INTRODUCTION
Insolvency is where a person or company can't pay their debts. An insolvency practitioner is appointed as trustee to sell all the available assets, and pay as much as possible to the creditors.
The winding up, liquidation and receivership of limited companies and limited liability partnerships are largely reserved to the UK Parliament.
Insolvency of individuals, ordinary partnerships and some public bodies (such as Universities) is devolved to the Scottish Parliament.
There are two forms of 'devolved' insolvency in Scotland. They are sequestration (usually called 'bankruptcy') and the protected trust deed. The main legislation that controls insolvency in Scotland is the Bankruptcy (Scotland) Act 1985.
Sequestration
In a sequestration the court orders that the assets of a debtor are transferred to a trustee, on the application of either the debtor or one of their creditors. The debt must be £1500 or more. In all cases the debtor must be 'apparently insolvent', which in most cases means that a creditor has tried to enforce a debt without success.
When sequestrated the debtor is subject to various restrictions, including asking for more credit. At the end of the sequestration the debtor is discharged, and in most cases that takes around three years. The legal restrictions are lifted but the practical effect can last for a lot longer. For example, it may be many years before the debtor can get another mortgage.
Protected trust deed
In a trust deed the debtor signs a contract (trust deed) to pay the creditors as much as the debtor can afford. The trustee then gathers in assets and pays a dividend in much the same way as a sequestration. The debtor does not need to be apparently insolvent.
A trust deed does not stop creditors from taking enforcement action. It can become 'protected' if most of the creditors don't object to the planned payment. In that case all creditors are bound to accept the payment offered and can't enforce their debts except in very limited circumstances.
The debtor is not subject to many restrictions in a trust deed, which in most cases will last three years. The main sanction for not making payment is that the trustee can sequestrate the debtor. In most cases a trust lasts for three years. As with sequestration, the practical effect can last a lot longer.
The Accountant in Bankruptcy
The Scottish Executive sponsors an executive agency that oversees the insolvency process in Scotland. The agency is the Accountant in Bankruptcy.
If you are considering applying for your own bankruptcy, or believe you are in a situation where a creditor might apply for your bankruptcy, you should seek free and independent advice. There are many money advice centres in Scotland that can provide free and independent help and assistance with debt problems. See below for further information.
Modernising Insolvency
On 28 May 2003 the First Minister agreed that the Executive would legislate to modernise the laws of personal bankruptcy and diligence in Scotland to strike a better balance between supporting business risk and protecting the rights of creditors.
You can learn more about the Executive's first consultation for the reform of bankruptcy legislation in Scotland in the 2003 consultation paper.
You can learn more about the Executive's proposals for Modernising Bankruptcy and Diligence in the 2005 consultation paper and draft Bill. The final version of the Bill was introduced to the Scottish Parliament on 21 November 2005, and is expected to complete its passage through Parliament by the end of 2006.
You can learn more about the Executive's proposals for modernising protected trust deeds by reading the 2006 consultation paper and partial regulatory impact assessment.
Further information
Please note that neither the Scottish Executive nor the Office of the Accountant in Bankruptcy can provide specific advice on whether or not to apply for sequestration.
The Scottish Executive has produced an advice and information package, called Dealing with Debt: finding your feet. The package contains contact details for free and independant local money advisers.
If you have any queries or questions please email mailto:bandd@scotland.gsi.gov.uk