ICAS calls for the Scottish Law Commission to consider areas of insolvency law reform

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david-menzies By David Menzies, Director of Insolvency

28 July 2017

ICAS has called for law reform in three areas impacting on insolvency in response to a consultation by the Scottish Law Commission. David Menzies reports on the recommendations made.

An effective insolvency regime is a significant factor in providing a functioning and growing economy and capital market. Insolvency regimes are largely driven by statute and therefore effective legislation in this area underpins the effectiveness of the insolvency regime in Scotland.

The Scottish Law Commission issued a consultation in July 2017 seeking suggestions for areas of law which could form part of their Tenth Programme of Law Reform. This programme will set out the main areas of law which they intend to start reviewing in 2018.

Responding to the consultation, ICAS has suggested that there would be substantial benefit to carrying out a review of the law in relation to three areas:

  • Disclaimer of onerous property,
  • Trust deeds, and
  • Retention of records.

While all areas identified related to insolvency, the concerns in relation to retention of records also have a wider general business application.

Disclaimer of onerous property

Section 178 of the Insolvency Act 1986 provides powers for a liquidator in England and Wales to disclaim onerous property. The decision of the Inner House of the Court of Session in the Scottish Coal case resulted in a disparity in outcome for a company operating in Scotland depending simply on whether that company has been registered in England and Wales or Scotland. The impact on creditors may be substantially different in all but the same circumstances.

The Scottish Coal case was not appealed to the Supreme and as a result, there remains significant lack of clarity with unanswered questions.

The issue of disclaimer of onerous property was considered previously by the Scottish Law Commission in 1971. It concluded, at that time, "in the absence of public demand for such a provision and in view also of the impending changes in the law relating to feudal tenure, such a change in the law is not required". Given developments since then, including the abolition of the feudal tenure through the Abolition of Feudal Tenure etc. (Scotland) Act 2000, it is now appropriate for this area to be re-visited by the Scottish Law Commission.

Law reform in this area would bring clarity to a complicated situation. Without clarity and resolution there may be situations where no office holder will be willing to be appointed to an insolvent company (due to significant personal liability) leaving a company without an orderly closure and creditors in limbo. In addition, this may impact on employees and their ability to readily access statutory entitlements.

The apparent lack of parity between Scotland and the rest of the UK for the liquidator to disclaim onerous property means that there is a significant difference in outcome for creditors simply due to whether the company is registered in Scotland or not. This differential does not support the Scottish economy and does not appear to have arisen as a matter of policy but as an unintended consequence of developments in legislation.

Trust deeds

Trust deeds (including protected trust deeds) are governed by a mixture of insolvency legislation, trust law, common law and case law. This has led to uncertainty and ambiguity relating to their operation.

Over time, changes in legislation have also blurred the distinction between trust deeds and bankruptcy making it less evident the purpose they are intended to serve and consequently the situations in which they are appropriate.

The economic situation and advancement of consumer debt has also changed substantially in recent years and the possibility of a more flexible voluntary debt relief solution, or alternatively a debt relief solution specifically meant to deal with consumer debt only, may be more appropriate to modern day Scotland.

Reform of trust deed legislation would provide significant clarity through bringing together insolvency law, trust law, common law and case law into a single statutory code in a similar way to that which the recent consolidation of bankruptcy legislation has achieved.

The opportunity to bring clarity to consumers will be of immense benefit to the people of Scotland, many of those who require access to debt relief are the most vulnerable in society.

Retention of records

When appointed as an office holder, an insolvency practitioner will take steps to obtain possession of the insolvent's records as a means of identifying assets to be recovered for the benefit of creditors and to enable the insolvency practitioner to report on the conduct of the directors in corporate insolvency.

Once the administration of the case has concluded, the insolvent's records will no longer be required, but an insolvency practitioner will be required by insolvency law and otherwise to continue to keep and store these records with different provisions applying for each insolvency procedure.

Tax law requires the tax payer (for all practical purposes, the insolvency practitioner in this situation) to keep their records. The relevant period varies between 22 months and 6 years depending upon specific circumstances.

In addition to the company books and records, the insolvency practitioner will create their own books papers and records relating to the administration of the insolvency proceeding. This will comprise working papers and the sederunt book. Legislation requires the sederunt book to be retained for a period of between 12 months and 10 years, again depending on the relevant insolvency procedure.

The complicated landscape for record keeping is further enhanced when consideration is given to the requirements under the Data Protection Act 1998 and the forthcoming introduction in May 2018 of the General Data Protection Regulations.

There needs to be an alignment of the periods for which records need to be kept, in particular after the completion of an insolvency procedure where the records are no longer required by the insolvency practitioner.

Alignment of record keeping requirements will bring clarity to a confused landscape and help reduce unnecessary costs to business ultimately bringing economic benefit to Scotland.

Topics

  • Consultations and responses
  • Insolvency

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