CIGA
The majority of the changes to legislation apply UK wide and come from the most important piece of insolvency legislation that we've see in a generation - the Corporate Insolvency and Governance Act 2020 ("CIGA").
CIGA introduced a whole raft of measures, some of which are permanent and some of which are temporary.
Measures | Status |
Moratorium process | Permanent |
Restructuring plan (Part 26A, Companies Act 2006) | Permanent |
Prohibition on termination of contracts for the supply of goods and services | Permanent |
Return of Crown Preference from 1 December 2020 (introduced via Finance Act) | Permanent |
Restrictions on use of statutory demands and winding up | Temporary - extended to 31 March 2021 |
Suspension of wrongful trading provisions | Temporary - ceased on 30 September. Recommenced on 26 November 2020 until 31 April 2021 |
These changes are hugely significant and even the temporary changes will have a long lasting impact. In Scotland, we have seen lots of creditors frustrated at their inability to take steps to recover sums owed from debtors via a statutory demand process since, without the teeth of a winding up petition behind them, they are of little force. A news release from the Insolvency Service showed that the year on year reduction in Scottish insolvencies is 43% (39% in England & Wales). The reduction in Scotland has been largely caused by far lower numbers of compulsory liquidations which surely must reflect the CIGA prohibition on creditors using winding up petitions against debtor companies. The feeling is that these well intentioned measures have saved businesses which needed to be saved but, in doing so, have saved businesses which were in deep financial trouble long before coronavirus.
Personal insolvency
There have also been distinct Scottish changes in the field of personal insolvency. For a time limited basis (currently until 31 March 2021), the general moratorium which is granted to a debtor on their application to stop debt enforcement steps being taken against them has been extended from a 6 week moratorium to a 6 month moratorium. Again, on a time limited basis, a debtor can apply for more than 1 moratorium in a 12 month period. Finally, and also on a time limited basis, the debt threshold for a creditor application for debtor's bankruptcy has been extended to £10,000 from a previous threshold of £3,000. That provision is due to come to an end in March 2021 but there is speculation that it may last longer.
Case law
The Scottish court also reached an important decision in the field of gratuitous alienations. This is where an asset is transferred for nothing, or not enough, in the 5 years preceding formal insolvency - similar to transactions at an undervalue in English law. If a challenge is successful, then the court can order that the transferred property is to be restored to the bankrupt's estate, or it can order "other redress" as appropriate. It is a complete defence to a claim that "adequate consideration" was made for the transfer and the point of contention in the case of O’Boyle’s Trustee v Brennan [2020] CSIH 3 was whether adequate consideration had been given.
In that case, six months prior to his bankruptcy, Mr O’Boyle transferred £190,000 to Ms Brennan which Ms Brennan used to buy a property in her own name. Eight months after Mr O'Boyle's discharge from the bankruptcy process, Ms Brennan sold the property and paid the net sale proceeds of £197,000 directly to Mr O’Boyle. The trustee sought to challenge the original transfer of £190,000 to Ms Brennan as a gratuitous alienation but Ms Brennan claimed that the £197,000 paid directly to Mr O’Boyle - years after he made the payment of £190,000 to her - was adequate consideration.
The original court rejected that argument. On appeal, the Inner House came to the same conclusion. It held that, to be consideration, the payment must be the counterpart to the alienation (i.e. the quid pro quo). It also held that payment to a discharged debtor can’t amount to consideration for a pre-bankruptcy alienation. The court was also asked to consider whether payment of the £190,000 back to the bankrupt estate produced an “unjust and anomalous result” since she'd already paid £197,000 to Mr O'Boyle and was now being asked to pay £190,000 to the bankrupt estate. That notion was also rejected and it was suggested - somewhat optimistically - that Ms Brennan could claim repayment from the debtor under the law of unjustified enrichment.
All in all, 2020 was a year of change. It's likely that 2021 will see lots more of the same.
This article formed part of our Litigation in Scotland Report 2021 - to view the complete report click here.
