity of a bankruptcy regime has a significant effect on levels of entrepreneurship"27. This research suggests that a benign bankruptcy regime is better for entrepreneurs than a very severe one and that it increases self-employment28.

34. Whilst most of the evidence from organisations expressed support for a reduction in the period of bankruptcy from three years to one year, the Committee heard calls for the changes to the payment periods. In summary, many bodies appeared keen to align the period of bankruptcy with the period of payment of debts. The City of Edinburgh Council was typical of many of the submissions received, stating in written evidence that "not to synchronise payments with discharge creates unjust anomalies". The council added—

"It seems to make no sense for an individual to be discharged and yet still carry forward the burden of payment from previous debts. This seems counter productive particularly for those seeking to restart or continue trading activity"29.

35. Aligning the period of bankruptcy with the time for payment may, however, distort the proposed level playing field across the UK30 and non-trade creditors may not be content. In some respects, such synchronisation could see debtors after only a year’s worth of contributions to their creditors being free of any obligations after their discharge, even though the debtors are in employment and quite capable of paying creditors for a longer period. Additionally, as the Bill is currently drafted, debtors will be required to make payments out of their income to creditors (as is already the case) for up to three years and not one.

36. The Scottish Executive is not supportive of a move to synchronise periods of bankruptcy with time for payment. In evidence to the Committee, members heard that "the synchronisation argument, although superficially attractive, does not stack up when one considers what its consequences might be for the behaviour of debtors and creditors"31. Of specific concern to the Executive is the view that this would prejudice the interests of creditors, particularly small businesses and be inconsistent with payment periods in trust deeds, which are three years32.

37. The Committee recognises that the level of bankruptcy is already on the increase and that this bill will not necessarily stem this rise and might, given the evidence from England and Wales, accelerate the trend. However, on balance, the Committee is content with the Executive’s proposal to reduce the period of bankruptcy from three years to one year.

38. The Committee believes that the impact on the levels of entrepreneurial activity or business restarts will be negligible despite the change. The Committee suggests that this part of the policy memorandum accompanying the Bill has been over emphasised. The Committee believes that the desire to create a level playing field across the UK on bankruptcy periods is a more likely reason for the proposal.

39. The Committee notes the call to synchronise the period for bankruptcy with the time for repayment. Such a change has obvious benefits but would have implications for creditors. At this stage, we do not believe that it is right to make such a change.

Bankruptcy restrictions orders

40. An undischarged bankrupt is currently subject to restrictions on how much credit they can obtain without informing the lender of their status. They are also disqualified from acting as a director of a company or serving as a Justice of the Peace or as a member of a local authority, the Scottish Parliament, the UK Parliament or the European Parliament. The current bankruptcy legislation does not distinguish between debtors who co-operate fully with their trustee and culpable debtors.

41. The Scottish Executive now proposes that debtors will be discharged after one year. However, a debtor whose conduct is fraudulent or culpable will be subject to a bankruptcy restrictions order (BRO), which imposes particular restrictions on a debtor for a period of up to 15 years after discharge depending on the debtor’s conduct in relation to bankruptcy. Alternatively, a debtor who is not subject to a BRO may agree an undertaking to be bound by certain restrictions, known as a bankruptcy restrictions undertaking (BRU). BROs and BRUs will only apply to individuals and not to partnerships.

42. Being subject to a BRO or a BRU would be similar in effect to being an undischarged bankrupt in that the debtor cannot be a receiver, i.e. appointed to take possession of a company which goes into receivership, and is disqualified from nomination, election and holding office as a member of a local authority. Scottish Ministers would also be able to make orders, subject to the approval of the Parliament, changing existing provisions by which a debtor is disqualified from being elected or appointed to an office or position.

43. In the range of submissions to the Committee, a variety of issues were raised in relation to BROs. First, there is concern at the administrative procedures. BROs are intended to help prospective creditors or employers essentially to vet an applicant through the ability to search through records held centrally. In this way, the suitability of a person can be assessed with the help of a system that contains data on those people subject to a BRO or BRU. However, given the flexible lifestyle of many people and their ability to move around the country or indeed to and from the EU for work, how well will central record-keeping systems be able to cope.

44. The Committee is aware that some Government projects of this type have a poor track record, for example, the problems at the Child Support Agency or at the Glasgow Passport Office. There must be questions as to how well the system will cope with, for example, a debtor who moves around Scotland, moves to England (where there is a different BRO registration system), moves abroad, changes name, or borrows money from a friend rather than a bank.

