Implementation of the Bankruptcy and Diligence etc (Scotland) Act 2007 continues apace. 22 April 2009 saw the most recent instalment with the passing of Commencement Order NO.4 including Parts 5 and 10 of the Act: namely the parts relating to inhibition, arrestments in execution and actions of furthcoming.

Part 5 - Inhibition

A warrant to inhibit is a court order preventing the debtor from voluntarily disposing of his land, e.g. by concluding a missive of sale or granting a standard security over it. Before 22 April 2009 inhibition also affected debts incurred after it was served; a prior inhibition giving a preference in the inhibitee's land upon liquidation or other insolvency process.

As regards procedure, after 1 April 2008 it was no longer necessary to obtain letters of inhibition in the Court of Session - such a warrant could be obtained from the sheriff. However, when it came to registering and serving the Inhibition, prior to 22 April 2009, the general rule was that the inhibition took effect only when it was recorded - unless a notice of inhibition was recorded, served, and then recorded again within 21 days in which case the inhibition was effective from the date the notice was first recorded. This became the common practice as a means of bringing forward the effective date and to prohibit land disposal as soon as possible. However, this was particularly crucial as the Insolvency Act 1986 and Bankruptcy (Scotland) Act 1985 provided that no inhibition or arrestment would be effective if it took effect less than 60 days before a sequestration/winding up.

Post 22 April 2009, the effective date is the date upon which the inhibition is served, regardless of whether a notice of inhibition is registered previously. This could cause some concern in light of the 60 day rule mentioned above. However, the position is worse than that; post-22 April 2009, inhibitions no longer confer any preference in insolvency proceedings at all! The Scottish Law Commission's reasoning behind this is more practical, rather than legalistic. In short, their report suggested that the ranking rules were too difficult to enforce and (perhaps more pertinently) created too great a preference for the inhibiting creditor over, for example, trade creditors who cannot be expected to check for the existence of an inhibition before supplying goods and services.

Part 10 - Arrestments

Arrestments secure funds owed to the debtor in the hands of third parties. The most common example is the freezing of bank accounts. Prior to 22 April 2009, the frustrating aspect of arrestments was that the creditor did not know what was caught; Scottish banks would not divulge any information in line with their duties of confidentiality to their customers. The new provisions state that the arrestee (e.g. a bank) will now have to disclose the value of assets attached within 3 weeks of it being served.

The consequence of a failure to make such disclosure can be extreme: the arrestee can be ordered to pay to the creditor the lesser of either (i) the sum due by the debtor to the creditor or (ii) the amount representing the minimum protected balance. The arrestee will not be able to recover this sum from the debtor. Furthermore, failure to disclose can be treated as a contempt of court.

Moreover, prior to 22 April 2009, an arrestment did nothing more than ringfence the arrested sums for the benefit of the creditor; he would then have to raise a separate action to recover the sums caught - without even knowing whether or not anything had actually been caught. As a result, such actions could prove to be a waste of time and money. Now, such actions are no longer necessary as funds will be automatically released after 14 weeks if no objection is lodged.

In conclusion, whilst the changes do, in many respects, streamline the procedures involved this has been at the expense of the abolition of ranking of inhibitions upon insolvency which must be regarded as a major blow to creditors.

This article appeared in the August 2009 edition of Project Scotland.