Moveable Transactions (Scotland) Act 2023 - insolvency definition consultation

Questions arising

Extent of definition

4.1 This consultation seeks views on how insolvency should be defined for the purposes of the Act only. It became apparent, as part of the short consultation we carried out between the Bill stages that there is an underlying conceptual issue about whether the definition should capture actual insolvency or insolvency procedures – they are different in so far as the latter may be engaged without insolvency having technically occurred. As one academic noted, "(t)he conflation of concept makes the consideration of policy difficult..."  Another difficulty reported was that insolvency and insolvency procedures can mean different things in different contexts and at different times. Nevertheless, it would be helpful to have views on whether the definitions used in the Act should capture insolvency procedures or insolvency itself, or indeed both. 

4.2 A paper [8] on what constitutes an insolvency procedure (in relation to corporate insolvency) has kindly been shared with us. The paper discusses the concept of insolvency as a ‘scalar attribute’ i.e., that it is not an absolute or all or nothing, rather it can apply in degrees or as the author refers to there is a ‘solvency/insolvency spectrum’. The paper also includes a discussion about the Gategroup judgment [9] which considered whether a restructuring plan (as described in paragraphs 4.9 and 4.10 below) is an insolvency procedure or not. The court ruled that for the purposes of the Lugano Convention, it was. All of this reinforces that this is a difficult and sometimes subjective area of the law.

Question One – should the relevant definitions of insolvency capture insolvency procedures or the state of being insolvent? Please provide reasons for your views.

Current definition

4.3 We would welcome general views on the current definitions as set out above at paragraphs 2.11 and 2.12 of this paper. We would also welcome views on whether any of the circumstances are not required or if other circumstances should be added to the definitions.  

4.4 There was a suggestion from one academic that it may be helpful to review the list of circumstances set out in the legislation against the list in Annex A of the Recast European Insolvency Regulation (2015/848).  For information that list comprises of for the United Kingdom:

• winding-up by or subject to the supervision of the court
• creditor’s voluntary winding-up (with confirmation by the court)
• administration, including appointments made by filing prescribed documents with the court
• voluntary arrangements under insolvency legislation; and
• bankruptcy or sequestration.

Question Two – please provide your views on the current definitions of insolvency in the Act and highlight any circumstances which are unnecessary or alternately are missing. It would be helpful if you could provide reasons and/or examples for your views.

Trust deeds

4.5 The current definition relating to trust deeds, for individuals, extends to all trust deeds. We consider that it is appropriate to do so because to limit it to protected trust deeds is too restrictive. Both are formal agreements to apply assets for the benefit of creditors. We understand that unprotected trust deeds are rare but nonetheless may occur. We are mindful of the point at which it becomes unfair to other creditors if pre-existing agreements about future assets are allowed to continue in force and also when it becomes unfair to the person in financial difficulty if the insolvency provisions are not triggered, given that discharge will only give the person a fresh start if the arrangement is covered. Your views are therefore sought on whether the definition of insolvency should be restricted only to protected trust deeds. For information, the Accountant in Bankruptcy explains the difference between these thus: 

"A voluntary trust deed is an agreement made between a debtor and their creditors to repay part or all of what they owe. A trust deed transfers the debtor’s rights to the things they own to a trustee who will sell them to pay creditors part of what is owed to them… A voluntary trust deed is not binding on creditors unless they agree to its terms, which means it then becomes protected… 
...A protected trust deed is a special kind of trust deed that is binding on all creditors. Provided the debtor complies with the terms of their protected trust deed, creditors can take no further action to pursue the debt or to make the debtor bankrupt. A protected trust deed prevents the debtor from applying for their own bankruptcy or take part in the Debt Arrangement Scheme. If a debtor acquires any new debts after they sign the trust deed, they will not be protected from action by their new creditors. There is a £5,000 minimum level of debt before a trust deed can become protected."

Question Three – should all trust deeds be included in the definition of insolvency for individuals? Please provide reasons for your answer.

The terms 'composition’ and ‘arrangement’

4.6 The definition of insolvency for individuals  also includes the making of a composition or arrangement with creditors. A view has been expressed that this terminology is not used in Scotland. Whilst the Bankruptcy and Debt Advice (Scotland) Act 2014 repealed discharge on composition in bankruptcy it did not abolish composition more generally. This is a term that still exists in law more widely for insolvency purposes. We understand too that the term arrangement is also still used in Scotland, for example, the Debt Arrangement Scheme. Your views on this matter would be welcome.

Question Four – should the terms composition and arrangement be excluded from the definition of insolvency for individuals? Please provide reasons for your answer.

Company Voluntary Arrangements

4.7 The definition of insolvency for providers and assignors who are not individuals e.g., they are a company, includes company voluntary arrangements. This means that any approved voluntary arrangement entered into by the assignor or provider is capable, for the purposes of the Act, of amounting to the assignor’s or provider’s insolvency.  

4.8 It has been noted that as company voluntary arrangements are a way of restructuring a company’s debts to resolve the financial issues that necessitated it there should be a question mark over whether the point where the Act defines insolvency (i.e. after the resolution of the difficulties) is correct. A similar issue, which is discussed immediately below, arises in respect of Part 26A agreements. We understand that although a company need not be insolvent to enter into a company voluntary arrangement there was some consensus that it is an insolvency procedure.  

Question Five – do you agree that the definition of insolvency should include company voluntary arrangements? If so at what point in the process should the definition be aligned to? Please provide reasons for your response.

Question Six – should only company voluntary arrangements which include the claim/encumbered property fall within the definition?  Please provide reasons for your response.

Part 26A of the Companies Act 2006

4.9 The making of an order sanctioning an agreement under Part 26A of the Companies Act 2006 was added as part of the parliamentary process to the definition of insolvency in the Act. Part 26A of the Companies Act 2006 (of which s.901F forms part) enables companies to 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.  Section 901F of the Companies Act 2006 refers to the process of the court sanctioning any such agreement. A restructuring plan under Part 26A is intended as a flexible tool to assist indebted companies to avoid formal insolvency proceedings – but a company already in formal insolvency proceedings may present one. ‘Financial difficulties’ are a prerequisite for a restructuring plan.

4.10 So whilst Part 26A of the Companies Act 2006 only requires financial difficulty rather than actual insolvency, the said financial difficulties may in fact mean the company is practically technically insolvent. This position is comparable to certain arrangements already listed in section 4, which do not actually require insolvency, including company voluntary arrangements. It has however been pointed out to us that it may not be correct to pin the definition of insolvency to the sanctioning judgment at s.901F because that is when – in line with the purpose of the restructuring plan at s.901A(3) – the financial difficulties will have been eliminated or limited etc.

Question Seven – do you agree that the definition of insolvency should include the making of an order sanctioning an agreement under Part 26A of the Companies Act 2006? If so, at what point in the process should the definition be aligned to? Please provide reasons for your views.

Question Eight – should only Part 26A compromises or arrangements which include the claim/encumbered property fall within the definition? Please provide reasons for your views.