Though we may see further amendment at Stage 3, , it does seem an appropriate time to consider where this Bill takes personal insolvency in Scotland, and why. After Stage 1, the Committee requested that the Scottish Government consider a number of matters and issues that had been raised by consultees. We can assume that the response is contained in the Government's own Stage 2 amendments, though it would seem fair to say that there has been no major shift in approach or intention by the Ministers.
What then is the main intention of the legislation? It would seem that there are two major stands that wind through the main provisions of the Bill.
The first is that things should now be tougher on debtors who become bankrupt. The Bill attempts to ladle on some healthy doses of responsibilities to balance out the existing rights which debtors, and bankrupt debtors, hold. Of these, the most obvious three are:
- there will be a formal "Debtor Contribution Order" in each and every case, determining what the debtor should be contributing from income towards their debts. (Such an order will be made even if the sum to be contributed is determined to be zero.)
- if contributions are to be made, they should be over a 48 month period (and not 36 months as is the norm at present).
- discharge from bankruptcy will no longer occur automatically after one year but will have to be applied for by the Trustee where the debtor has co-operated with their obligations (and thus discharge delayed if they have not).
The second intention would seem to be that the bankruptcy process should seek to restrict costs where possible, principally by procedural steps currently undertaken through the courts (like contribution orders and recall of sequestration) being undertaken by the office of the Accountant in Bankruptcy (AiB). The Bill thus introduces a swathe of changes that will shift powers from the Sheriff to the AiB in the first instance (with an internal AiB appeal and then a further appeal right to the Sheriff).
It would however appear that some of the procedures to give effect to intention 1 (more responsibilities) may hamper intention 2 (efficiency and, thus, lower costs). Indeed, many of the attempted efficiency measures may actually end up costing more (or, at least, simply shifting costs to different areas), thus probably resulting in increased costs overall and potentially lower returns to creditors.
Responsibilities versus efficiency
To examine just a few, it does appear that there is a greater requirement for form filling by Trustees, and greater work considering such forms by the AiB, than at present. To require a Debtor Contribution Order to be completed even where there is to be a nil contribution would seem to require a good amount of paperwork to be completed over and above the existing initial standard financial enquiries. These costs will surely be borne partly by the creditors (in that the Trustee's fees will increase due to extra time spent on such matters) as well as the public purse (the AiB's time in considering and filing nil applications). Further, there will now be up to two levels of internal appeal available to a creditor who disputes a contribution order. Though this may be a positive improvement on the existing law for creditors, as there is no such ability to challenge at present, if challenges will now occur they will add to administrative costs both of the Trustee and the AiB.
In general, the AiB holds that the Bill's proposals will be "cost neutral" for her organisation, as any increased costs will be off-set by increased fees. Even if this were to come to pass, any increased fees will be paid from funds in each sequestration, meaning that the sums otherwise available for creditors will pay for both increased AiB costs as well as any increased time costs incurred by Trustees. This potential issue raises its head through a number of the other proposed changes.
In regard to the abolition of automatic discharge of bankrupt, many concerns were raised about this change at consultation, both on grounds of cost and fairness. The Government's most recent amendments leave the provision effectively unaltered but now places a requirement on the Trustee (or the AiB) to circulate the report on the debtor's conduct to all known creditors in regards to any application to discharge. The original wording of the Bill simply required a notification to go to creditors. It would therefore seem that the Stage 2 amendments add further time and cost onto Trustees and the AiB to produce a detailed report and then post the full report to all known creditors. If one assumes that the majority of debtors will be discharged without issue after one year (as is the current position, with automatic discharge), there will be increased costs in almost every case, and these will presumably be borne by creditors as increased Trustee's costs and outlays.
Finally, to attend - in part - to concerns from a wide range of consultees (such as the Sheriff's Association and the Law Society of Scotland) as to the consequences of a shift in powers from the court to the AiB, the Government has put in a collection of Stage 2 amendments permitting the AiB to refer a greater category of case decisions direct to the Sheriff for a "direction". Where the Bill, as initially drafted, permitted the AiB to make the decision, and then allowed for the decision to be subject to appeal to an internal AiB review panel and only then appealed to the Sheriff, the amendment presumably intends that the AiB will appreciate the difficult cases and put these straight to the courts.
One may speculate whether, in practice, the AiB would ever determine the matter in a way that diverges from the Sheriff's direction. There may be cases where only part of the question is referred for direction and the AiB's final decision covers more than that which the Sheriff has given directions. It does therefore make sense that the Bill, as amended, reads that the AiB is always the initial decision maker, even in the circumstances where the AiB refers matters to the Sheriff for a "direction" (and the AiB's decision given in light of the direction). The amendments however provide that there is no provision for a further appeal in cases where the Sheriff has been called upon to provide a direction to the AiB.
One would, therefore, be left with the apparent position that decisions by the AiB will either be subject to two layers of review and then appeal, or no appeal whatsoever (and, thus, only challengeable at judicial review). In difficult, or controversial cases, it would seem a more costly approach than the current use of the courts to provide an initial determination by a single Sheriff.
Where does the Bill take us?
Though the above criticisms may seem niggling, these are only a selection of matters arising from the Stage 2 amendments. Similar concerns could be raised in regards to unamended elements of the Bill, and were raised at consultation. It does, however, leave the observer with a view that whatever the final state of the legislation, there is likely to be more formal procedure in personal bankruptcy once it is passed. Further, there is a clear desire to see a significant shift of "first instance" powers from the Sheriff Court to the AiB.
Of these two likely impacts, greater formality may result in more work by Trustees, more work by the AiB and the advisers, and potentially more work for creditors in considering proposals and documents they never had to consider previously (such as nil Debtor Contribution Orders, or Applications for Discharge). In regards to the shift of powers to the AiB, concerns were raised before the Committee at Stage 1 as to the readiness of the AiB for taking on such powers, effectively and efficiently attending to them, and whether the costings proposed by the Scottish Government were realistic. If the transfer of powers does occur, the AiB will need sufficient numbers of trained staff to attend to processing and considering applications which currently are spread very lightly across all the Sheriff Courts (where training has built up over years). One may thus query whether the resultant savings to the Scottish Court Service will be noticeable, and conversely whether the AiB's costs of administering these new powers may be greater than expected (or else risk underfunding and delays in processing).
If the principal policy intentions underlying the Bill - of "more responsibilities" on the debtor and "more efficiency" of process - it looks like attempts to achieve the first will harm the second. Perhaps increased responsibilities on debtors is worth that potential cost. Ultimately, however, if administration costs are increased in personal insolvency, this is normally borne by the creditors by way of increased costs than the Trustees. A potential increase in costs at the AiB, in regards to their new powers, may be borne solely on the public pursue. Time will tell whether the policy objectives are delivered, but there does appear to be a significant risk that they shall be thwarted.