21 Oct 2014

Analysis: The Bankruptcy and Debt Advice (Scotland) Act 2014

Analysis: The Bankruptcy and Debt Advice (Scotland) Act 2014

Rob Aberdein, Partner, analyses the changes that The Bankruptcy and Debt Advice (Scotland) Act 2014 will introduce when it comes into force next year.

Rob Aberdein, Partner, analyses the changes that The Bankruptcy and Debt Advice (Scotland) Act 2014 will introduce when it comes into force next year.

The 'BADAS Act’, as it is/will be known, will mean some significant alterations to the personal insolvency landscape - with practical implications for debtors, creditors and Insolvency Practitioners. Some of the most significant sections of the Act are evaluated below. 

Education and Advice

Advice: The estate of a debtor can only be sequestrated after the debtor has obtained advice from an approved Money Advisor. The Money Advisor must declare that advice has been provided and specify his or her name and address. The ‘advice’ must relate to the debtor’s financial circumstances, the effect of proposed Sequestration on the debtor’s estate, assistance on preparation of Applications and any other relevant matter.

Education: Where a debtor has been sequestrated, granted a Protected Trust Deed or has participated in a Debt Management Programme under the Debt Arrangement Scheme,  the Trustee must notify the debtor of his or her requirement to undertake a ‘financial education course’.

Common Financial Tool (CFT)

The BADAS Act introduces the CFT as a way of assessing the contribution of the debtor to the Sequestrated Estate. A specific method is required under the CFT (through Regulations) to assess the debtor’s financial circumstances (assets/liabilities, income/ expenditure) and thereby determine the proportion of the debtor’s income which will constitute his or her contribution.

The Accountant in Bankruptcy (AiB) must determine the contribution to be made by the debtor using the CFT. 

The debtor’s contribution can be fixed at zero under certain circumstances and the debtor can also apply for a payment break for up to 6 months. These circumstances include: where the debtor has had a reduction of at least 50% of disposable income (using CFT) as a result of unemployment or change of employment; where the debtor has had to take leave from employment due to birth of a child, illness etc.

Moratorium on Diligence

Under the BADAS Act the debtor receives the protection of a moratorium (stop) on diligence. This prevents the service of a Charge for Payment or the Execution of any Diligence to enforce a payment by a creditor. The period of protection afforded to the debtor is 6 weeks from the date of publication of the appropriate notice in the Register of Insolvencies by the AiB.

To obtain the ‘grace period’ of a moratorium, a debtor must give written notice of an intention to make an application for sequestration to the AiB; seek to fulfil the requisite conditions to enter into a Trust Deed; or make an application for a debt payment programme under the Debt Arrangement Scheme.

Debtors are only allowed to give one such notice in a 12 month period.

Administration of Estate

Creditors must now submit their claims to the Trustee within 120 days of receiving notice of the statutory meeting or where no such meeting takes place, 120 days from the day on which the Trustee gives notice inviting submission of claims.

Claims made out-with this period will not entitle the creditor to a dividend unless there were exceptional circumstances which prevented the claim from being submitted on time.

The period in which property or rights acquired by the debtor after the date of sequestration are vested in the trustee has been extended from 3 to 4 years.

Transfer of Powers from Sheriffs to the Accountant in Bankruptcy

The BADAS Act has shifted the power of decision-making in the context of Sequestration from the court to the Accountant in Bankruptcy.

The AiB now has the power to make and vary Debtor Contribution Orders.

Applications for the recall of Sequestration are to be made to the AiB and not the Sheriff where a debtor has paid or is able to pay his/her debts in full. The AiB can also grant a Recall of an award of Sequestration.

Where the AiB is not the Trustee, an application can be made by the Trustee to the AiB for a direction in relation to any matter arising in the Sequestration.

The AiB has the power to remove Trustees or Commissioners.

The AiB can extend the period (currently 28 days) where a Trustee must adopt of refuse to adopt a contract.

The AiB can make a ‘Bankruptcy Restriction Order’ (‘BRO’). This can now only be made by a Sheriff if the AiB makes an Application to this effect.

The AiB can make an order converting a Protected Trust Deed into a Sequestration award. Previously, a petition had to be made to the Sheriff. 

The AiB can make an order to cure defects in procedure such as correcting clerical or ‘incidental’ errors in documents and can waive a failure to comply with a time limit.

The AiB can, instead of a Sheriff, review and revalue if appropriate the valuation of contingent debts by a Trustee.

The effect of the BADAS Act in this context is that the Sheriff has been ‘pushed out’ of the Sequestration process to the role of an appeal body where debtors or Trustees seek review of a decision by the AiB.

Sequestration where Debtor has Few Assets

The Low Income Low Asset regulations under the Bankruptcy (Scotland) Act 1985 are replaced by the Minimal Assets Process (MAP) under the BADAS Act.

The MAP allows for discharge of the debtor after a period of 6 months and where the MAP is eligible, the AiB should not appoint a Trustee to the debtor’s Sequestrated Estate.

Debtors are assessed for eligibility under the MAP using the Common Financial Tool.

The criteria are:

  • Total debts do not exceed £17,000.
  • The total value of the debtor’s assets (excluding liabilities) does not exceed £2,000.
  • The value of any single asset does not exceed £1,000.
  • The debtor does not own land.
  • A certificate of Sequestration has been granted.
  • The debtor’s Estate must not have been sequestrated by application of the debtor under the MAP in the last 10 years.
  • Sequestration must not have been awarded under any other part of the Bankruptcy (Scotland) Act 1985 by debtor application or petition by creditors in the last 5 years.

Discharge of Debtor

Under the BADAS Act, there is now no longer an automatic discharge of the debtor.

Where the AiB is not the Trustee, the debtor’s trustee must send a report to the AiB after 10 months from the award of Sequestration. The report must provide information as to the debtor’s conduct in relation to his or her assets/liabilities, financial/business affairs and the conduct of the debtor during the period of Sequestration. The report must also state whether in the opinion of the Trustee the debtor has complied with any contribution order, co-operated with the Trustee, complied with the statement of undertakings, made a full and fair surrender of the estate, made full disclosure of all claims the debtor is entitled to bring against other persons and has delivered to the Trustee all relevant documents relating to the debtor’s estate and financial or business affairs.

Where the AiB is the Trustee, he or she must decide after 12 months from the award of Sequestration whether to discharge the debtor. A report similar in its content to the one issued by the Trustee above must be sent to the debtor and every known creditor by the AiB advising and detailing the decision to discharge the debtor or otherwise.

Rob Aberdein, Partner

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