New bankruptcy bill a balancing act

The second Bankruptcy (Scotland) Act was a revolutionary document. Picture: Phil Wilkinson

IN 1772, a person unable to pay their debts was a criminal.

That year, the Bills of Exchange (Scotland) Act was passed by parliament, the first statutory expression of sequestration (bankruptcy) in Scotland. It was all for the benefit of creditors. Debtors were imprisoned and only released if they turned their entire property and possessions over to their creditors. They were left destitute and humiliated. A person unable to pay their debts was denounced in a very public way and bankruptcy was as much an attack on them as on their estate.

Gradually, however, it was accepted that a person unable to pay their debts was not always at fault. Circumstance could play a role and, regardless of circumstance, debt did not merit imprisonment. So, between 1880 and 1882, parliament brought the Debtors Act and Civil Imprisonment Act into force which, together, effectively abolished the imprisonment of debtors. By 1913 there was so much bankruptcy legislation in Scotland that parliament consolidated it and the first Bankruptcy (Scotland) Act came into force. That act and bankruptcy law generally remained relatively unchanged until 1985 when the second Bankruptcy (Scotland) Act was brought in. It was a revolutionary document.

Far from the days of humiliation and imprisonment, the interests of debtors were now considered alongside those of creditors and the legislation sought to balance creditors’ rights against debtors’ rights, and the rights of creditors among each other. These competing interests were not easy to reconcile and the balance was still in favour of creditors because historically the point of bankruptcy was to protect creditors. However, debtors now benefited from innovations including an automatic discharge from their debts after three years, considered a humane development which set Scotland apart from most European civil legal systems.

In recent years, you would be forgiven for thinking bankruptcy legislation was in fashion. The enterprise culture meant that in 2008, we had new legislation. Debtors were now discharged automatically from their debts in one year rather than three and a new route to bankruptcy was introduced allowing the poorest in society to bankrupt themselves without jumping through established legal hoops. In 2010, debtors were given additional protection for their family home and yet another route to bankruptcy was introduced which has again increased the availability of bankruptcy as a means of debt relief.

All of which brings us to the present day. On 29 April, 2014, the Bankruptcy and Debt Advice (Scotland) Bill received Royal Assent. The Scottish Government wanted to ensure debtors had access to a fair and just process of debt management; that those who could pay their debts did so (while acknowledging the wide range of circumstances that can lead people into debt); and, that the best possible return was secured for creditors. These are certainly laudable aims and probably the right ones. Putting debt relief at the heart of legislation when Scotland is experiencing unprecedented levels of personal debt is also understandable – albeit that, one day, the economic downturn will end and the legislation must be fit for purpose in good times too.

The new act introduces some provisions which favour debtors and some which favour creditors. There is compulsory financial education for debtors which is a positive step although it may be difficult to assess its effectiveness. Financial education, like all other kinds, must start at school. The debtor’s right to automatic discharge is removed, perhaps not a move which will be overwhelmingly popular. Procedurally, the Accountant in Bankruptcy has a wider role than before which may lead to criticism that bankruptcy is treated merely as an administrative matter with too little emphasis on the consequences for debtors.

Undoubtedly what Scotland needs is a consolidated piece of bankruptcy legislation. The act seeks to balance the interests of all concerned, which is right but also difficult. Balancing interests is not the same as pleasing everyone. If either debtors’ groups or creditors’ groups are not pleased by the result, they will say that the legislation has failed in the balancing exercise, whether it has or not.

It will be interesting to see how it works in practice, but it is difficult not to reflect on how significantly both the theory and practice of bankruptcy in Scotland has changed.

• Richard McMeeken is partner and solicitor advocate, commercial litigation, Morton Fraser