Jurisdiction

Section 16 - Sequestration proceedings to be competent only before sheriff

62.     This section provides for the removal of the jurisdiction of the Court of Session in respect of petitions for sequestration or for recall of sequestrations, which are to be heard by the sheriff alone. Actions of reduction and suspension in relation to a sequestration will continue to be dealt with by the Court of Session.

63.     This section amends several sections of the 1985 Act, including section 15 which makes further provisions relating to sequestrations. It should be noted that appeals against the AiB's refusal to award sequestration on a debtor application will also be heard by the sheriff (see section 15(3A) of the 1985 Act, inserted by paragraph 13 of schedule 1 to this Act), and appeals against a decision of the sheriff to transfer a sequestration to any other sheriff will be heard by the sheriff principal (see section 15(2A) of the 1985 Act, inserted by subsection (2)(c) of this section).

64.     There are a number of amendments of the 1985 Act contained in schedule 1 which are consequential on the changes made by this section.

Vesting of estate and dealings of debtor

Section 17 -Vesting of estate and dealings of debtor

65.     This section amends sections 31 and 32 of the 1985 Act. These changes arise from issues which first came to light in the case of Sharp v Thompson, 1997 SC (HL) 66. Although that case concerned a person who had purchased property from a debtor subject to a floating charge, it highlighted issues relevant to sequestration. The Scottish Law Commission issued a discussion paper (No. 114) in 2001 dealing with these issues and proposing some changes to the law relating to sequestration. Then in 2004 the case of Burnett's Tr. v Grainger, 2004 SC (HL) 19, which concerned a sequestrated debtor, clarified the position of a purchaser whose title was unregistered and reinforced the need for some of the reforms proposed by the Law Commission. This section makes a number of those proposed changes in light of the decision in Burnett's Tr.

66.     This section does four things (all of which are connected by a general theme of protecting a person who has for value purchased heritable property from a debtor, whether before or after the debtor goes bankrupt).

67.     First, it provides that a trustee in sequestration is precluded from registering title to heritable property of a debtor for 28 days after the award of sequestration is itself registered. That enables a third party who has purchased property in good faith from a debtor to complete title by registration provided it is done with expedition (see new section 31(1A) and (1B) of the 1985 Act inserted by subsection (1)(a)).

68.     Secondly, it makes clear that heritable property which a debtor has sold or otherwise transferred remains part of the debtor's estate which is given over to the trustee in sequestration if the person to whom the property is transferred has yet to complete title by registration (this is linked to the first purpose in that a trustee's rights can be defeated by the other person if that person registers first, and that person has a 28 day head start). This is considered to be the existing position in law but it is considered that this is based on the fact that section 31 of the 1985 Act treats sequestration as if it was an adjudication. The diligence of adjudication is abolished by this Bill so the position needs to be clarified (see new section 31(8)(aa) of the 1985 Act inserted by subsection (1)(b)).

69.     Thirdly, this section makes clear that dealings with a debtor after the date of sequestration are void in any question with the trustee where they relate to property which the trustee gets at the date of sequestration and where they relate to property the debtor acquires after sequestration but which is passed to the trustee (the position regarding the latter is currently unclear, this provision resolves that uncertainty) (see the amendment of section 32(8) of the 1985 Act made by subsection (2)(a)).

70.     Finally, the amendments make it clear that where a person deals with a debtor after the date of sequestration the dealing is not void if it relates to incorporeal (i.e. intangible) or heritable property, was done in good faith and for an adequate value, was done during the period of 7 days after the sequestration is registered (which allows for the period, sometimes called a "registration gap", when a sequestration has been granted but there has not been enough time for it to appear in any register) and the person had no knowledge (and ought not to have had knowledge) of the sequestration. This change to the law on dealings with a debtor protects persons who deal with the debtor right around the time a sequestration is awarded and who could not know about the sequestration even if they take all the normal steps (i.e. they search the appropriate registers) (see the amendment of section 32(9) made by, and new section 32(9ZA) inserted by, subsection (2)(b) and (c)).

