The sheer breadth and complexity of insolvency laws can be difficult to comprehend and apply to any business looking to enter administration. 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, voluntary liquidation specialists, we will look at the legality behind this process in both countries, identifying any key differences.
On both sides of the border, the aim of insolvency is to provide a legally enshrined solution for businesses to repay any outstanding debts where they are unable to do so. 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.
Key advances in these laws are the reduction of associated costs, and the overall modernisation to bring the Scottish policy closer to the jurisdictions of England and Wales, as the digital age progresses. 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.
However, there are still some evident differences in Scottish laws; for example, insolvency practices can still go ahead without a ‘liquidator of last resort’, which is deemed essential in English insolvency cases. 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.
As well as this, a Law of Property Act (LPA) Receiver is still not required under the 2018 rules. 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.
Creditor fees are another notable difference in Scottish laws, as the country has its own set of jurisdictions relating to them. 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.
To avoid hindering an insolvency process, companies should familiarise themselves with the laws which relate to their geographical location. 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 specialises in company administration to create a plan that is tailored to your companies specific requirements.