This item was published during the term of a previous administration that ended in April 2007
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Bankruptcy and diligence reforms
22/11/2005
Legal reforms to help individuals and small businesses get back on their feet and move on after debt problems were published today.
Measures contained in the Bankruptcy and Diligence etc. (Scotland) Bill will provide for more effective enforcement against 'won't pay debtors', help and support for 'could pay' debtors, and fair treatment for 'can't pay' debtors.
Proposals in the Bill will also make it easier for business borrowers and lenders to have a flexible and effective security for loans.
Deputy Enterprise Minister Allan Wilson said that the Bill will help make Scotland a good place in which to do business.
Personal bankruptcy affects individuals and small businesses (sole traders and partnerships). Bankrupts have their assets transferred to a trustee to be distributed amongst their creditors. The public are protected as they are subject to certain disqualifications for a three year period - including restrictions on borrowing, not being permitted to be a director of a limited company, and not being authorised to serve on certain public bodies. Key reforms relating to bankruptcy include:
- Reducing the bankruptcy period from three years to one year
- Streamlining the bankruptcy process, and taking debtor applications out of the court system
- Limiting the right of creditors to decide to sell or dispose of the debtor's family home to three years after bankruptcy. This will help balance returns for creditors with the ability of debtors to move on with their lives
- Bankruptcy Restriction Orders (BROs) - Current bankruptcy legislation is applied equally to all debtors and end with the discharge, no matter what their previous conduct has been. BROs will protect the public and business interests by continuing to enforce restrictions on potentially fraudulent or culpable bankrupts after they are discharged from their bankruptcy
- Encouraging a 'can pay, should pay' principle so that contributions towards debts can be continued after the period of bankruptcy has been discharged
Deputy Enterprise Minister Allan Wilson said:
"People who can't pay their debts can become bankrupt through misfortune such as job loss or misjudging a risk. For these people the stigma associated with bankruptcy lingers for far too long and can lead to a fear of failure.
"We want to help people to be able to clear their feet and get on with their lives and businesses after a period of bankruptcy. Entrepreneurs willing to take sensible risks are essential to a strong and dynamic economy. We want to create the right climate to enable those who don't succeed the first time round an early chance to move on and try again.
"At the same time we don't want bankruptcy to be viewed as an easy option. It is vital that we have checks and balances in place to protect the interests of creditors and ensure debt recovery. There must also be tough sanctions in place to deal with the minority of bankrupts who are a particular risk."
Floating charges are loans made to businesses. They "float" because they are general loans which are not attached to particular assets of the company unless the company becomes insolvent. At present, it can be difficult for lenders to find out whether there are other loans over the assets, or to get full information about the conditions which apply to any other loans. Key reforms are:
- a new Scottish Register of Floating Charges. This will make it easier for lending institutions to assess the financial position of a company
- The Register will be held by the Keeper of the Registers and will be self-financing
Diligence is the legal process for enforcing orders for payment of money made by civil courts in Scotland. Once authorised by court decree or equivalent, creditors can choose their preferred way to enforce from a range of diligences. Their choice will depend largely on what they know about their debtor's circumstances. Key reforms include:
- Creating a new protected minimum balance on arrested funds in bank accounts, helping vulnerable debtors to support themselves
- Setting up a new public body called the Scottish Civil Enforcement Commission to oversee and improve the accountability of a new single profession of court messenger replacing the professions of messengers-at-arms and sheriff officers
- Creating a new diligence of land attachment to strike a fair balance between creditor interests in recovery and the risk of a debtor's ejection from their home
- Introducing a final notice (charge to pay) to debtors facing recovery of public debts under a summary warrant
Mr Wilson said:
"This Bill's provisions to reform diligence will strike a better balance in our system of debt enforcement. It will introduce new and reformed diligences giving creditors a range of effective and modern remedies. At the same time, it will create improved debtor protections to ensure that those people who owe money are treated with fairness and dignity.
"By reforming bankruptcy and diligence together, we are aiming for a unified system of debt recovery to be used against those who can pay but won't pay; debt management for those who can pay, but need more time and extra support to do so; and debt relief for those who can't pay even with more time and extra help."
There have been three major goverment consultations on the policy of the Bill:
- 'Enforcement of Civil Obligations in Scotland' closed during July 2002
- A Consultation: 'Personal Bankruptcy Reform in Scotland: a modern approach' closed in February 2004
- The Bankruptcy and Diligence Draft Bill and Consultation closed in September 2004
A fourth consultation on the reform of protected trust deeds is expected to begin in November 2005 and close February 2006.