Calman Commission and corporate insolvency

Given the constitutional reforms of recent years all lawyers must have some familiarity with matters traditionally viewed as public law. The incorporation of the European Convention on Human Rights has touched a number of areas (in early cases in scotland primarily protecting the rights of corporations) The devolution settlement established by the Scotland Act 1998 has caused a degree of complexity for commercial lawyers. That complexity is inherent in the uncertain boundaries of commercial law.

Commercial law can be viewed in a variety of ways. In his magisterial work on commercial law Sir Roy Goode writes

"commercial law is that branch of law which is concerned with rights and duties arising from the supply of goods and services in the way of trade." (p 8, Commercial Law (3rd edn)

but acknowledges that not everyone would agree with this definition because

"Its scope is not clearly defined, and no tow textbooks adopt the same approach as to spheres of commercial activity that ought properly to be included in a work on the subject." (ibid)

On one level commercial law can be viewed as applied private law, involving the interaction of the law of obligations and the law of property. Nominate contracts may be considered (sale; hire; carriage; insurance &c) and the interface between property and obligations (apparent in rights in security and insolvency). However, others would interpret commercial law more broadly. For example, the Law Society of Scotland provides that the syallbus for the paper on Scots Commercial Law includes

  1. Insurance
  2. Diligence
  3. Commercial paper
  4. Real and personal rights in security
  5. Sale of goods
  6. Carriage
  7. Agency
  8. Partnership (including limited liability partnerships)
  9. Companies
  10. Personal and corporate insolvency

The lack of a unified approach, and the manner in which the general subject of commercial law touches upon a variety of other general areas of law (contract, property, civil procedure, the law of persons), means that in devolving legislative power to the Scottish Parliament there is a piecemeal approach to legislative competence in commercial matters.

For example, much of commercial law (in the sense used by the Law Society) is reserved under s 30 and Sch 5 to the Scotland Act, but some is not. The rationale for the reservations and exceptions to the reservations is not always clear.

Generally private law (as defined in s 126 (4) of the 1998 Act generally in accordance with the traditional civilian division of persons, obligations, property, and actions) is devolved. But matters relating to trade and industry are reserved (SCh 5, Head C) including the law relating to business associations (companies and partnerships); competition law; intellectual property law; consumer protection (including the regulation of the law of sale and supply of goods to consumers, and hire purchase; as well as the subject matter of the Commercial Agents (Council Directive) Regulations); the law of insolvency (including winding up of companies (but not sequestration of individuals). The reservation for winding up companies details a number of elements:

“(a) the modes of, and grounds for and the general legal effect of winding up, and the persons who may initiate winding up, (b) liability to contribute to assets on winding up, (c) powers of courts in relation to proceedings for winding up, other than the power to sist proceedings, (d) arrangements with creditors and (e) procedures giving protection from creditors”

but excluded from this general reservation is

"(a) the process of winding up, including the person having responsibility for the conduct of a winding up or any part of it, and his conduct of it or of that part; (b) the effect of winding up on diligence, and (c) avoidance and adjustment of prior transactions on winding up"

as well as the law of floating charges and receivers. For reasons best known to the Westminster government no amendment of these provisions was made to respond to the extensive reforms to the law of corporate insolvency processes made by the Enterprise Act 2002 (which transformed the law of receivership and the law of administration).

The Scottish Parliament has legislated on some of these devolved topics. The Bankruptcy and Diligence etc (Scotland) Act 2007 will (when in force) completely replace the rules on ranking and creation of floating charges currently found in the Companies Act 1985. However, even this project demonstrated the difficulties of the current devolution settlement because while Holyrood was passing this legislation – providing among other things that a floating charge is created on the date of registration in a new Register of Floating Charges – Westminster was passing the Companies Act 2006 which repeals and replaces the law on registration of company charges and provides that a floating charge in Scotland is created on the date of execution. Dual competence potentially leads to confusion and incoherence (albeit in this case likely to be resolved by a statutory instrument under s 893 of the Companies Act 2006).

Examining the reservation and exception for corporate insolvency under the Scotland Act 1998 one sees the potential for difficulty.

