The Scottish Government

Dear Sir/Madam

BANKRUPTCY AND DILIGENCE ETC. ( SCOTLAND) ACT 2007

COMMENCEMENT ORDER (NO 1)

The Bankruptcy and Diligence etc. (Scotland) Act 2007 received Royal Assent on 15 January 2007.

This circular contains information on provisions of that Act which are either in force, or will be brought into force by the Bankruptcy and Diligence etc. (Scotland) Act 2007 (Commencement No. 1) Order 2007 ("the Commencement Order").

It also contains information on statutory instruments that will be made in consequence of enabling powers being brought into force. This circular has been prepared to inform stakeholders about the commencement of certain provisions in the Act. It is not a statement of law and should not be relied upon in court proceedings.

1. Electronic standard securities and summary diligence

Section 226 of the 2007 Act provides that section 222 of that Act shall come into force on the day after Royal Assent. Section 222 has therefore been in force since 16th January 2007.

Section 222 inserts a new section 6A into the Requirements of Writing (Scotland) Act 1995. Section 6A applies where an electronic document has created a standard security over land or buildings, as provided for by the system of Automated Registration of Title to Land which is soon to be launched by the Keeper of the Registers of Scotland.

Section 6A of the 1995 Act has the effect that an office copy of such a security may be registered for preservation and execution in the Books of Council and Session. An office copy is a paper version of the document, authenticated by the Keeper of the Registers and issued under section 6(5) of the Land Registration (Scotland) Act 1979.

An electronic security is by this means to be enforced in the same way as a paper deed. This has the effect where an office copy is so registered of, for example, authorising under section 3 of the Writs Execution (Scotland) Act 1877:

• The charging of the debtor to pay the sum due, and on failure to do so, the execution of an earnings arrestment,
• An arrestment of other funds or goods (for example, funds in a bank account); and
• An attachment of moveable goods in the debtor's own possession.

It also means that where an office copy is so registered it will on commencement of Parts 4 and 8 of the 2007 Act authorise the three new diligences of land attachment, residual attachment, and money attachment.

2. Debt Arrangement Scheme

The Debt Arrangement Scheme ("DAS") is created by the Debt Arrangement and Attachment (Scotland) Act 2002, with further provisions set out in the Debt Arrangement Scheme (Scotland) Regulations 2004 [1] ("the 2004 regulations").

Annex A to this circular contains further information about the DAS, and the policy behind the changes made by the 2007 Act.

Sections 211 and 212 of, and schedule 5 to, the 2007 Act amend the 2002 Act. The Commencement Order brings the provisions that relate to the DAS into force on 8th March 2007 .

Electronic communications

The provisions being commenced on 8 March 2007 make minor changes to the 2002 Act intended to facilitate electronic communications. In particular, an application by a debtor for approval of a DAS programme, or by a debtor or creditor for variation of an approved programme will not need to be signed by the applicant.

The infrastructure needed to support electronic signatures is not in place, and therefore the effect of the 2002 Act before amendment is that the applicant must sign a paper form. This change will therefore facilitate electronic applications, although signed paper applications will still be competent.

DAS amending regulations

The provision being commenced on 8 March 2007 includes changes to the powers of Scottish Ministers to make further provision on the DAS. The existing regulation making power in section 7 of the 2002 Act is amended, and a new section 7A is inserted into that Act.

Ministers will from 8 March 2007 have power to make provision about:

• The circumstances in which the functions a money adviser may instead be carried out by an approved intermediary;
• The manner in which asking creditors to agree a proposed programme, or applying to the DAS administrator for approval of such a programme, affects the rights and remedies of creditors; and
• Debt relief by virtue of a debt payment programme.

These changes do not have any practical effect, other than to fully enable the two sets of amending regulations that are planned.

The Debt Arrangement Scheme (Scotland) Amendment Regulations 2007

The above instrument is subject to affirmative parliamentary procedure, and a draft of the instrument must therefore be approved by the Scottish Parliament before it can be made.

It was laid with the Parliament on 9 February 2007, and will if agreed by them be made by Scottish Ministers and come into force on 30 June 2007 .

The instrument deals with the effect of interest and charges continuing to accrue during a programme. It does so by providing that interest and debt charges (fees, penalties or other charges) are suspended on approval of a debt payment programme, and cancelled on completion of a programme.