45. With the sanction for breach of a BRO being contempt of court, the Committee believes it will be important that any administrative arrangements for registration and ongoing tracking of people in receipt of a BRO or BRU are efficient, effective, easily accessible to external bodies and transparent.

46. The Accountant in Bankruptcy, which will exclusively manage the system of BROs and BRUs, believes that there is sufficient time to put the necessary administrative procedures in place33. Its staff also intend to model any systems on those of the Insolvency Service in England and Wales.

47. As the sole body in charge of the business of issuing bankruptcy restrictions orders and undertakings, third parties such as insolvency practitioners will have to go through the AiB to request that a BRO or BRU be applied. What, however, is the procedure if there is a dispute between the AiB and an insolvency practitioner as to the award or otherwise of a BRO or BRU?

48. The Committee urges the Scottish Executive and the Accountant in Bankruptcy to ensure that a centralised record-keeping system for bankruptcy restriction orders and undertakings will be open, transparent and efficient.

49. We recommend the creation of a system of appeal, perhaps to the sheriff court, where there is a dispute between the Accountant in Bankruptcy and a third party on the award or otherwise of a bankruptcy restrictions order or undertaking.

50. Finally, we note the comments by Money Advice Scotland with regard to the representation by money advisers in bankruptcy restrictions orders and undertakings as they are unlikely to be able to put forward a client’s case in court, given current court procedures that prevent their participation34.

51. The Committee considers this unnecessarily restrictive and recommends that the Scottish Executive consider this matter along with appropriate agencies and the judiciary.

Trustee in sequestration

52. The 1985 Act provides for interim and permanent trustees. The interim trustee safeguards the debtor’s estate pending the appointment of a permanent trustee, ascertains the reasons for the debtor’s insolvency and ascertains the state of the debtor’s liabilities and assets. The permanent trustee among other things, recovers, manages and realises the debtor’s estate and distributes the estate among the creditors. In the interest of streamlining the bankruptcy process, the Executive proposes that, from the time of sequestration, there should only be one trustee, to be known as the trustee in sequestration.

53. Most of the relevant provisions contained within the Bill are supported, in the main, by external bodies as well as by the Committee. However, the Committee recommends that there must be a minimum level of investigation carried out by a trustee into the reasons for a debtor’s insolvency and the state of the debtor’s liabilities and assets.

Jurisdiction

54. The Bill alters the legal avenue under which petitions for bankruptcy are dealt with. Currently, these are mainly by the sheriff courts. However, some creditors choose to submit petitions to the Court of Session. As such, applications for recall (cancellation) of a bankruptcy and applications for reduction or a suspension of a sequestration are currently dealt with only by the Court of Session, which is a very expensive process. The Scottish Executive considers that no creditor petitions for bankruptcy are so complex that they must be dealt with in the Court of Session. The question of recall procedures is a subject raised by Mr Edward Fowler in his petition to the Parliament (PE 865), which was referred to the Committee.

55. The Committee believes that recall should be a matter for the sheriff court and not the Court of Session and that there must be an ‘appeal process’ that is both fair to the debtor whilst not unnecessarily slowing down the system.

56. One further matter raised in relation to jurisdiction is the Bill’s provisions to open the provision of services by insolvency practitioners (IPs) to organisations and individuals from outwith Scotland. For the Institute of Chartered Accountants of Scotland (ICAS), this raises practical concerns. In its written evidence, ICAS indicated that it does not feel that "the interests of debtors and creditors would be well served by an IP who is acting remotely and does not meet the debtor"35 and "it is important that any English IPs taking work in Scotland should be competent in the law and procedures of Insolvency in Scotland"36. Finally, ICAS believes "that there is a very real danger that it could open the floodgates in Scotland to unregulated debt consolidators, who mainly operate South of the Border"37.

57. The Committee is not convinced that opening the Scottish market to insolvency practitioners from elsewhere will necessarily be a problem in that consumers of such services will be able to make an informed choice of firm. However, we do have concerns that any IP or, more importantly, unregulated debt consolidators operating in Scotland conform to high standards and good practice and be able to demonstrate a competence in the relevant Scottish legislation.

58. The regulation of such professions is a reserved matter and, as such, the Committee recommends that the Scottish Executive discusses the issues raised by ICAS with the UK Government to see what can be done.