Income received by debtor after sequestration

Section 18 - Income received by debtor after sequestration

71.     This section amends section 32 of the 1985 Act introducing income payment orders (IPOs) and income payment agreements (IPAs). An IPO is an order requiring the debtor to pay to the trustee a proportion of any income the debtor receives after the award of sequestration. The order may require a third party to pay income due to the debtor straight to the trustee instead. It must, subject to one exception (see paragraph 72 below), be applied for by the trustee before the date of the debtor's discharge. It can run for a maximum period of 3 years and the application must state what period is being applied for. Debtors may be subject to criminal penalties if they default on payments (see new subsection (2ZA) of section 32).

72.     An IPA is a formal written agreement between the debtor and the trustee in the same terms as an IPO, but without the requirement of court involvement, and without the possibility of criminal sanctions for defaulting (see new subsection (4F) of section 32). Section 32(4L) of the 1985 Act provides for one exception to the rule that an IPO cannot be applied for after the debtor has been discharged from sequestration. If a debtor has failed to maintain payments agreed under an IPA the trustee can apply to the sheriff to have the remaining payments due converted to an IPO. The application can be made before or after the date of the debtor's discharge.

Debtor's home and other heritable property

Section 19 - Debtor's home and other heritable property

73.     Subsection (1) amends section 32 of the 1985 Act by inserting new subsections (9A) and (9B) into that section. Subsection (9A) provides that, when a trustee gives heritable property back to a debtor, written notification by the trustee is evidence that the debtor is now the owner of the property. Subsection (9B) provides that the trustee must register the notice of abandonment in the Register of Inhibitions. This ensures that anyone dealing with the debtor can see from a search of that register that the debtor is the owner. A search of that register would reveal the existence of the sequestration and without evidence of the notice of abandonment it would appear to a searcher that the property was still owned by the trustee for the creditors in the sequestration. The form of the notice will be prescribed by the Scottish Ministers.

74.     Subsection (2) inserts new section 39A into the 1985 Act.

New section 39A - Debtor's home ceasing to form part of sequestrated estate

75.     Section 39A provides for the ownership or other right in a debtor's family home, which is part of the sequestrated estate, to be returned to the debtor if the trustee has not taken any action in relation to that property within 3 years of the date of sequestration. If the trustee discovers the interest in the property at a later date, the 3-year period runs from the date the trustee became aware of the property.

76.     Subsection (3) of section 39A lists the types of action the trustee may take which would prevent the home being returned to the debtor. The Scottish Ministers may modify that list by regulations.

77.     Subsection (8) of section 39A gives the Scottish Ministers power to make regulations setting out circumstances in which the 3-year period may be shortened or where section 39A will not apply or where the sheriff may decide that the section does not apply. The regulations can also make provision for compensation. These regulations are subject to negative resolution procedure.

Protected trust deeds

Section 20 - Modification of provisions relating to protected trust deeds

78.     This section amends Schedule 5 to the 1985 Act to provide the Scottish Ministers with a regulation-making power setting out what conditions are required in order for a trust deed to become protected and the extent to which a debtor may be discharged, by virtue of a protected trust deed from all or part of his or her liabilities.

Modification of composition procedure

Section 21 - Modification of composition procedure

79.     This section amends Schedule 4 to the 1985 Act which sets out the procedure for an offer of composition (which is a settlement offer made by a sequestrated debtor to the creditors which, if accepted, results in the debtor being discharged). Offers of composition will now be made by the debtor to the trustee and passed for approval to the AiB rather than to the court.

80.     The previous requirement for active agreement by the creditors is changed so that those creditors who do not actively object and have been notified of the offer will be considered to have agreed to the offer of composition.

Status and powers of Accountant in Bankruptcy

Section 22 - Status of Accountant in Bankruptcy as officer of the court

81.     This section makes it clear that the AiB has duties to the court in the same way as a solicitor or advocate would have.

Section 23 - Accountant in Bankruptcy's power to investigate trustees under protected trust deeds

82.     This section amends section 1A of and Schedule 5 to the 1985 Act to extend the powers of the AiB in respect of protected trust deeds. The AiB will now be able to audit the trustee's accounts and fix the trustee's remuneration in protected trust deeds without the requirement of a request from creditors to do so.

