Bankruptcy and debt advice review: consultation

3. Introduction

On the 1 April 2015 the Bankruptcy and Debt Advice Scotland Act 2014 ("the 2014 Act") came into force introducing some significant reforms to the bankruptcy process in Scotland. The 2014 Act amended the Bankruptcy Scotland (Act) 1985 ("the 1985 Act") in several key areas and was the latest of a number of legislative instruments which have been targeted at improving and modernising the bankruptcy system in Scotland.

By the time of the 2014 Act, several earlier reforms to the 1985 Act had introduced important provisions including:

• the role of the Accountant in Bankruptcy (AiB) as the trustee of last resort in bankruptcy;
• the inception of bankruptcy awarded through debtor petition to the court and subsequently through debtor application submitted to AiB;
• the introduction of a new access route to bankruptcy for those with low income and assets and enhanced safeguards and considerations in relation to the family home during bankruptcy proceedings.

The 2014 Act reforms were developed and introduced in direct response to the feedback received from the Consultation on Bankruptcy Law Reform which was published in 2012. This sought views on how to develop a service for debt advice, debt management and debt relief fit for the 21^st Century.

The modernisation of the bankruptcy process under the 2014 Act aimed to encapsulate the following key principles:

• Ensuring that fair and just processes of debt advice, debt relief and debt management are available to the people of Scotland.
• Those debtors who can pay should pay their debts, whilst acknowledging the wide range of circumstances and events that contribute towards financial difficulty and insolvency for both individuals and businesses.
• Securing the best return for creditors by ensuring that the rights and needs of those in debt are balanced with the rights and needs of creditors and businesses - and in doing so help ensure that all those who need to borrow can do so as economically as possible.

Since the implementation of these changes on 1 April 2015, the Scottish Government with support from the Scottish Law Commission, completed an extensive exercise to consolidate bankruptcy legislation. This recognised the fact that the 1985 Act had been heavily amended over many years and had become particularly unwieldy for those using the legislation. The Bankruptcy (Scotland) Act 2016 ("the 2016 Act") was passed and came into force with effect from 1 November 2016 and although this did not introduce changes to policy or the bankruptcy process, it did simplify the statute by incorporating all of the changes that had been introduced over time, including those introduced by the 2014 Act.

The Scottish Government is committed to ongoing review of policies and newly implemented legislation and undertook to consult on the 2014 Act reforms after a reasonable period of time had elapsed to allow the changed processes to become established. We believe there will now be a reasonable body of evidence of how those reforms have operated in practice.

Over the last year AiB has been seeking feedback from stakeholders and gathering information on how each of the changes implemented by the 2014 Act have been working in practice, and if there is a requirement for further improvements to be made. This includes: feedback received through a number of AiB's stakeholder forums; feedback received on specific bankruptcy cases; feedback from those involved in administering the bankruptcy process e.g. money advisers, insolvency practitioners and AiB staff; and letters from creditors and individuals who have been involved in the bankruptcy process. In particular, AiB's series of public stakeholders events hosted in 2018 included dedicated sessions covering all of the reforms. A summary of the discussion points raised is included at section 7.

Information gathered from these representations suggests that in the main the changes introduced in 2015 have been working well in practice. However, it has been acknowledged there are some areas where stakeholders would like to see further reform and improvement. In light of this, the consultation and policy review will concentrate on the areas introduced by the 2014 Act that have been highlighted as needing some improvement. These key areas are as follows:

• Statutory Moratorium on Diligence;
• Common Financial Tool;
• Debtor Contribution Order;
• Minimal Asset Process Bankruptcy; and
• Financial Education.

The consultation will also seek views on two additional areas that have been raised. The first is on the treatment of child maintenance debts in bankruptcy and whether these should be discharged along with other unsecured debts on discharge from bankruptcy. Feedback on this topic was requested in the 2012 consultation and the general consensus was that legislation should remain unchanged with child maintenance debts, including those due to the Child Support Agency, remaining discharged after bankruptcy. However, this issue has been raised with AiB and Scottish Ministers on a number of occasions. In light of this it has been suggested that these matters are considered further as part of this consultation, notwithstanding the fact this was not part of the 2014 Act reforms.

The second issue relates to the statutory rate of interest that should apply in the payment of debts in cases where sufficient funds have been realised to pay all costs and debts. During the consolidation of bankruptcy legislation in 2016, a commitment was made to the Scottish Parliament that this issue would be considered at the next available opportunity. The consultation also seeks views on a related but more general issue which is the rate of interest applied by Scottish Courts in civil litigation matters where no other interest rate has been specified. The "judicial rate of interest" applied is set by Rule 7.7 of the Rules of the Court of Session No 1443 and in the Sheriff Courts the rate is prescribed by section 9 of the Sheriff Courts (Scotland) Extracts Act 1892 and may be amended by Act of Sederunt. Similarly, this is set at 8% and the Lord President has the ability to change the level that the rate is set at, usually following a request to do so by the Scottish Ministers. This consultation invites views on whether this rate of interest should be amended.

There is scope for respondents to comment on any aspect of the changes introduced and these will be considered carefully along with all other responses received. This exercise may also result in scope to introduce streamlining or improvements to legislation which may not involve a change to policy.

One such area which has been raised at stakeholder events for consideration is the debtor discharge process. At these events most stakeholders were satisfied with the debtor discharge process itself but there was a view among some insolvency practitioners and creditors that the administrative burden of circulating around creditors at both the discharge report stage and at the discharge stage could be reduced. We are aware of a number of technical drafting issues around the Act, which further primary legislation would give an opportunity to address. A separate technical consultation will be issued nearer the time of any future legislative measures, if they are identified as a preferred way forward.

The consultation responses will be collated and the Scottish Government will publish proposals in due course.