Debtor’s home

59. The current legislative framework for bankruptcy provides for the sale of the debtor’s home. Such an action can have severe social consequences for a debtor with dependents living in the family home. However, at the moment, any trustee need not take steps to sell the home with any urgency and, in a rising housing market, will have an incentive to wait. This causes uncertainty for debtors and their families. The Scottish Executive proposes setting a time limit of three years on the period during which a trustee has to take some action in respect of realising the debtor’s home.

60. Some witnesses giving evidence to the Committee questioned whether the "family home" should be included in bankruptcy procedures at all38. On the other hand, to exempt the family home (as, for example, in the USA) may give rise to complaints from creditors that not all the assets of a debtor are being considered (the principle of ‘universal attachability’). Moreover, research in England suggests that most bankrupts do not own their homes anyway39.

61. The Committee recognises that there will be some occasions where the sale of a debtor’s home is merited during bankruptcy proceedings and some where it is not. In our view, a ‘one-size-fits-all’ approach is not the best way to proceed. We believe that careful consideration must be given as to whether the forced sale of the debtor’s home would lead to homelessness or whether there would be sufficient assets left over from the sale after the debts have been paid for the debtor to use the remaining capital to purchase or rent a new home.

62. In our view, it would make no sense for bankruptcy proceedings to cause homelessness. The Committee recommends that the Executive ensures that its proposals in this part of the Bill are consistent with its policies on tackling homelessness and to bring about any changes that are necessary.

63. The Committee would also like to see the Executive close one potential loophole should the Bill’s existing provisions remain, namely that debtors could re-mortgage a property prior to entering into a trust deed. The property would, consequently, no longer be considered as an asset and the trust deed in effect is income only. Additionally, for a one-off fee of £500, the debtor could freeze the equity in the house during the timetable of the trust deed. After discharge, with rising house prices, the debtor would see the value of his or her property rise substantially and would simply be able to repay the re-mortgage and, most likely, recoup a sum well in excess of the £500 fee. Creditors would not, however, receive any sums from the asset that is the debtor’s house.

64. The Committee believes that this kind of practice, especially where advised by a third party, is not consistent with the spirit of the Bill. We recommend that the Scottish Executive considers tabling amendments at stage 2 that will require a trustee to conduct a search as to whether such a re-mortgage has taken place within the previous 12-months. If this is found to be the case, the Accountant in Bankruptcy should be afforded the possibility of preventing the trust deed from being protected.

65. Finally, although the regulation of financial services and debt consolidation services is reserved, the Committee recommends that the Executive discusses with the UK Government whether it is possible to penalise any such advisers providing such advice to debtors to re-mortgage before entering a trust deed.

Trust deeds and protected trust deeds

66. A trust deed is where a debtor transfers some or all of his/her assets to a trust which is looked after by a trustee. The trustee uses the income arising from those assets to pay the creditors over a period of time. Once the debts are all paid, the trust is dissolved. A debtor who has granted a trust deed is still at risk of diligence or being sequestrated by a creditor who has not agreed to the trust deed.

67. A protected trust deed is similar, but all the debtor’s assets are transferred to a trust and, provided a majority in number or one third in value of the creditors have not successfully objected to the deed, it will be registered with the Accountant in Bankruptcy, thus giving protection to the debtor. The debtor is then free from diligence and the trustee uses the income from the assets to pay the creditors. Protected trust deeds will only be entered into where there is a prospect of a dividend but they are cheap to operate, with no cost to the public purse. They also avoid the stigma of bankruptcy and the debtor is not subject to the usual restrictions of bankrupts. They are only really useful where debtors have assets and some income. They are not useful, however, for debtors with ‘no income and no assets’ ("NINAs").

68. According to the Scottish Executive, in 2004-05, there were 6,141 PTDs registered by the AiB, up from 890 in 1997-9840. Similarly, the dividends paid to creditors in completed insolvency cases for PTDs fell from 34.1p/£ in 2000 to 22.2p/£ in 200541. It is the intention of the Executive to modernise PTDs through subordinate legislation under the 1985 Bankruptcy Act and this Bill extends the enabling powers needed to carry through that reform.

69. The Executive’s main concerns are set out in the policy memorandum accompanying the Bill42. This states that regulation of PTDs has to date been very ‘light touch’. The Executive notes that the AiB’s functions are limited to entering any PTD in a public register and, if asked, determining the trustee’s remuneration and outlays. The Executive believes that the ‘light touch’ approach can be justified if PTDs deliver a clearly better return for creditors and do not leave a gap in public and business protections. However, the Executive considers that the present arrangements for PTDs cannot be justified on either basis.