Offences

Section 24 - Modification of offences under section 67 of the 1985 Act

83.     This section amends section 67 of the 1985 Act. It widens the grounds of the offence in subsection (2) of that section to include the disposal of assets. It repeals subsection (8) so that a failure to keep records is no longer an offence under section 67.

84.     The limit set out in subsection (9) on credit that can be applied for, without disclosing the information required about the debtor's circumstances, is increased to £500. A further requirement to disclose the required information is added to subsection (9), and applies where a debtor already has debts of at least £1,000 (or another amount which is substituted for the £1,000 by the Scottish Ministers in regulations made under the power now contained in subsection (9)) the debtor has to disclose the required information when applying for any amount of credit.

85.     New subsection (9A) provides that, in calculating the amount of credit in relation to the limits in subsection (9), any liability for utility supplies or council tax can be ignored.

86.     The amendments of subsection (10) provide that a failure to disclose a BRO or BRU made in England or Wales amounts to a failure to provide the information required in subsection (9). The same provision is made for BROs and BRUs made in Scotland by new sections 56C and 56H of the 1985 Act respectively (see paragraphs 11 to 18 above).

87.     The addition of new subsection (11A) clarifies that an act prohibited by section 67 of the 1985 Act will still be an offence in Scotland even if it takes place elsewhere in the UK.

Miscellaneous and general

Section 25 - Debt limits in sequestrations

88.     This section amends the qualifying debt limit threshold, which sets out the minimum amount of debt that must be owed in order for a person to be sequestrated (see paragraph 59 above). It provides that a debtor must have debts of £3,000 or more. The amount of the qualifying debt limit can be amended by regulations (subject to affirmative resolution procedure).

Section 26 - Creditor to provide debt advice and information package

89.     This section amends section 5 of the 1985 Act to introduce a requirement for creditors to have provided debtors with a copy of a debt advice and information package before the creditor can petition for sequestration. The debt advice and information package is the same package required, in the case of attachment of moveables, by section 10 of the 2002 Act.

Section 27 - Continuation of sequestration proceedings

90.     Section 27 makes amendments to section 12 of the 1985 Act.

91.     Under new subsection (3B) of that section, the sheriff can continue a creditor petition for sequestration for any period up to a maximum of 42 days if the debtor is able to demonstrate to the court that they will be able to pay or satisfy the petitioning creditor's debt, and any other debts due to creditors concurring in the petition, within that time.

92.     Section 27 also inserts a new subsection (3B) into that section which gives a sheriff the option of continuing a creditor petition for sequestration if the sheriff is satisfied that a debt payment programme (DPP) is pending under the debt arrangement scheme (set up under the 2002 Act).

93.     If a debtor attends court to show cause why sequestration should not be awarded, and can provide sufficient evidence that a DPP application is ongoing or is about to be made, the sheriff has the power under subsection (3C) to delay awarding sequestration for as long as the sheriff thinks is necessary. Under section 4(3) of the 2002 Act a creditor is barred from petitioning for sequestration in respect of a debt which is covered by a DPP. So if the DPP is approved during the period of continuation granted by the sheriff under new subsection (3C) it would then be incompetent to sequestrate the debtor on that petition.

Section 28 - Abolition of summary administration

94.     This section repeals various provisions of the 1985 Act with the effect that the Certificate of Summary Administration (COSA) procedure is abolished.

Section 29 - Non-vested contingent interest reinvested in debtor

95.     This section inserts new section 31(5A) into the 1985 Act. Section 31(5) of that Act gives the trustee the right to non-vested contingent interests (potential assets) as if an assignation (transferring rights to those assets) of the interest had been executed by the debtor and intimation of the assignation made at the date of sequestration. This meant that the trustee continued to hold the right to these interests even after the debtor was discharged. The most common example would be where the debtor was the beneficiary under a will at sequestration, and the testator was still alive when the debtor was discharged. In such a case, if the debtor subsequently inherited an asset under the will, it would vest in the trustee.

96.     This was not the case prior to section 97(4) of the Bankruptcy (Scotland) Act 1913. New section 31(5A) returns the law to the position as it was prior to the 1913 Act; non-vested contingent interests will no longer remain vested in the trustee after the debtor is discharged.