This has the effect that a debtor entering into a debt payment programme does so in the knowledge that they will be clear of their debts when the programme is completed.

The Debt Arrangement Scheme (Scotland) Amendment (No. 2) Regulations 2007

The above instrument is subject to negative parliamentary procedure. It is intended to make the instrument on or immediately after 8th March 2006. It will unless annulled by the Scottish Parliament come into force on 30 June 2007 .

This instrument provides for a freeze on enforcement to give the debtor a chance to put a debt payment programme in place, and simplifies DAS in order to make it easier to use and to understand it. Annex B to this circular provides further information.

3. Diligence of attachment

Sections 211 and 212 of, and schedule 5 to, the 2007 Act amend the 2002 Act. The Commencement Order brings the provisions that relate to the existing diligence of attachment into force on 31st March 2007 . Annex C to this circular provides further information.

4. Prescription of creditor claims in sequestration

Paragraph 42(a) of schedule 1 to the 2007 Act amends section 48 of the Bankruptcy (Scotland) Act 1985 ("the 1985 Act"). The Commencement Order brings that provision into force on 31st March 2007 .

The effect of this amendment is that a claim for payment from the sequestrated estate is once made deemed to be re-submitted for the purpose of payment of a dividend to the creditor in respect of any accounting period, provided the claim is not rejected by the trustee.

The effect is that a claim for payment will not prescribe if for any reason the trustee makes no decision on that claim within 5 years after the date on which it is made.

5. Further information

Enquiries

Enquiries on the issues covered by this Circular should be directed as follows:

• Electronic Standard Securities

Kenneth Young

Address Registers of Scotland, Erskine House, 68 Queen Street, Edinburgh, EH2 4NF

Telephone 0131 659 6111 ext 5687

e-mail ken.young@ros.gov.uk

• Diligence

Lesley Bagha

Address Debt and Diligence Implementation Team (as per letterhead)

Telephone (as per letterhead)

e-mail Lesley.bagha@scotland.gsi.gov.uk

• Bankruptcy and Debt Arrangement Scheme

Sharon Bell

Address Accountant in Bankruptcy, I Pennyburn Road, Kilwinning, Ayrshire KA13 6SA

Telephone 0845 612 6416

e-mail Sharon.Bell@aib.gsi.gov.uk

Full text of legislation

Electronic copies of the 2007 Act, the Explanatory Notes to the Act (when completed), and statutory instruments made under the Act from time to time, can be obtained free at the website of the Office of Public Sector Information at:

http://www.opsi.gov.uk

Paper copies can be purchased from The Stationary Office Limited, whose website is at:

http://www.tso.co.uk

Policy background

Further information on the 2007 Act can be obtained from the Policy Memorandum and Financial Memorandum and Delegated Powers Memorandum that were laid with the Scottish Parliament when the Bill that preceded the Act was introduced in November 2005.

Copies of those documents are on the Scottish Parliament website at:

http://www.scottish.parliament.uk/business/bills/50-bankruptcyDiligence/index.htm

Yours faithfully,

Lesley Bagha

19 February 2007

ANNEX A

Debt Arrangement Scheme

The purpose of the DAS is to provide a facility for the orderly repayment of multiple debts. It complements the time to pay arrangements for single debts created by the Debtors (Scotland) Act 1987.

The policy objectives of the DAS are to:

• enable people to resolve serious debt problems in a dignified way;
• reduce the need for creditors to take legal action to recover their debts;
• extend the benefit of money advice to those people who have a particular need for it;
• improve the quality of money advice, by training and accrediting money advisers; and
• minimise the impact of bad debt on both debtors and creditors.

The DAS allows people who are unable to pay their debts in full as they fall due, but who have a reasonable level of surplus income after meeting their basic needs (food, accommodation, utilities, council tax etc.) from which to pay those debts over a longer period.

Such people can apply for approval of a DAS debt payment programme. A programme will be approved by the Accountant in Bankruptcy (on behalf of the Scottish Ministers) if all the creditors agree, or the programme is otherwise fair and reasonable. The creditors are unable to bankrupt the debtor or use diligence (seize and sell assets) against them while a programme is approved.

