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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

26 JUN 2009

Professor Sir Kenneth Calman's Corporate Insolvency Recommendations

Following the recent blog entry on Dealing with Debt in Scotland and the comment that the entry attracted I thought it might be prudent to add up what Professor Sir Kenneth Calman's committee proposed in terms of corporate insolvency laws in the Calman Report on Devolution. The Calman Report recommends:

"RECOMMENDATION 5.23: The UK Insolvency Service, with appropriate input from
the relevant department(s) of the Scottish Government, should be made responsible
for laying down the rules to be applied by insolvency practitioners on both sides of
the border. This should be achieved by UK legislation."

Here is the meat of the discussion in the Calman report:

"Corporate insolvency

5.267 Company law is in general reserved, and the Scotland Act achieves this by reserving
“business associations” (which include partnerships as well as companies). But company
law interacts with other aspects of Scots law, including the procedures which are
followed by courts when winding up companies which are insolvent. The boundary
which is drawn in the Scotland Act between these two areas of law is quite complex,
because the law itself is inevitably complicated also. The Scotland Act (Schedule 5,
Part II, Section C2) reserves (in relation to business associations) “(a) the modes of,
and grounds for and the general legal effect of winding up, and the persons who may
initiate winding up, (b) liability to contribute to assets on winding up, (c) powers of courts
in relation to proceedings for winding up, other than the power to sist proceedings, (d)
arrangements with creditors and (e) procedures giving protection from creditors”. But
it devolves “(a) the process of winding up, including the person having responsibility
for the conduct of a winding up or any part of it, and his conduct of it or of that part,
(b) the effect of winding up on diligence, and (c) avoidance and adjustment of prior
transactions on winding up” and “floating charges and receivers, except in relation
to preferential debts, regulation of insolvency practitioners and co-operation of
insolvency courts”.

5.268 Essentially this means that the ways in which winding up can happen, and the grounds
for doing so, are reserved. This prevents there being different circumstances under
which winding up can happen in different parts of the UK. The reservation of the
general legal effect of winding up allows for a consistent legislative response to court
rulings affecting insolvency. The “process of winding up” – which is devolved – refers
to procedural issues arising in practice (for example, who would need to be served with
information or documents about the case, and by what timescales, by various parties
to proceedings).

5.269 The elements involved in this process have changed since the Scotland Act came into
force. Previously the winding-up process in Scotland could be seen as analogous to
the procedure used for (personal) bankruptcy. But changes to the administration
procedure in Great Britain (made by the Enterprise Act 2002) to allow winding up
through administration has meant that there could be undesirable differences in the
processes governing winding up depending on the jurisdiction under which that
winding up happens.

5.270 Bankruptcy law in Scotland has a different history to the law in England and Wales and
has always been subject to a separate legal framework (as the Scotland Act recognises
in the exceptions made in Schedule 5).

5.271 It was suggested to the Commission that legislation relating to corporate insolvency
in Scotland has lagged behind that in England and Wales. The Scottish Government
has said that it proposes to make amendments to the Scottish Insolvency Rules in 2009
to remove cross-references to personal insolvency and replace them with stand-alone
provisions with the intention of making the Rules clearer, and that additional resources
have been made available by the Accountant in Bankruptcy. The Rules are also being
reviewed to identify areas where administrative burdens can be eased by simplifying
processes and ensuring consistency between insolvency procedures. A similar
modernisation project is being carried out for England by the Insolvency Service.

5.272 Notwithstanding moves by the Accountant in Bankruptcy to bring the law relating to
insolvency procedure in line with that of England and Wales, the Commission has heard
from insolvency practitioners who question the necessity of duplicating work in Scotland
and the potential this allows for divergence in policy and practice. The Institute of
Chartered Accountants of Scotland (ICAS), for example, argues that this is unhelpful in a
field in which businesses operate across the UK, supported by lenders who also operate
common policies across different jurisdictions

5.273 Given that the Scotland Act 1998 reserved company law as a whole to the UK
Parliament, there is an argument that the current division of responsibility for liquidation
between the UK and Scottish Parliament should be ended.

5.274 On the other hand, some of the exceptions to the general reservation in the Scotland
Act relate to matters where the law of Scotland is materially different from the law of
England, not least because of the distinction between law and equity. This underlies
much of English law on securities, bankruptcy, receivership and winding up and does
not exist in Scots law. Scots law must therefore find different solutions appropriate to
the nature of the problem. In addition, the Scottish courts exercise a wide supervisory
jurisdiction in relation to liquidators, receivers, administrators and other aspects of
winding up. The procedures of the Scottish courts are, of course, a matter of Scots law.

5.275 The Commission is, however, persuaded that devolution has produced an unsatisfactory
state of affairs relating to corporate insolvency in that:

  • there is an absence of clarity as to where responsibility lies for drawing up the rules
    to be followed by insolvency practitioners dealing with corporate insolvencies;
  • there are unnecessary and confusing divergences between the insolvency rules
    applying in England and Scotland; and
  • there have been unnecessary and damaging delays in introducing new rules in

5.276 Many corporate insolvencies involve companies operating on both sides of the border.
Clarity, consistency and speed are essential, particularly in the present economic and
financial climate. Whether or not, as some submissions have suggested, the necessary
expertise is lacking in Scotland (which the Commission is not in a position to judge), that
does not alter the importance of clarity, consistency and speed.

5.277 In the opinion of the Commission, the serious issues raised in connection with corporate
insolvency might be resolved without altering the reserved/devolved boundary in
Schedule 5 in relation to primary legislative competence. The essential point appears to
be that the UK Insolvency Service, with appropriate input from the relevant department(s)
of the Scottish Government, should be made responsible for laying down the rules
to be applied by insolvency practitioners on both sides of the Border. This could be
achieved by UK legislation to which the Scottish Parliament would consent by legislative
consent motion under the Sewel Convention.

5.278 If such a solution is not possible for technical reasons (or if, which the Commission hopes
would not be the case, the Scottish Government and Parliament were to withhold their
consent or cause unnecessary delays in agreeing a solution), then it would be necessary
for the UK Parliament to amend Section C2 of Schedule 5. Given the complexity of this
area of the law generally, and the terms of Section C2 in particular, the Commission is
not in a position to suggest the terms of an appropriate amendment, nor would it be
appropriate to do so. The Commission does, however, consider that this is a problem
which should now be resolved with the minimum of delay."

R3 have responded to the proposal in the positive. There seem to be some mixed messages coming from north of the border on this subject. The comment on the original blog post was:
"So on the 15th the Calman Comission proposes re-reserving insolvency matters to Westminster to eradicate the divergences, and eight days later, The Scottish Parliament proposes further divergences. Good to see they're all singing from the same hymn sheet North of the border."
Quite so, I can add nothing to this critical evaluation of these two recent corporate insolvency proposals.

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