Some aspects are clearly appropriately devolved. It would be an odd system that prejudiced an unsecured creditor attempting to protect his or her position with different rules on the efficacy of their actions dependent on whether the debtor is a company or not. How civil procedure operates for liquidation, given an independent Scottish system of procedure (most of the time, but not always respected by Westminster) also seems appropriately to be devolved. Further insolvency law involves the interface between other subjects. It is the acid test for the efficacy of property rights, and determining the validity of obligations. Given the very different approaches to property law in Scotland in comparison with a system based on equitable property rights in England and Wales a difference in approach in various respects does not seem unreasonable. For example, Scots law has a numerus clausus of security rights with strict rules on creation that require publicity of property rights. English law is much more (secured) creditor-friendly being influenced by freedom of contract and while publicity is applicable for some security rights this does not apply generally (see, for example M Bridge, "The English law of security: creditor-friendly but unreformed" in E Kieninger (ed), Security rights in movable property in European private law (2004)). Other areas may seem less appropriate for devolved treatment. For example, the grounds for winding up are reserved (and consistent between Scotland and England).

But, as happened when the law of administration was substantially amended, it is essential that where there is joint competence, or competence for different aspects of the one area, that reform is carried out in a coherent manner. The risk of devolution and areas of complex competence is that neither legislature adequately addresses the issue – and Scots law finds itself ossifying.

In its review of the Scottish devolution settlement, the Commission on Scottish devolution (better known as the Calman Commission) received various reprsentations on the settlement, and while media attention on the Commission's final report focused on issues of taxation there is some attention in the final report on commercial law matters. Corporate insolvency is considered at paras 5.267ff.

The Commission notes that despite work by the Accountant in bankruptcy to reform Scots law to produce standalone insolvency rules

"Notwithstanding moves by the Accountant in Bankruptcy to bring the law relating to insolvency procedure in line with that of England and Wales, the Commission has heard from insolvency practitioners who question the necessity of duplicating work in Scotland and the potential this allows for divergence in policy and practice. The Institute of Chartered Accountants of Scotland (ICAS), for example, argues that this is unhelpful in a field in which businesses operate across the UK, supported by lenders who also operate common policies across different jurisdictions." (para 5.272)

And goes on to note, despite the different systems of property law and the different treatment of secured and unsecured creditors, :

"The Commission is, however, persuaded that devolution has produced an unsatisfactory
state of affairs relating to corporate insolvency in that:

• there is an absence of clarity as to where responsibility lies for drawing up the rules
to be followed by insolvency practitioners dealing with corporate insolvencies;
• there are unnecessary and confusing divergences between the insolvency rules
applying in England and Scotland; and
• there have been unnecessary and damaging delays in introducing new rules in

Many corporate insolvencies involve companies operating on both sides of the border.
Clarity, consistency and speed are essential, particularly in the present economic and
financial climate. Whether or not, as some submissions have suggested, the necessary
expertise is lacking in Scotland (which the Commission is not in a position to judge), that
does not alter the importance of clarity, consistency and speed." (paras 5.275 – 6)

To that end the Calman Commission has not recommended repatriation of the law of corporate insolvency to Westminster but instead recommends,

"In the opinion of the Commission, the serious issues raised in connection with corporate
insolvency might be resolved without altering the reserved/devolved boundary in
Schedule 5 in relation to primary legislative competence. The essential point appears to
be that the UK Insolvency Service, with appropriate input from the relevant department(s)
of the Scottish Government, should be made responsible for laying down the rules
to be applied by insolvency practitioners on both sides of the Border. This could be
achieved by UK legislation to which the Scottish Parliament would consent by legislative
consent motion under the Sewel Convention." (para 5.277)

with a threat that if this is not done Westminster should look to repatriate, and a recommendation that reform in this area be carried out as soon as possible.

The suggested solution has attractions – in that if one body is responsible for the reform process in relation to the actions of insolvency practitioners – this should ensure consistency and avoid the lag that has blighted Scottish law in this area since the prioritisation of company rescue in the insolvency system. What must be secured though in any such reform is respect for Scottish civil procedure (and the actions in relation to tribunals and judical review highlighted by Jonathan Mitchell QC must be avoided) and appreciation of the differences in the Scottish law of rights in security, diligence, and the law of property must be central to any reforms. It is here that I feel cautious. The track record of the old DTI in responding in a manner sensitive to the Scottish legal system was not great; and when even (English) judges in the House of Lords in Scottish cases do not know what diligence is, can we rely on a system based south of the border to understand the differences in the Scottish system – specifically the Scottish law of procedure, property, and diligence – and to legislate appropriately?