However, not every person with debt problems either needs to use DAS or is suitable for it. DAS is one of range of debt tools, both formal and informal. For that reason all persons wishing to use DAS must take advice from an approved money adviser. They can choose the best way forward in the light of that advice.

The adviser will look at a person's whole circumstances and (for example) help them to maximise their income. In some cases the person may be able to agree an informal payment arrangement. In others, it will be clear that the debt problem is so severe that the person should either go bankrupt or grant a trust deed for their creditors. In those cases where the DAS is suitable the adviser can apply for approval of a programme that will benefit both the debtor and his/her creditors.

Take up of the DAS by both money advisers and debtors has been lower than expected. At this date, there are 90 approved advisers and 202 debt programmes. Coverage is not uniform across Scotland, with some parts of the country seeing significantly greater use of the Scheme than other comparable areas.

The Executive therefore conducted a review of DAS during 2006, and listened to the views of stakeholders and of the Parliament as expressed during the passage of the 2007 Act. That process has identified several reasonable concerns about the effect of DAS.

Successful management of a debt through completion of a DAS programme is a considerable achievement. There is a general concern that DAS offers too small a reward for the efforts made by the debtor, and a particular concern about the effect of interest and charges continuing to accrue during the period of a debt payment programme. A debtor may 'complete' a programme and still have debts to pay.

There are concerns about the difficulty some debtors experience in using the protection offered by DAS, because some creditors rush to enforce their debts as soon as they think a debt payment programme may be approved. A debtor who might have been able to put in a programme in place will be prevented by (say) an intervening bankruptcy.

There are concerns that DAS is too complex, and that is a deterrent both to money advisers becoming approved to use the Scheme and debtors applying for approval of programmes.

All these concerns have been addressed by changes made to the 2002 Act by the 2007 Act.

19 February 2007

ANNEX B

Changes in the Debt Arrangement Scheme ( Scotland) Amendment (No.2) Regulations 2007

· Enforcement can be suspended on request by the debtor for 6 weeks, once in every 12 month period, when creditors are asked to agree a debt payment programme;

· Enforcement is suspended while an application for approval of a debt payment programme is being considered by the DAS administrator;

· A money adviser approval will last 3 years instead of 2;

· A money adviser will be required to review a debt payment programme once every 12 months instead of once every 6 months;

· A money adviser will no longer need to seek revocation of a 'failed' programme;

· The DAS administrator will be able to revoke failed debt payment programmes;

· A fee charging money adviser will not be required to tell the debtor about any 'free' alternative service, for example a local authority money advice service;

· Creditors will no longer be entitled to object to programmes on the grounds that a debtor has too much equity in land, or should be sequestrated;

· The DAS administrator will be able to take into account information about land and buildings when deciding whether or not to approve an application for a debt payment programme;

· The sheriff will no longer determine any application for approval of a debt payment programme; and

· There will be a final right of appeal to the sheriff alone, and not to either the sheriff or the sheriff principal.

19 February 2007

ANNEX C

Changes to the diligence of attachment

· Clarification, for the avoidance of doubt, that more than one court officer (sheriff officer/messengers-at-arms) can act during the different stages of any one attachment process;

· A court officer may remove an attached article without notice if that is needed to secure, or preserve the value of, the attached article (new section 19A of the 2002 Act);

· The costs of opening a shut and lockfast place, removing an article, and storing an article, for the purposes of new section 19A shall not be chargeable against the debtor;

· A report of attachment under section 32 of the 2002 Act shall specify any sums paid by the debtor to account of the sum recoverable;

· Where an article is sold for less than the value fixed at the attachment it is the value, and not the price, which is credited against the sum due to the creditor;

· Where an article damaged without any fault by the debtor has been re-valued, and is sold for less than the value fixed at the attachment, it is the original valuation, and not either the price or the re-valuation, which is credited against the sum due to the creditor;

· The cost of serving notice of intention to enter a dwellinghouse to execute an attachment in pursuance of an exceptional attachment order shall be chargeable against the debtor; and

· Facilitates electronic communication by enabling certified electronic signatures, in accordance with section 7(2) and (3) of the Electronic Communications Act 2000 (new section 60A of the 2002 Act).

19 February 2007

[1] S.S.I. 2004/468, amended by S.S.I 2004/470.