Section 30 - Debtor's requirement to give account of state of affairs

97.     This section inserts new section 43A into the 1985 Act which impose a duty on the trustee to require any debtor who is not discharged or who is subject to an IPO or IPA to give the trustee an account in writing providing details of income and expenditure every 6 months.

Section 31 - Restriction of debtor's rights to appeal under sections 49(6) and 53(6) of the 1985 Act

98.     Section 49(6) of the 1985 Act allows the debtor or any creditor to appeal against an adjudication by the trustee in sequestration on claims. Section 53(6) of that Act allows the same parties to appeal against the trustee's remuneration and outlays.

99.     This section inserts a new subsection (6A) into both sections introducing a restriction on the right of appeal by the debtor. The debtor can now appeal only if the debtor has a financial interest in the outcome of the appeal, such as a right to a reversion of funds after dividend.

Section 32 - Status of order on petition to convert protected trust deed into sequestration

100.     This section inserts a new subsection (2A) into section 59C of the 1985 Act. It applies to the situation where a sheriff grants an application by a person in charge of proceedings akin to sequestration commenced in another EU country which requests the conversion of a protected trust deed granted by the debtor into sequestration of the debtor's estate. The sheriff's order granting that conversion is to be treated as if it is an award of sequestration granted by the AiB following a debtor application.

Section 33 - Power to provide for lay representation in sequestration proceedings

101.     Section 33 inserts a new paragraph (m) into section 32(1) of the Sheriff Courts (Scotland) Act 1971 (which deals with the regulation of civil procedure in the sheriff courts). This new paragraph gives power to the Court of Session by Act of Sederunt (that is to say court rules) to permit a debtor to be represented by a person who is not a qualified advocate or solicitor at the hearing where the sheriff decides whether or not to award sequestration following a petition by the creditor (see section 12 of the 1985 Act). The Act of Sederunt may specify particular circumstances where a debtor can be represented by a non-lawyer at such hearings (for example, the debtor may have to satisfy particular criteria).

Section 34 - Treatment of student loans on sequestration

102.     Debtors who are sequestrated in Scotland are currently discharged from their liabilities in respect of student loans. This section amends the enabling power in the Education (Scotland) Act 1980 to allow regulations made under that Act to exclude from discharge loans under that Act. It also directly excludes from discharge loans which have been made under the Education (Student Loans) Act 1990.

Section 35 - Certain regulations under the 1985 Act: procedure

103.     This section provides that any regulations made by the Scottish Ministers under sections 5(2B)(a) or (4), 5A or 39A(4) of the Bankruptcy (Scotland) Act 1985 shall be subject to affirmative parliamentary procedure. In addition, the first regulations under paragraph 5 of Schedule 5 to the 1985, made after the amendments of that schedule by this Act are brought into force, are also subject to affirmative procedure.

SCHEDULE 1 - MINOR AND CONSEQUENTIAL AMENDMENTS OF THE 1985 ACT (INTRODUCED BY SECTION 36)

104.     This schedule contains a number of minor amendments of the 1985 Act and amendments of that Act consequential on the provisions in Part 1 of this Act.

105.     Paragraph 4(3)(b) clarifies that where the debtor meets the criteria in paragraphs (a) and (b) of section 5(2B) of the 1985 Act (which sets out the criteria which must apply before a living debtor can be sequestrated) and is liable to sequestration on the criterion that the debtor has granted a trust deed which has not become a protected trust deed, that the trust deed in question must have failed to become protected in accordance with the regulations under schedule 5, paragraph 5 of the 1985 Act (as inserted into that Act by section 20 of this Act).

106.     Paragraph 8 inserts new sections 10 and 10A into the 1985 Act.

New section 10 - Duty to notify existence of concurrent proceedings for sequestration or analogous remedy

107.     Section 10 deals with the duty to notify the existence of concurrent proceedings for sequestration or proceedings which are similar to sequestration.

108.     Where a debtor or a concurring or petitioning creditor is aware of the existence of another sequestration, of proceedings that may lead to sequestration, or of proceedings that are similar to sequestration in relation to the same debtor, that person must notify the sheriff (or the AiB in the case of a debtor application) of the existence of the other proceedings. Subsections (4) to (6) set out the consequences of failure to notify on the part of any of those persons. A petitioner may be liable for the expenses of presenting the petition, a concurring creditor may be liable for the expenses of a debtor application, and a debtor shall be guilty of an offence and liable on summary conviction to a fine up to the limit at level 5 on the standard scale.

