Scotland: How has Coronavirus (COVID-19) affected qualified creditors in bankruptcy?
On 26 January 2022, the Coronavirus (Recovery and Reform) (Scotland) Bill was introduced to the Scottish Parliament following a period of consultation by the Scottish Government, including on the proposed adoption of amendments to sequestration laws contained in the Bankruptcy (Scotland) Act 2016 and Coronavirus (Scotland) (No. 2) Act 2020.Julie HamiltonPartner Leon BreakeyPartner
On 26 January 2022, the Coronavirus (Recovery and Reform) (Scotland) Bill (the “Bill”) was introduced to the Scottish Parliament. The Bill followed a period of consultation by the Scottish Government, including on the proposed adoption of amendments to sequestration laws contained in the Bankruptcy (Scotland) Act 2016 and Coronavirus (Scotland) (No. 2) Act 2020 (the “No. 2 Act”).
Part 3 Section 16 of the Bill proposes that the minimum debt level owed to a “qualified creditor” before an application for a debtor’s sequestration can be made is to be raised from £3,000 to £5,000.
31 March 2022
However, until at least 31 March 2022, temporary protection levels enshrined in the No. 2 Act remain in force. Part 5 of Schedule 1 to the No. 2 Act made several temporary changes to bankruptcy legislation. Section 10 of the No. 2 Act secures extra debtor protection by increasing the minimum debt level owed to a qualified creditor from £3,000 to £10,000.
The No.2 Act was previously extended on 31 March 2021, then again in September 2021. Those remaining provisions which otherwise would have expired on 30 September 2021 are now extended through the Coronavirus (Extension and Expiry) (Scotland) Act until 31 March 2022, with the option for further extension to 30 September 2022. Accordingly, the temporary increase in the debt threshold to £10,000 is currently due to come to an end on 31 March 2022.
Previously, the threat of sequestration would usually be sufficient for a creditor to encourage a debtor to pay. However, by raising the minimum debt level requirement to £10,000, it forced smaller creditors to use less effective enforcement measures and effectively placed more financial pressure on them to potentially carry over debt they might otherwise have sought to recover earlier.
This was recognised by Ministers and, as a result, the Government sought views on the appropriate minimum debt threshold during the consultation period prior to the introduction of the Bill. Given the minimum levels are £5,000 in England and Wales, it was proposed that a figure of £5,000 would be a more equitable level with which to set the lower level, as it would better reflect the interests of creditors and debtors alike.
There is no doubt that sequestration in Scotland is an important and valuable method of recovery. Underpinned by a broadly efficient and cost-effective process, smaller creditors have rightly used the process as a powerful recovery tool. However, the temporary increase in the lower level has conversely reduced the volume of sequestration petitions being lodged with the courts. As creditors had been barred from sequestrating for debts under £10,000, once the levels reduce to £5,000 it is probable that the courts will be overwhelmed with applications which might otherwise have been dealt with at an earlier stage.
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