Moveable Transactions (Scotland) Act 2023 - insolvency definition consultation

Parliamentary passage

Stage 2

3.1  At Stage 2 of the Bill process, amendments to the legislation can be laid and are subject to consideration by the relevant committee. They are debated and if pressed they may be agreed or subject to a vote. Where there is a majority in favour of the amendment they are passed, and the Bill is duly amended. 

3.2 At Stage 2 [7] of the Moveable Transactions (Scotland) Bill, which was being considered by the Delegated Powers and Law Reform Committee, a number of amendments were laid, pressed and passed in relation to the definition of insolvency.

3.3 The effect of these amendments is set out below. For ease of reference, they have been corralled into 3 sets of amendments.

Set 1 amended sections 4(6)(a) (Assignation of claims: insolvency) and 47(3)(a) (Creation of statutory pledge: insolvency) respectively to: 

1. remove from the definition of insolvent, for the purposes of these sections, an assignor/provider who grants a trust deed for creditors or makes a composition or arrangement with creditors, and 
2. replace this with the Accountant in Bankruptcy registering a Protected Trust Deed in relation to the assignor 

Set 2 amended sections 4(6)(b) and 47(3)(a) respectively to add to the list of events which constitutes, for the purposes of these sections, an assignor/provider becoming insolvent. The event that was added is the making of an order sanctioning a restructuring plan under Part 26A of the Companies Act 2006 which affects the assigned claim/encumbered property. 

In relation to pledges, the new criterion was erroneously added to the definition of insolvency that relates to individuals, not the one that relates to incorporated bodies.

Set 3 amended sections 4(6)(b) and 47(3)(b) respectively to ensure that a Company Voluntary Arrangement (CVA) only constitutes the insolvency of an assignor/provider for the purposes of these provisions in the Bill if it affects the relevant claim (or in section 47 the encumbered property) in question. 

3.4 The amendments were derived from those included by the Law Society of Scotland in their written evidence to the Delegated Powers and Law Reform Committee at Stage 1.   

3.5 The Law Society of Scotland considered the first set of amendments necessary as they thought that the existing references were (i) too vague and (ii) used (a) a technical term ('composition') which in their view has since fallen out of use; and (b) a technical term ('arrangement') which in their view is used in England but not Scotland. More importantly and substantively, they also consider that only a statutory Protected Trust Deed should count as insolvency for the purposes of the Bill. 

3.6 This first set of amendments therefore reduced the types of trust deed that are covered, so that they only cover protected trust deeds.   

3.7 The second set of amendments were proposed by the Law Society of Scotland on the basis that the Bill makes no reference to such arrangements under the Companies Act 2006 and they consider that it should do so, to ensure consistency with wider insolvency law.  

3.8 The Law Society of Scotland considered the third set of amendments necessary to ensure that irrelevant company voluntary arrangements are prevented from affecting assignations and statutory pledges. 

3.9 At Stage 2 of the Bill process the Scottish Government opposed these amendments.  

3.10 On the first set of amendments the Scottish Government view was that both protected and unprotected trust deeds are formal agreements to apply assets for the benefit of creditors and that they should therefore both be included otherwise the amendment was too restrictive.

3.11 In respect of the second set of amendments, which sought to add a further catch to the corporate insolvency net where under part 26A of the Companies Act 2006 companies may apply to the court for an order sanctioning an arrangement or reconstruction agreed with a majority of members or creditors, should they find themselves in financial difficulty, the view was that the amendments had no utility in expanding the corporate insolvency provisions in the Bill as introduced. 

3.12 Finally, the effect of the third set of amendments was to ensure that irrelevant company voluntary arrangements are prevented from affecting assignations and statutory pledges. The Scottish Government view was that this was unnecessary as the relevant subsections are for ascertaining if an assignor or provider is insolvent. Whether any voluntary arrangement includes the claim (or property) is unimportant to that consideration.
 
3.13 The preference of the Scottish Government was not to rush into any changes and instead take the time to consult further on the basis that amendments to said definitions, if needed, could be made at Stage 3 of the Bill process. As mentioned above the amendments were however agreed and the Bill amended accordingly.

Stage 3

3.14 In the time available between Stage 2 and Stage 3 of the parliamentary process, the Scottish Government sought views from a range of stakeholders on the amendments passed. In relation to the insolvency provisions, it became clear that this is a complex area of the law and that opinions are divided. There was some consensus that the first 2 sets of amendments were inappropriate but that it may be sensible to retain the third set – at least for the time being pending further review and consultation.

3.15 The Scottish Government therefore laid amendments at Stage 3 to reverse the first two sets of amendments. The third set of amendments were retained but subject to a correction of the location of the provision in section 47 and the removal of the reference to “which includes the claim/encumbered property”. They were passed unanimously. This was all on the basis that the Scottish Government would undertake further consultation before the Act comes into force and if the consultation points to further amendments being necessary that these would be made by regulations under sections 4(7) and 50(4) of the Act as passed.

3.16 This consultation fulfils the aforementioned commitment to consult.  Our aim is to reach an informed view on whether or not changes are necessary to the insolvency definitions in the Act, bearing in mind that any definition needs to be clear, certain and consistent.