Examples of bankruptcy reforms
Length of Sequestration
A young man has his own business but due to a prolonged illness, cannot generate sufficient income to pay his suppliers and he is subsequently made bankrupt. The bankruptcy means he is subject to certain restrictions and automatic disqualifications. The stock remaining in the business premises and his share of the property which he and his wife own are transferred to the trustee to realise for the benefit if his creditors. His discharge from bankruptcy does not return the assets to him. Discharge does however remove his liability for pre-sequestration debts. The automatic restrictions also cease.
Current legislation
Sequestration lasts for three years unless recalled or discharged on composition, which is rare. A three year period can be considered harsh for small business debtors. It does also not encourage debtors who have failed in business to try again after they have been discharged. The Enterprise Act 2002 introduced a one year bankruptcy in England and Wales with effect from 1 April 2004, which has caused inequality between Scottish and English debtors, with Scottish debtors being disadvantaged.
In future
Sequestration will last for one year. This will allow debtors to be free from the restrictions and disqualifications sooner, allowing them to start again. This will help debtors running small businesses to begin again. Other consequences of sequestration will not change; assets will still be transferred to the trustee and will remain vested in the trustee after the debtor is discharged.
Bankruptcy restrictions
Bankruptcy restrictions and disqualifications are applied equally to all debtors irrespective of their previous conduct.
Current legislation
The trustee submits a suspected offences report to the Accountant in Bankruptcy if he suspects that the debtor has committed an offence in terms of the Bankruptcy (Scotland) Act. The Accountant submits the report to the Crown Office who make the final decision on whether to proceed with a prosecution of the debtor. Any offences need to be proved beyond a reasonable doubt.
In future
The trustee will still be able to submit a suspected offences report if he considers that there is sufficient evidence to do so. However, if a debtor has acted in such a way that on the balance of probabilities calls for some action, but there is insufficient proof to merit a suspected offences report, the new bankruptcy restrictions will be more appropriate. The trustee can apply for a bankruptcy restrictions undertaking (BRU) or bankruptcy restrictions order (BRO) which can last from two to 15 years. The restrictions will also be tailored to the individual debtor's actions.
Contributions from income
A debtor who has been sequestrated for six months has not paid any contribution to their estate despite being able to afford to. The trustee had negotiated a contribution with the debtor but he had failed to make any payments due.
Current legislation
The majority of contributions are done by agreement between the debtor and the trustee. This debtor has not paid any contributions and the trustee is forced to submit an application to the sheriff to have a contribution fixed. It is at the sheriff's discretion how much the contribution is fixed at. The debtor is no longer liable to continue paying a contribution after he is discharged. The trustee can apply to defer the date of the debtor's discharge which would enable the contributions to continue. That application has to be made before the debtor is discharged.
In future
The debtor and the trustee will negotiate a contribution. A voluntary arrangement will be called an income payment agreement (IPA) and will avoid the need for court involvement. The terms of an IPA can be varied more easily to take changes in finances into account. An IPA is more formal than the current voluntary contribution.
If the debtor does not agree to an IPA, or does not maintain the payments, the trustee can make an application to court for an income payment order (IPO), as long as it is before the date of discharge of the debtor. Both IPAs and IPOs can run for up to three years and continue after the date of the debtor's discharge.
Creditors' claims
A supplier makes a delivery of goods to a client, unaware that there is a petition for sequestration of the client lodged in court by another creditor. Once the sequestration is awarded creditors are not able to pursue the client for any monies owed but must deal with the trustee. They will only receive funds back if a dividend is paid.
Current legislation
The creditor's claim is formulated at the date of sequestration. In a creditor petition case this is the date of the warrant to cite. The supplier who has continued to transact during the period between the warrant to cite and the award is unable to submit a claim in the sequestration for any losses he may have incurred in that period.
In future
The creditor's claim will be up to the date of the award of sequestration, or the date of the bankruptcy order as it will be called, irrespective of what type of petition was lodged. This will ensure that no creditors are discriminated against.
Protected trust deeds
A woman with high levels of debt is unable to meet the requirements of apparent insolvency. She enters into a voluntary trust deed which transfers her assets to her trustee who is bound to administer them for the benefit of her creditors.
Current legislation
The trust deed would automatically become a protected trust deed, which binds all the creditors and protects her from any further debt recovery measures, unless the majority of creditors or those representing 1/3 of the value of the debt object in writing, and assuming the trust deed meets all other criteria.
The Accountant in Bankruptcy will audit the trustee's accounts and set the trustee's remuneration if asked to do so. Otherwise there is very little supervision of the trust deed.
The details of how and when the debtor will be discharged should be stated in the trust deed document.
In future
The woman will still be able to sign a voluntary trust deed. However, protection of the trust deed will not be automatic. Only trust deeds which have assets which when realised will provide a dividend to creditors will be able to be protected. The trustee will have to provide details of the expected dividend to the Accountant in Bankruptcy when applying for protection.
The Accountant in Bankruptcy will have a greater role in the monitoring of protected trust deeds and will be able to carry out a review or audit the trustee's accounts without having been requested to do so by a creditor.
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