70. Although the Executive has not yet provided the Committee with the detail of its plans following the ongoing consultation on PTDs, there are already concerns being raised by other bodies. ICAS believes that they are now better regulated than ever before, that setting a minimum return to creditors will pose problems and that 30p/£ (as proposed in the consultation) is too high43. Credit Unions are concerned that the inclusion of debts owed to them within trust deeds will have implications for them and their ability to operate.

71. The Committee agrees at this stage, however, that protected trust deeds should continue to have a major role to play and that they should be simple to access, rigorously monitored and appropriately regulated. Furthermore, the Committee does not believe that the case has been made for the setting of a minimum dividend of 30 pence in the pound. We are also supportive of the call for the Executive to consider the impact on credit unions.

72. We agree with the minister’s suggestion that the regulations in this area should be subject to the affirmative procedure, or even a ‘super affirmative’ procedure, and we recommend that suitable amendments are introduced at stage 2 to give effect to this.

Status and powers of the Accountant in Bankruptcy

73. According to the Scottish Executive, the current legislative framework involves the courts in bankruptcy proceedings to a greater extent than is now considered necessary. The Bill aims to reduce the involvement of the courts and streamline the process by giving greater responsibilities to the AiB. However, the AiB does not currently have the same powers as an officer of the court and the Bill seeks to change this.

74. Currently, the Accountant in Bankruptcy is in charge of the process of sequestration in Scotland and ensures that various registers, particularly those relating to sequestrations, protected trust deeds and corporate insolvencies, are properly maintained. Nominees in the AIB’s office act as the trustees in sequestration in about 90 per cent of all sequestrations. Of those, a large number are subcontracted out on an agency basis to various insolvency practitioners.

75. The Accountant in Bankruptcy is also the appointed administrator under the Debt Arrangement and Attachment (Scotland) Act 2002 and supervises that area of business. The office audits and checks the remuneration that is payable to trustees and complies with various other legislation.

76. Additionally, the Bill gives the AiB powers to be more involved in the process of protected trust deeds and to audit the accounts of trustees in such deeds and fix their remuneration and outlays. Finally, the AIB will gain significant new roles in relation to bankruptcy restrictions orders and undertakings.

77. The Committee is content with the new status of, and roles for, the Accountant in Bankruptcy. However, we do have concerns regarding its ‘business plan’ and costings. Some of these issues were raised by the Finance Committee and we consider these further below.

78. Our main concern is that we are not convinced that enough planning has been done within the AiB and the Executive in relation to what level of work the AiB will be expected to carry out, what resources will be required and what systems and procedures will be necessary. This is an issue that has been raised by the Finance Committee, whose views we share. For example, when asked if the AiB had factored in the 66% increase in sequestrations in Scotland between Q4 of 2005 and Q4 of 2004, the AiB responded—

"back in June 2005, when we tried to assess what the bankruptcy figures would be on implementation of the Bill, we thought that bankruptcies would rise by 25 per cent. We must now consider the implications of an increase of considerably more than that—60-odd per cent. We must now reassess what the rate and number of bankruptcies at the time of implementation will be"44.

79. In fact, many of the cost estimates in the Financial Memorandum are presented on the basis of a 25% increase in bankruptcies, yet recent increases in the number of bankruptcies are substantially higher.

80. The Committee has reservations that the budgets and resources to be provided to the Accountant in Bankruptcy will be sufficient and recommends that the Executive takes steps to consider the likely level of work that will be required and resource the service accordingly.

81. Whilst we recognise the views expressed by the Minister in his letter to the Committee (dated 5 May 2006)45, the Committee believes that it is important that the Executive considers the points raised by the Finance Committee in its report and recommends that a revised Financial Memorandum is now required.

Debt advice

82. The Scottish Executive proposes that, before a creditor can petition for sequestration, debtors must be provided by creditors with a debt advice and information package (DAIP). The nature of the DAIP will be determined by Scottish Ministers and copies of relevant leaflets were sent to the Committee as evidence. However, as the Committee heard in oral evidence, "it is the experience of Shelter, and of all agencies that deal with persons with debt problems, that a large proportion of debtors do not seek advice, and do not engage with legal processes until the last minute"46.

83. The Committee welcomes the proposal that creditors will have to send debtors information in the form of leaflets etc. However, experience shows that many debtors will simply ignore anything that is sent by post.

84. In relation to the Executive itself, the Committee encourages ministers to continue to support the development of credit unions and to help this sector expand their operations.

