The Scottish Government Legislative Programme – impact on commercial law

The First Minister announced the SNP government legislative programme earlier today. Unusually there are two bills of relevance to commercial lawyers.

The statement can be seen here (the relevant section beginning some 14 minutes into the speech)

The intention of the government is to bring forward a new Debt and Family Homes Bill and a Debtor Protection Bill.

The former will follow a consultation on proposals to exempt the family home from certain debt processes (the basis upon which the SNP voted against the Bankruptcy and Diligence etc (Scotland) Act 2007 when it was passed by the Scottish Parliament. The government proposal states that the proposed reform

"to make sure that people who become bankrupt and who are in debt are not made homeless unnecessarily.

That's why:

  • A thorough review wil be conducted of what can be done to ensure that people who become bankrupt are not made homeless unnecessarily
  • We propose to consult on issues relating to debt and the family home and, subject to that consultation, to bring forward a Debt and Family Homes Bill
  • The aim of the Bill will be to put in place a system that strikes the right balance between the interests of creditors and debtors within the effective system for the enforcement of court orders required in a modern economy
  • The review will recognise the Scottish Government's commitment to exempt the main dwelling house from land attachment (that is, the ability of creditors to recover debts by taking possession of and selling houses and other heritable property) "

The interaction between this consultation and bill and the proposed Debtor Protection Bill is not at the minute clear. The latter will

"introduce measures to protect the people of Scotland who are struggling to deal with debt.

It will also increase protection for those who are facing repossession or become bankrupt.

The Debtor Protection (Scotland) Bill will be introduced into the Scottish Parliament in autumn 2009.

The Bill offers protection by:

  • Providing for all repossessions cases to involve court proceedings with the exception of cases where the borrower voluntarily surrenders possession
  • Requiring all lenders to demonstrate to a court that they have taken reasonable steps to avoid repossession, i.e. a 'pre-action protocol with teeth'
  • Enabling the use of lay representation in repossessions cases where the home owner wishes it
  • Extending the period by which a sheriff may postpone the sale of a family home in bankruptcy from one to three years
  • Introducing a requirement for trustees in bankruptcy and trust deeds to notify the local authority of the sale of a family home
  • Allowing the exclusion of specified assets, including the family home, from protected trust deeds
  • Improving access for debtors to debt relief by providing a new route into bankruptcy"

The proposed legislation can be traced back to the Debt Action Forum, established in January of this year. The final report was published in June. Part D of that paper was a legislatiove opptions paper prepared by Scottish Law Commissioner Professor George Gretton and John St Clair (co-author of the leading textbook on corporate insolvency law in Scotland). The Gretton-St Clair paper drew on comparative approaches to personal insolvency law and pointed out that a number of jurisdictions adopt much wider exemptions from bankruptcy than is the current law in Scotland. Accordingly, that paper suggested various potential changes to the law relating to the treatment of family homes to ensure appropriate dovetailing with the protection to homeowners and their families offered by the Mortgage Rights (Scotland) Act 2001.

In pointing out that the protection under the 2001 Act is greater than that offered under s 40 of the Bankruptcy (Scotland) Act 1985 – the Gretton-St Clair report points out the peculiarity that the debtor has more protection against a secured creditor (with whom the debtor agreed that the loss of his or her home was a potential remedy in the event of non-payment) than against the general body of unsecured creditors (although the protections of the 2001 Act would be mirrored in the case of land attachments under the Bankruptcy and Diligence etc (Scotland) Act 2007). A tentative suggestion that the home if worth less than a prescrived value be exempt from bankruptcy is made in the report. Such an approach would be in line with the approach in some jurisdictions (there is a "homestead exemption" in a number of US states). This will prove a controversial area, and the economic evidence presented in the report is janus-headed – with suggestions that entrepreneurship is encouraged, although a potential detrimental impact on the costs of unsecured lending (through the removal of assets available to the general body of unsecured creditors). Determining policy here will require careful consideration.

The Gretton-St Clair report also noted some of the anomalies of the law of standard securities. The protection under the 2001 Act has to be initiated by the party claiming it. This is because Scots law provides a variety of informal means of enforcement of standard securities that do not require court involvement. Similar points are made in the Repossessions Group report (which appears as Annex B to the final Debt Action Forum report). The Repossessions Group considered the issue in some detail and in Part 6 of their report recommended that applications for repossession of residential properties should require to be made to the court (unless the property is voluntarily surrendered to the creditor).

Such proposed reforms are very welcome – in ensuring that the policy of the 2001 Act is implemeted without putting the strain and pressure of initiating court proceedings on the debtor, but that the 2001 Act protections be considered as a matter of course during repossession proceedings. In my teaching experience  there is a look of bemusement from foreign students at the idea that a creditor can simply serve a notice on the debtor and if payment is not received within a specified time period the creditor immediately has a power of sale. The removal of the excessive informality of the current Scottish enforcement proceedings would be a very welcome reform.

We will provide further information on these bills on the Edinburgh Centre for Commercial law blog when made available by the government. Let us hope that in the desire to legislate quickly to deal with the prevailing economic climate that the reforms try to resolve some of the anomalies that have affected the Scottish system.

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