Personal and corporate insolvency law and the differences

As a solicitor practising in Scots law and specialising in dealing with contentious personal and corporate insolvency cases, I am regularly asked about the differences in the personal and corporate insolvency processes between Scotland and England & Wales. There is often an assumption that the processes and law relative to these regimes is the same or largely similar as between the jurisdictions. This is not so.

The New insolvency rules

Whilst with the two new sets of corporate insolvency Rules in Scotland which came into force in April of this year, one set relevant to CVA and administration procedures and one to receiverships and winding ups, has led to an increased similarity in the Rules which govern the corporate insolvency processes between Scotland and England & Wales, the Rules are not the same as the Rules which came into effect in England & Wales in 2017 and it is essential that one obtains advice from advisers with experience of dealing with the relevant regime to ensure that nothing is missed or done incorrectly. The new rules in Scotland are aimed at, amongst other things, consolidating the ‘old’ rules which had been in force since 1986, modernising processes including providing for electronic communication to creditors, and removing unnecessary regulatory burdens.

The ‘new’ Rules in general terms apply to all corporate insolvencies and not just new insolvencies post April 2019, however there are transitional provisions which require in some cases parts of the ‘old’ 1986 Rules to apply. Such provisions require there to be an understanding of the interaction of the old and new Rules and their application to the specific case.

Distinct features of Scottish insolvency regimes

Aside from the Rules governing corporate insolvency processes, there are a number of distinct differences between both corporate and personal insolvency regimes in Scotland and England & Wales, including, for example, in Scotland there is no Official Receiver, specific forms and procedures are followed where statutory demands are used where the winding up of a company is being threatened, bankruptcies are called sequestrations and debtors in Scotland can apply to the Accountant in Bankruptcy (“the AiB”) for their own sequestration whilst creditor petitions are presented to the Court.

The office of the AiB is specific to Scotland and the AiB a public official with a supervisory role over Trustees in sequestration but can also be the Trustee in a sequestration.

The formal insolvency processes which are direct alternatives to sequestration are Trust Deeds and the Debt Arrangement Scheme (“DAS”). Both these alternatives involve arrangements with creditors for payment of debts. Trust Deeds are in many ways similar to IVAs. DAS was introduced in 2004. Debt payment programs (“DPPs”) are approved by the administrator of DAS who is the AiB. The DPPs can be for an individual or for joint individuals. In addition there is a Business DAS which allows DPPs to be entered into by, for example partnerships, limited partnerships and trusts. The Regulations relative to DAS have been amended with new Rules which came into force on 4th November 2019. The effect of these changes are expected to, for example, alleviate the additional financial burden of costs related to DAS for debtors.

Further points of note are that the share capital of a company registered in Scotland will determine in which Court liquidation petitions can be lodged and where a company has a registered office in Scotland, the Scottish rules and procedures apply in any winding up of the company, administration or other corporate insolvency process. The new rules now provide for there being prescribed content in forms to be used as opposed to prescribed forms. This change mirrors the changes which came into England & Wales in this regard.

Interestingly, the new rules do not apply to Limited Liability Partnerships, at least for the present time.

In relation to sequestrations, a debtor residing in Scotland may own property in England and vice versa. Particularly in relation to property matters, seeking the advice and assistance of professional advisers with the relevant knowledge of the law in the particular jurisdiction is vital.

In addition, not only is the terminology as between Scots law and the law applicable to England and Wales very different, in certain areas of insolvency law, the way in which insolvency practitioners can deal with creditors and realise assets can differ significantly, particularly, for example, if there are questions of retention of title over goods and landlord’s hypothec (a feature of Scots law which might feature in an insolvency).

A Word of Advice
One cannot assume that what happens in an insolvency process in one jurisdiction will happen in another jurisdiction and a lack of understanding of these differences can lead to creditors, Directors and individuals having false expectations as to what the outcome of a process may be for them.

Dialogue as between practitioners in the different jurisdictions where there are any cross border elements/assets and so on is essential at an early stage to ensure that there are no surprises further down the line.

Carr Stephanie

Carr Stephanie