85. Finally, we recommend that the debt advice and information package be extended to protected trust deeds and advice provided by insolvency practitioners.

Access to credit

86. Of significantly more value than the provision of debt advice and information packages would be efforts to educate and support people to plan their finances better, to regulate the credit industry and prevent mis-selling and inappropriate lending to unsuitable people. Much of this area is, however, reserved.

87. The Committee is aware that this issue is complex and wide-reaching. To comment in any depth is not possible within the context of this report and the Bill in particular. However, we are aware of the work being done by many organisations and, in particular, by our counterparts in the Treasury Select Committee at Westminster. In general, there is a need to bring together all of these interested parties to see what can be done in relation to both devolved and reserved areas.

88. In this respect, we recommend that the Scottish Executive discusses with the UK Government what more can be done to minimise the amount of credit provided to people without the necessary assets to repay the loan.

89. Care must be taken that, in doing so, this does not drive people to use the services of ‘loan sharks’. It is clearly in the interest of lenders to ensure that borrowers are able to repay but borrowers should not be able to take excessive risks that, if they go wrong, results in the tax payer ultimately picking up the pieces and the costs. We are also concerned at the growth in the number of companies offering debt consolidation services not necessarily in the best interests of debtors.

Apparent insolvency

90. A petition for bankruptcy, whether by a debtor or a creditor, can only be made if the debtor is ‘apparently insolvent’. The conditions for constituting apparent insolvency are set out in the 1985 Act, namely, in the main—

  • being bankrupt elsewhere in the UK or the EU;
  • the giving of notice by the debtor to his creditors that he cannot pay his debts in the ordinary course of business;
  • the granting of a trust deed for creditors;
  • the failure to pay a debt following a charge for payment within 14 days;
  • following an attachment of goods on a summary warrant, the failure to pay taxes or rates within 14 days;
  • the revocation of a debt payment programme;
  • a creditor has served a statutory demand for £750 or more to be paid within 21 days and the debtor has failed to pay.

91. Whilst this may appear relatively straightforward, in fact it is not. Establishing apparent insolvency can be problematic for some debtors – for example, those with no income and no assets – and the inability to be declared insolvent prevents them from using bankruptcy as a means of obtaining debt relief. It also costs in excess of £60 in administrative fees.

92. Secondly, although creditors can of course petition for bankruptcy, they are not always keen to do so, owing to poor returns on debts owed. Conversely, whilst in theory debtors can also petition, it is sometimes hard to do so. Often, creditors are not interested in supporting or concurring with debtors to apply for sequestration because they simply want the debts repaid as soon as possible and are not keen to wait for months to probably receive very little return.

93. The Scottish Executive has established a working group to examine the problems of debt relief. The group reported in July 2005. Its recommendations included proposals for a money advisor gateway into sequestration, similar to that for the Debt Arrangement Scheme, and a moratorium on creditor-led sequestration while alternatives are explored. The Executive is still considering the recommendations of the group.

94. The Committee awaits the outcome of the Executive’s deliberations and recommends that they be completed as soon as possible and preferably before the completion of the passage of this bill.

95. We suggest that the Executive considers reforms along the lines of allowing self-certification of insolvency to avoid the current pitfalls and/or introducing a non-monetary way of defining when apparent insolvency takes effect. The Committee believes a wider definition of apparent insolvency is needed.

96. The Committee wants to see a more joined-up approach by the Executive in terms of its proposals for the different options it suggests ranging from debt write-off to sequestration.

Debt threshold

97. Currently, debtors can only be sequestrated if they have at least £1,500 of debt. The Scottish Executive has consulted on whether the threshold should be increased but decided not to do so at this time. However, it intends that Scottish Ministers should have the power to vary the amount by order.

98. The Committee is not convinced that £1,500 is the correct figure or that there is a rational basis for it. We note that the threshold is lower in England in any case and recommend that the Executive considers other ways of defining what the debt threshold should be, for example, a set percentage of debt relative to assets and whether it should rise with inflation.

Other issues

Access to bank accounts for discharged bankrupts and procedures in credit reference agencies
99. In evidence to the Committee, a former bankrupt, Euan Wallace, noted that "from the moment that someone becomes bankrupt, they can forget getting any normal method of credit, such as credit cards, even after they are discharged"47 and "getting a bank account is also impossible for a bankrupt or a discharged bankrupt. Of all the banks or building societies in the high street, only two will deal with discharged bankrupts and offer them a current account: one is the Co-operative Bank and the other is the Nationwide Building Society".

