Introduction - different rules and legal processes apply to insolvency and bankruptcy law in Scotland, compared to England and Wales. The huge increase in individuals overburdening themselves with credit card debt, unsecured loans and other forms of credit, is putting an increasing strain on the Scottish legal system. The insolvency legal system in Scotland dates back to the Bankruptcy Act of 1621. The recent Bankruptcy (Scotland) Act 1985, amended in 1993, aimed to make the Petition process fairer for the debtor, as well as assist members of the public, with public financial help for the administrative aspects of going bankrupt. The following provides a brief overview of the latest legal mechanisms (as at October 2008), and the terms and processes involved....
Diligence - diligence is the collective term for the legal processes for the recovery of overdue debts. Diligence is regulated by the Debtors (Scotland) Act 1987. Debtors must first prove there is a debt owed to by using the following three legal instruments:-
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Decree for Payment - the creditor must apply to the local sheriff court for a decree. Notification of the application must also be sent to the debtor, which may in itself encourage them to repay the debt. The court may decide to extend the deadline for debt repayment. However if the decree is granted and the deadline lapses with repayment, the debtor may receive a 'charge for payment' from the creditor, which must be settled within 14 days.
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Statutory Demand - here the creditor issues under oath, a statutory demand for debt repayment within 21 days, that has been signed for by a 'Notary Public'. If the debtor fails to answer the demand, the debt is proved.
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Summary Warrant - this mechanism is reserved for official governmental departments and local authorities collecting rate and tax arrears.
Sequestration - If the debt is proved, creditors may recover outstanding monies (in other words apply diligence), from the debtor either via arrestment of earnings or banking funds or attachment. Failure to recover debts using it may mean that the creditor decides to sequestrate the debtors estate... Sequestration is a legal process that underpins the recovery of unpaid debts. If an individual is unable to meet any of their debts they insolvent and may be made legally bankrupt i.e. their assets will be sequestrated. A precondition for sequestration is 'apparent insolvency' which in principle, means the individual cannot repay any of their debts. For apparent insolvency to exist in law:-
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A charge for payment has been served and expired after 14 days of non-payment;
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a summary warrant has been approved by a court;
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a statutory demand has been issued followed by a lapse of 21 days, with non-payment.
Practically, the process is started with a Petition to the local Sheriff of the district where the debtor lives. The debtor must be apparently insolvent, have debts of more than £1500 and have not been sequestrated during the last five years. if these conditions are met, any creditor can initiate the petition (called a Warrant to Cite). Alternatively, the individual may declare themselves bankrupt and file the petition themselves, in order to seek legal protection from aggressive creditor action. All diligence processes are stopped at that point of sequestration and the 'permanent trustee' then takes control of the debtor's estate. This is similar to the English process where a qualified insolvency practitioner becomes the court-appointed administrator of bankruptcy order. The interim trustee calls a creditors 'Statutory' Meeting at which the creditors can choose to appoint a qualified insolvency practitioner to become the 'permanent trustee' using an 'Act of Warrant'.
There are different types of assets or property which will be taken from the debtor on behalf on the creditors. Firstly, for debtors with secured home loans, the debtor's house may be repossessed. This is referred to as 'immovable property' or 'heritable property'. Secondly, assets which are 'movable'such as cash in bank accounts, shares and investments. Thirdly, trade debts. Fourthly, the legal rights to receive future monies. Lastly, any income from benefits and employment. If the conditions of bankruptcy are met within the usual three year time period, the individual may be deemed 'discharged' by the court.
Theorder of the repayment of debts from the estate to creditors, depends on their legal status. Secured creditors (such the mortgage lender), preferred creditors (such as the taxman) and sequestrated expenses (for the trustee), will all get paid before 'ordinary creditors'. Unfortunately, for ordinary trade creditors. Attempting to salvage something from to originally collect business debt, this may mean that they receive no money is back from the process. Late payment and bad debtors (due to business failure), is a huge problem for millions of small businesses across the UK and Scotland is no exception. Many are having to resort to invoice factoring or business debt consolidation in an attempt to stabilise the impact of late payment on managing cash flow. These ordinary creditors ranked equally and will be paid relative to the amounts they are owed i.e. in property 'parri passu'.