Just when we were coming to terms with the Decrees in Absence Act of 1584 and the Diligence Act of 1661 we find they have been repealed along with another half dozen Acts of the Scottish Parliament dating back to the 16th and 17th centuries. These and many other sweeping changes are just some of the consequences of the passing of the Bankruptcy and Diligence etc. (Scotland) Act 2006.
The Act is one of the biggest pieces of legislation ever to come out of Holyrood and consists of seventeen parts and six schedules. The new rules will apply from dates yet to be appointed by Scottish Ministers.
Here is our A - Z one minute summary of what the Act covers.
* Admiralty Actions and Arrestment of Ships - the new provisions modernise the processes involved in such cases and includes an extension of the power to obtain arrestments in rem of a ship or cargo from a Sheriff, the ability to arrest a ship that is demise or bareboat chartered, and useful strengthening of creditors rights to recover expenses. Brodies Shipping partner, Duncan MacLean acted as consultant to the Scottish Executive in respect of this aspect of the new legislation and will be happy to discuss any aspects with individual clients.
* Arrestment in Execution and Actions of Furthcoming - This may well be the part of the Act which is of most interest to bankers since it radically amends the way in which arrestments in execution are treated. First of all, the concept of an 'all sums' arrestment disappears. Instead a sum certain will need to be stated in the arrestment schedule. Banks will face the burden of having to calculate how much is to be attached as the new legislation excludes a certain sum intended to cover a personal debtor's living expenses. Banks, and others on whom arrestments are served, now have a duty to disclose information to arresting creditors and in some circumstances the sums attached will fall to be released automatically to the arresting creditor without the need for an Action of Furthcoming. Notices of objection to this can be lodged and hearings will come before a Sheriff. As happens in practice at present it will still be possible to release funds using a mandate but in future a prescribed form of mandate will be introduced. The new rules are complicated in a number of respects and banks may wish to seek more detailed advice on some aspects of the new rules.
* Attachment of Money - This form of Diligence allows a judicial officer 9previously known as a Messenger-at-Arms or Sheriff Officer) to seize cash and cheques from a debtor's premises, but not his house. Since the definition of Money includes cheques, doubts have already been expressed as to how banks will deal with third party non-transferable cheques caught by the money attachment. Additionally great care will be needed to ensure that this new scheme is not exploited by those attempting to launder money.
* Bankruptcy - The new Act radically amends Scottish Bankruptcy procedures by:-
* allowing automatic discharge of a debtor after 1 year;
* including safeguards to protect the interests of creditors such as the introduction of bankruptcy restriction orders which can apply for up to 15 years;
* requiring the Trustee to deal with the debtor's home within 3 years as otherwise the rights may revert to the debtor; and
* requiring a creditor to provide the debtor with a debt advice and information package.
* Debt advice and information packages - throughout the legislation there are several new requirements on creditors to provide debtors with information packs and advice regarding the potential consequences of the steps the creditor is taking. Banks and other creditors therefore need to be very aware of the need to have robust systems in place to ensure that the relevant information is provided at the right time.
* Diligence on the Dependence - as a consequence of successful challenges, largely based on Human Rights principles, there have been a number of important restrictions in recent years on the extent to which it is possible to exercise diligence before, or at the same time as, an action is raised. Much of this has now been codified but importantly the right to use diligence on the dependence still exists in Scotland.
* Diligence against Earnings - employers will have to come to terms with a new scheme setting up very complicated arrangements for dealing with earnings arrestments. The calculations become particularly difficult when there is more than one competing arrestment against earnings. The legislation also imposes requirements on employers to provide detailed information regarding the employee including advising where an employee has left their employment. Many employers are likely to require detailed advice on the proper procedures they will need to follow. The consequences for failing to implement the legislation can be onerous. For example, in a worst case scenario, the employer may be forced to pay twice the sum which he should have deducted from the employee - and then not be able to recover this from the employee!!
* Enforcement - abolishes the offices of messenger-at arms and sheriff officer and replaces them with judicial officers. This part also sets up a new Scottish Civil Enforcement Commission. The role of the Commission will include keeping a register of judicial officers, publishing codes of practice and generally supervising the work of judicial officers.
* Floating Charges - introduces a new Register of Floating Charges and a raft of new registration requirements. This part of the Act is not expected to come into force for some time.
* Inhibition - it will become possible to obtain an inhibition in execution based on holding certain kinds of decrees or documents of debt. Another change sees the Court of Session's power to grant letters of inhibition abolished.
* Interim Attachment - allows the court to grant warrant for the attachment of corporeal moveable property on the dependence of an action. This form of attachment is not competent as a means of attaching any articles in a dwelling house nor perishable items nor a range of other items excluded from attachment by the Debt Arrangement and Attachment (Scotland) Act 2002.
* Land Attachment and Residual Attachment - this part abolishes the old and rarely used diligence of adjudication for debt. Two new forms of diligence known as Land Attachment and Residual Attachment have been introduced. The new remedies cannot be used on the dependence of an action and the debt must be proved before this remedy becomes available. After the lapse of six months, with a debt of at least £3,000 remaining unpaid, a creditor holding a land attachment can apply to the court to sell the attached land. The sale process is a rather formal one involving an officer of the court being named as an appointed person to deal with the sale. Banks will need to be very careful when they receive notice of a Land Attachment affecting property over which they hold a standard security. The effect on the preference in ranking will be similar to the intimation of a second charge on the property.
* Maills and Duties - have been abolished.
* Other changes - Numerous other minor changes have been introduced by the Act. These include amendments to the Debt Arrangement and Attachment (Scotland) Act 2002 and some new procedures for actions for removing from heritable property. A further feature of the Act is the introduction of provisions to allow certain steps associated with insolvency practice to be taken using electronic signatures.
* Sequestration for Rent - has also been abolished. This abolition, along with other restrictions to the Landlord's Hypothec will limit, but not remove, the value of this remedy. Institutional landlords often look to the Landlord's Hypothec as a useful weapon for unpaid rent and may need to re-assess how they protect themselves in light of these changes.
ZZZ- Congratulations to anyone who has not fallen asleep at this point!