100. The Committee of Scottish Clearing Bankers indicated that "basic accounts are available that must remain in credit all the time and have no overdraft facility. As a general rule, if an undischarged bankrupt is a customer of the bank, he will be allowed a basic bank account with no facilities. Once a person is a discharged bankrupt, the basic account is available to him subject to suitable references being taken up by the bank"48.

101. However, given that such basic bank accounts do not include a debit card and a cheque guarantee card49, it is questionable how useful they are, particularly from the perspective of encouraging business people and entrepreneurs to start again.

102. The Committee recognises that regulation of the banking sector is reserved but recommends that the Scottish Executive discusses with the UK Government how banks can be further encouraged to provide suitable banking facilities to discharged bankrupts, especially in relation to business restarts.

103. The Executive should also explore with the UK Government how credit reference agencies can have their own procedures brought into line with the discharge periods provided for by the new laws being proposed. Currently, discharge and repayment can be within three years and this may move to one year. Yet such agencies keep details of people’s poor credit record on file for up to six years. The principle should be to ensure that, after discharge and repayment, a clean slate is exactly that.

Other changes

104. The Committee received a substantial volume of other suggested changes of a more technical nature, most notably from the Law Society of Scotland. It is our view that these are sensible suggestions and not controversial.

105. The Committee recommends that the Executive considers the written and oral evidence received from these bodies and brings forward the necessary amendments at stage 2.



1 Minutes, Parliamentary Bureau, 22 November 2005, PB/S2/05/MINS/34, The Scottish Parliament

2 Citizens Advice Scotland, written evidence

3 The Insolvency Service, First Quarter Statistics for 2006, 5 May 2006, INS/Com/03

4 Office of National Statistics, Statistics and Analysis Directorate. Statistics Release - 4 November 2005.

5 Scottish Executive, A Partnership for a Better Scotland: Partnership Agreement

6 Bankruptcy And Diligence etc. (Scotland) Bill, Policy Memorandum, SP Bill 50-PM

7 A fourth, on reform of protected test deeds, is still ongoing.

8 Further details can be found at: http://www.scotland.gov.uk/library5/justice/ecos-00.asp

9 Further details can be found at: http://www.scotland.gov.uk/Resource/Doc/1097/0000854.pdf

10 Further details can be found at: http://www.scotland.gov.uk/consultations/justice/cdbdb-00.asp

11 Enterprise and Culture Committee, Official Report, 6 December 2005, c2552.

12 Stirling Park, written evidence

13 Bankruptcy And Diligence etc. (Scotland) Bill, Policy Memorandum, SP Bill 50-PM

14 Enterprise and Culture Committee, Official Report, 7 March 2006, c2742

15 Ibid.

16 Ibid.

17 Ibid.

18 Ibid.

19 Ibid.

20 Enterprise Act 2002. For more information, see: http://www.opsi.gov.uk/acts/acts2002/20020040.htm

21 Ibid.

22 Ibid.

23 Ibid.

24 Ibid.

25 SPICe briefing, 1 December 2005, Ref 05/73

26 Enterprise and Culture Committee, Official Report, 7 March 2006, c2727

27 Ibid, c2717.

28 ESRC Centre for Business Research, University of Cambridge, Bankruptcy Law and Entrepreneurship, Working Paper No. 300, March 2005

29 City of Edinburgh Council, written evidence.

30 The position in England under the Enterprise Act 2002 is that a person can be discharged from bankruptcy within a year, but that does not necessarily mean discharge of responsibility, which normally takes three years.

31 Enterprise and Culture Committee, Official Report, 2 May 2006, c3062

32 Ibid.

33 Enterprise and Culture Committee, Official Report, 28 February 2006, c2701

34 Money Advice Scotland, written evidence

35 ICAS, written evidence

36 Ibid.

37 Ibid.

38 Enterprise and Culture Committee, Official Report, 17 January 2006, c2603

39 Dr John Tribe, Kingston University, Bankruptcy Courts Survey 2005

40 Bankruptcy And Diligence etc. (Scotland) Bill, Policy Memorandum, SP Bill 50-PM

41 Ibid.

42 Ibid.

43 ICAS, written evidence

44 Enterprise and Culture Committee, Official Report, 28 February 2006, c2703ff

45 Volume 2

46 Shelter, written evidence

47 Enterprise and Culture Committee, Official Report, 17 January 2006, c2598

48 Enterprise and Culture Committee, Official Report, 7 February 2006, c2678

49 Ibid, c2679

  Volume 2     Next