Corporate Insolvency: Is it all that different in Scotland?

In 2024 we saw major names across multiple sectors go into insolvency processes.  For every household name which collapsed, scores of other businesses also had administrators or liquidators appointed.  Those businesses might not have generated the same individual headlines but it is clear that across the UK there is a trend towards increasing numbers of corporate insolvencies.  

The Insolvency Act 1986 is a UK wide statute, but it is a mistake to think that all of the provisions apply across the whole of the UK in the same way.  There are lots of differences between insolvency practices in Scotland and England and Wales - some subtle and some significant.  This article looks at those differences and points out some potential pitfalls for the unwary.

The underlying Insolvency Rules are not the same

As anyone dealing with insolvency will know, the provisions of the Insolvency Act 1986 only take you so far.  A lot of the technical detail comes from the underlying rules.  There are different rules in Scotland - the Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018 and the Insolvency (Scotland) (Receivership and Winding Up) Rules 2018.  Although the technical detail of the rules is supposed to mostly mirror the rules which apply in England and Wales, there are some fairly significant differences (such as approval of fees - more on that later).

There is no Official Receiver in Scotland

In England and Wales the Official Receiver, who is a government civil servant, will take corporate insolvency appointments.  That's not the case in Scotland, where in every corporate insolvency a qualified insolvency practitioner must have consented to act as administrator, liquidator or receiver (as appropriate).  This means that there is no liquidator of last resort in Scotland, although it does also mean that there is no Official Receiver to take a percentage of the asset realisations.

There is no such thing as an LPA Receiver in Scotland

The appointment of a Law of Property Act Receiver, where a fixed charge security holder appoints someone to take control of the charged asset (usually to sell, or take control of the rents), is a powerful tool but it's not available in Scotland. We do not have LPA Receivers, nor anything equivalent.  The only receiver recognised in Scotland is an Administrative Receiver under the Insolvency Act 1986.

The law on challengeable transactions is different

As is the case for insolvencies in England and Wales, the provisions of the 1986 Act mean that transactions entered into by a company before a formal insolvency process begins can be challenged in Scotland if they are detrimental to the company's creditors.  However, there are some important differences in the law between both jurisdictions, as follows:

Gratuitous alienations/ transactions at an undervalue

Unfair Preference

Common law challenges

Although the use of the statutory challenges set out above is significantly more widespread, it is possible to challenge gratuitous alienations and unfair preferences at common law.  In practice, that doesn't happen terribly often, largely due to the more significant evidential burden, but the benefit to the common law challenges is that the time limits set out above don't apply.

Landlord's Hypothec - a security for landlords

The landlord's hypothec creates a fixed security in favour of the landlord for arrears of rent over the tenant's moveable property which is located on the leased premises. If the tenant enters into an insolvency process then the landlord can rely on the hypothec and will be treated as a secured creditor over the moveable property owned by the tenant on the leased property.  In practice, this usually means that the moveable assets are sold and the arrears paid over to the landlord or, if the assets are unlikely to generate a surplus over the secured amount then they may simply be handed over to the landlord to deal with as they wish.

Insolvency Practitioners' fees - retrospective approval

The Insolvency Rules applicable in Scotland do not provide for Insolvency Practitioners' fees being approved in advance.  Instead, there is a process to follow which essentially involves retrospective approval of accounts.  This approval can come from the creditors or, from the court, following a court process involving the appointment of a Court Reporter (who will be a fellow Insolvency Practitioner who will examine the accounts and the files belonging to the case and recommend the amount of the fee).

Partnerships and unincorporated bodies are under the bankruptcy regime

In Scotland, it is the personal insolvency regime which applies to partnerships and unincorporated associations rather than the corporate insolvency processes.  This means that the process to follow is one of bankruptcy under the Bankruptcy (Scotland) Act 2016.

Caveats

Unique to Scotland, caveats are documents which are lodged at court by businesses and individuals, amongst others.  Their purpose is to provide early warning of certain court proceedings which have been raised against them, including liquidation petitions.  

Having a caveat in place means that the party who lodged the caveat has the right to be heard in court before any decision is taken on whether the interim orders, or in the case of liquidation, the initial orders, should be granted.   

In the case of a creditor trying to commence liquidation proceedings against a debtor company, this can slightly delay the process but it can often lead to resolution of the matter (by payment of the outstanding debt).

Summary

Although Scottish corporate insolvency cases have the same legislative starting point as cases in England and Wales (namely the Insolvency Act 1986), there are multiple differences which can often have a material bearing on the processes and strategies to be implemented.  Appreciating these differences will be important when dealing with Scottish companies.  If you have any Scottish corporate insolvency cases which you would like to talk to us about we would be delighted to hear from you.