New insolvency rules for Scotland

04 April 2019

On 6 April 2019, Scotland will experience the biggest change to its corporate insolvency proceedings in more than a generation, when not one but two updated sets of rules will come into force:

The Insolvency (Scotland) (Company Voluntary Arrangement and Administration) Rules 2018

and

The Insolvency (Scotland) (Receivership and Winding up) Rules 2018.

Whilst the procedures governing corporate and personal insolvency in England/Wales and Scotland are similar in many respects, with the Insolvency Act 1986 being the governing statute in both jurisdictions, there are some key differences; when it comes to corporate insolvency, different procedural rules apply in Scotland. Therefore, introducing the changes as two sets of Rules has been necessary in order to gain the relevant parliamentary approvals, as the processes are controlled by the UK Parliament and the Scottish Parliament respectively under devolution arrangements.

The Rules mirror, as far as possible, those rules that came into effect in England and Wales (E&W) in 2016 – they are a modern, simplified version of the original Rules, and incorporate all previous amendments made in the years prior to their introduction.

Key changes include:

• The removal of all prescribed forms which are currently in circulation
• Enabling electronic communications with creditors
• Removing the automatic requirement to hold physical creditors’ meetings, although creditors will be able to request meetings
• Enabling creditors to opt out of further correspondence and for small dividends to be paid by the office holder without requiring a formal claim from creditors.

Despite significant change, the procedures for approval of an office holder’s fees and disbursements in Scotland remain relatively the same and are very different from the procedures in E&W.

However, despite having the opportunity to remedy the issues that have arisen in E&W following the introduction of the new regime, these new Scottish Rules appear to repeat some problems found in the E&W legislation, and fail to prevent other potential problems being encountered by office holders, notably around the charging of statutory interest in members’ voluntary liquidations (MVLs).

Statutory interest in MVLs

Following previous concerns raised by R3 and others, HMRC concluded that its initial interpretations of the Insolvency Act 1986 and Insolvency (Scotland) Rules 1986 were incorrect. HMRC concluded that statutory interest did not apply to MVLs in Scotland, and no such payments were therefore required in respect of Scottish MVLs.

The introduction of the new rules in Scotland, however, will flip the above on its head, and statutory interest will apply to MVLs in Scotland from 6 April 2019. Insolvency professionals should be aware that there are currently no transitional periods with respect to these provisions, so they will apply to all MVLs which remain open at 6 April 2019, or which are commenced after this date.

Date and time of administrators’ appointments

When a company enters administration, a Notice of Appointment of Administrators must be filed with the relevant court. The E&W rules set out the information that a Notice of Appointment must contain, including the time and date of appointment of an administrator, notwithstanding that the appointment can only be effective once the relevant statutory requirements have been met.

It is this provision that has caused uncertainty as to when the appointment of an administrator takes effect, which has resulted in three cases being brought in the English courts.

Despite the uncertainty, the new Scottish Rules mirror the E&W rules in this respect, and will therefore create the same confusion amongst Scottish professionals.

Most insolvency practitioners in E&W are adopting the approach in Re Spaces London Bridge Limited (HHJ Nugee, High Court – London), 18 October 2018, where the requirement to state the date and time of the appointment is fulfilled by the Court inserting the date and time of filing on the Notice of Appointment, as was accepted practice under the old form-based system.

The above approach should be met with caution, however, and is provided here for information purposes only. R3 is continuing to seek clarity on this issue, to give more certainty to our members and the profession as a whole.

Conclusion

The new Scottish Rules will have significant implications for how insolvency cases are conducted, and it is disappointing that lessons learned the hard way in E&W have not led to changes. It is essential for Scottish professionals to be ready for these changes on 6 April 2019.