New section 10A - Powers in relation to concurrent proceedings for sequestration or analogous remedy

109.     New section 10A of the 1985 Act sets out what may be done when any of the other proceedings listed in section 10(2) are in progress or have been completed.

110.     Paragraph 20 changes the time limit for a trustee to give notice of intention to call a statutory meeting in section 21A(2) of the 1985 Act to 60 days from the date on which sequestration is awarded. It was previously 60 days from the date of sequestration which, in the case of a creditor petition, would be the date on which the sheriff grants warrant to cite the debtor - i.e. before the hearing where sequestration is awarded. Because of the provisions introduced by section 27 of this Act allowing hearings to be continued, it is possible for 60 days to pass from the date of the warrant to cite to the award of sequestration. Hence the change to the start point for the time limit for deciding whether to call the statutory meeting.

111.     Paragraph 35(4)(a) clarifies that, under section 39 of the 1985 Act, a trustee can shut down a debtor's business instead of carrying on the business (which section 39 already permitted the trustee to do).

112.     Paragraph 42(a) has the effect that any creditor's claim submitted to the trustee in sequestration shall not prescribe after 5 years, unless the trustee has rejected the claim in whole. This covers cases where the trustee makes no final decision on the claim within 5 years after the date of the sequestration or has, by that point, only partially rejected the claim (say, because there are insufficient assets from which the expense of such a decision can be recovered). In such cases, the creditor will not have to resubmit the claim during the period of the sequestration in order to bar the effect of prescription, and will therefore be entitled to a dividend (or further dividend) if any estate is realised after 5 or more years has elapsed.

113.     Paragraph 45 provides that it is not necessary for a trustee to submit any legal account to the Auditor of Court for taxation if the commissioners, or if there are no commissioners, the AiB has determined that the account can be settled without taxation.

114.     Paragraph 46 inserts new section 53A into the 1985 Act which modifies the procedure under section 53 of that Act where the AiB is trustee. These relate to the determination of fees, accounts of intromissions, appeals against such determinations, and the payment of dividends.

PART 2 - FLOATING CHARGES

Registration and creation etc.

Section 37 - Register of Floating Charges

115.     This section provides for the setting up of the new Register of Floating Charges under the management of the Keeper of the Registers of Scotland. The form and manner in which the Register is to be organised and maintained, and the form of documents and notices, the particulars they are to contain and the manner in which they are to be delivered to the Keeper, will be the subject of regulations made by statutory instrument. Those regulations are subject to the negative resolution procedure.

116.     The date of registration of the relevant document or notice is to be the date of receipt of it by the Keeper. The intention is that (as with the Sasine Register) the Register should record the text of the document rather than, as at present, only particulars. Subject to the stipulation of appropriate regulations by the Scottish Ministers, it is intended that registration can in due course be effected electronically

Section 38 - Creation of floating charges

117.     Subsections (1) and (2) of section 38 derive from section 462(1) of the Companies Act 1985 and restate the statutory rule that, in Scotland, a company may grant a floating charge. In view of the generality of the phrases "debt or other obligation" and "all or any part of the property" the reference in parentheses in the existing provision to the former including a "cautionary obligation" and the latter "uncalled capital" is unnecessary. The term "company" is defined in section 47.

118.     Subsection (3) lays down the new rule that, after the new legislation enters into force, the creation of a floating charge occurs only when the document granting the floating charge is registered in the Register of Floating Charges (which is instituted in terms of section 37).

119.     Subsection (4) clarifies the meaning of "document granting a floating charge" to reflect the fact that it is a company which grants a floating charge albeit by means of a document.

120.     Section 462(5) of the Companies Act 1985 provides that a floating charge has effect in relation to heritable property without the need for the document granting the charge to be registered in the Land Register or recorded in the Register of Sasines. It is evident from section 28 of the Land Registration (Scotland) Act 1979 that a floating charge constitutes an "overriding interest" and is not a registrable interest. The provision that floating charges are created by registration in the Register of Floating Charges implies no further act of registration is required and the terms of section 462(5) are not re-enacted.