Louise Laing and Iain Penman, Senior Associates at Brodies LLP explain how insolvency differs in Scotland compared to England and Wales.

Although the law, rules and procedures governing corporate and personal insolvency in Scotland and England and Wales are similar in many respects, there are some key differences.

With regard to corporate insolvency, the Insolvency Act 1986 is the governing statute in both jurisdictions. Earlier this year two new sets of corporate insolvency rules (a consequence of devolution) came into force in Scotland: the Insolvency (Scotland)(Company Voluntary Arrangements and Administration) Rules 2018 and the Insolvency (Scotland)(Receivership and Winding Up) Rules 2018. 

How does the insolvency process differ in Scotland to England and Wales?

The new Scottish Rules are drafted very much to mirror, as far as possible, the Insolvency Rules for England and Wales. However, Scotland has a separate legal system and there are still some important differences in the statutory provisions and rules applicable north and south of the border. These include:

1. There is no Official Receiver in Scotland. In England and Wales, the Official Receiver (a civil servant) will take insolvency appointments, both personal and corporate. In Scotland, private Insolvency Practitioners require to consent to act in any corporate insolvency. This means there is no liquidator of last resort in Scotland but consequently there is also no need to pay a percentage of realisations to an Official Receiver.
2. There is no Law of Property Act (LPA) Receivership in Scotland - the only type of receivership available in Scotland is Administrative Receivership under Chapter 2 of Part 3 of the Insolvency Act 1986.
3. There are different procedures for approving fees. In Scottish insolvencies, there is no ability to agree fees in advance with the creditors, rather there is a retrospective approval of accounts. Fees can be approved by creditors or by the court.
4. There is no statutory power to disclaim onerous property or contracts in Scottish insolvencies equivalent to sections 178 or 179 of the Insolvency Act 1986. An Insolvency Practitioner in Scotland can cause the insolvent company to decline to perform its contractual obligations.  However, a liquidator has no power to divest the company of a real right in land by unilateral disclaimer.

How does personal insolvency differ in Scotland to England and Wales?

On the personal insolvency side, although the principles are broadly the same, there is separate legislation in Scotland which governs personal insolvency, in the form of the Bankruptcy (Scotland) Act 2016. Some key differences are:

1. The technical word for bankruptcy is 'Sequestration'.
2. The Accountant in Bankruptcy (AiB) is an executive agency of the Scottish Government. The chief executive is also The Accountant in Bankruptcy who is an independent statutory officer. The AiB has a supervisory role in relation to personal insolvencies and can act as Trustee. Independent Insolvency Practitioners can also take appointment as Trustee.
3. A debtor can apply to the AiB to self-sequestrate, but creditor applications still need to be made to a court.
4. The minimum debt level for sequestration is £1,500 for a debtor application, and £3,000 for a creditor application, compared to £750 in England and Wales for all applications.
5. Partnerships, trusts and unincorporated bodies are subject to personal, rather than corporate, insolvency legislation.
6. There is no automatic discharge from sequestration. The debtor’s trustee must report to the AIB on the debtor's conduct and the AIB can defer discharge indefinitely if the debtor cannot be traced, or it is otherwise merited.

What are the alternatives to bankruptcy in Scotland?

With regard to alternatives to bankruptcy, there is no such thing as an Individual Voluntary Arrangement (IVA) in Scotland, however individuals can grant Trust Deeds which operate in a similar way. It's also possible to enter into a Debt Payment Plan (“DPP”) under the Debt Arrangement Scheme (“DAS”), which is a government-run debt management tool.

DAS, as it is known, has some key features of note:

1. It allows debtors to apply for a six week moratorium on diligence while they are considering a DAS.
2. It freezes all charges and interest on debts and allows individuals to reschedule payment of their debts over periods usually no longer than ten years.
3. Debtors can apply for variations in the terms of their DPP or payment breaks.
4. It is possible, in certain circumstances, for composition of debts to occur.   

In short, whilst the insolvency regimes north and south of the border are similar in many respects, there are significant and important differences that insolvency practitioners need to be aware of when it comes to dealing with people and companies facing financial difficulty in Scotland.

See also

Find out more

Insolvency (Scotland)(Company Voluntary Arrangements and Administration) Rules 2018 (Legislation)

Insolvency (Scotland)(Receivership and Winding Up) Rules 2018 (Legislation)

Bankruptcy (Scotland) Act 2016 (Legislation)

Insolvency Act 1986 (Legislation)

About Brodies

Brodies is the largest law firm in Scotland measured by income, directory rankings and lawyer numbers. The firm delivers a full range of legal services of the highest quality to Scottish, UK and global organisations from offices in Aberdeen, Brussels, Dingwall, Edinburgh and Glasgow. For more information, visit Brodies LLP.

Publication updated: 17 December 2019