Understanding the laws which govern the insolvency process can be challenging, due to their complexity and breadth. There are also regional differences to consider, and over the Scottish border, the practice regulations changed on the 6th of April 2019. Together with Business Rescue Expert we will look at the legality behind this process in both countries, identifying any key differences.
The insolvency practice is the same for the most part in both countries, with the provision of a legal solution for businesses who cannot repay their outstanding debts being the key objective. The Insolvency Act 1986 remains the overarching legislative guide for the UK, but Scottish laws have notable differences, which were modernised in the latest legislation, known as the 2018 rules. The new rules are constituted by two parts in compliance with the devolution status of the Scottish parliament: The Insolvency (Scotland) (CVA and Administration) Rules 2018/1082 and The Insolvency (Scotland) (Receivership and Winding Up) Rules 2018 (a Scottish Statutory Instrument). The first makes provision for the reserved insolvency processes of Company Voluntary Arrangements (CVAs) and Administration, and the latter relates to the devolved process of receivership and the mixed-competence process of winding up, including MVL, CVL and court liquidation.
These laws have modernized the processes in line with the digital age, reduced costs and brought the legislation much closer to the existing rules under the England and Wales jurisdictions. Elements such as decision-making have been brought up to date, with electronic communication named as the preferred method of contact in terms of seeking decisions from creditors. The new laws will remedy the administrative burden of physical meetings, simplifying dealings with multiple creditors and improving accessibility to the process. Documentation of the process has also been revised, with the abolition of statutory forms as a necessary part of proceedings. The matter of small debts has also been targeted, whereby an office-holder will be entitled to treat claims of £1,000 or less, and formal statements of claim are no longer necessary where this has been proved. These measures are the first large scale changes to the Scottish laws in over 30 years.
Scottish insolvency practice still has some existing differences aside from the new legislation, for example in Scotland there is no ‘liquidator of last resort’, a mandatory aspect of the English process. The absence of any Official Receiver means that companies have no financial obligation to pay fees to the Insolvency Service, as the Scottish court appoints a nominated insolvency practitioner to act as an interim liquidator. In England, a civil servant from the Insolvency Service acts as the Official Receiver and is an officer of the court responsible for administering the initial phases of the process. Private insolvency practitioners are also available in England and Wales, but they must be appointed to act in any insolvency case.
Another key absence from Scottish law is the Law of Property Act (LPA) Receiver. The only type of receivership in Scotland was outlined in the 1986 Act, named as the Administrative Receivership. The LPA functions to outline contractual obligations for a defaulting borrower, providing security for both parties even when the relationship can no longer produce definitive decisions. There is no distinction between a mortgage and a charge in Scotland, which eliminates the appointment of an LPA from practice.
Moreover, the Scottish insolvency process also follows differing jurisdictions which relate to creditor fees. The fees cannot be negotiated in advance with a creditor over the border, and they must be approved by the creditors committee or court reporter, who is generally another insolvency practitioner. Onerous property are also subject rules which deviate from English practice, as there are no existing statutory powers which deny onerous property of contracts during an insolvency case, listed in section 17/179 of the 1986 Act. The typical termination of a challenging contract isn’t feasible in Scotland, and instead considerations must be made regarding the potentiality of damage claims which could be made as a result of the contract or property. The liquidator can determine whether they will carry out the contract after assessing these factors, and where the risk of compelling performance is minimal to the court, the solvent party must accept the decision to terminate the matter.
For any company seeking insolvency advice, being aware of these differences can prove invaluable. The process can be slowed down greatly where laws are misunderstood or breached, so taking the geography of your business into account is vital. If you need insolvency advice, it’s a good idea to get in touch with a business that specializes in company administration to create a plan that is tailored to your companies specific requirements.