October 2010 - Law Society of Scotland

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Edinburgh EH3 7YR
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Muhunthan Vaithianathar
Policy Directorate
The Insolvency Service
Zone B, 3rd Floor
21 Bloomsbury Street
London, WC1B 3QW
21 October 2010
Dear Mr Vaithianathar
PROPOSALS FOR A RESTRUCTURING MORATORIUM - a consultation
The Company and Insolvency Law sub-committee of the Law Society of
Scotland has had the opportunity to look at the above consultation.
The sub-committee has reviewed the R3GTC's response to the same
consultation and endorses it.
Additonally, the committee has the following comments to make.
The Law Society of Scotland has responded to consultation on the concept of a
moratorium before and pointed out that a moratorium is unlikely to be invoked
widely due to technical issues which need to be addressed before the concept
will be used other than in very restricted circumstances. One such mischief
arises in terms of the Insolvency Act 1986 Schedule A1 Part 3. Paragraph 20
thereof provides as follows:-
20(1) This paragraph applies where….(b) any goods are in the possession of
the company under a hire-purchase agreement. (Hire-purchase agreement is
defined in paragraph (1) to include a retention of title agreement.)
20(3) provides “If the owner of the goods consents, or the court gives leave, the
company may dispose of the property as if all rights of the owner under the
hire-purchase agreement were vested in the company.”

26 Drumsheugh Gardens
Edinburgh EH3 7YR
Legal Post LPI Edinburgh -1
T: 0131 226 7411
F: 0131 225 2934
Textphone: 0131 476 8359
The result of this is that the directors cannot sell any goods subject to a
retention of title agreement without the approval of either the creditor or the
court. Retention of title agreements are now so commonplace that there can be
few businesses where most of their stock is not covered by a retention of title
agreement and trading would be very difficult/impossible in practice as no
creditor would agree to the goods being sold without their being paid and
paragraph 20(6) provides that the net proceeds of such sale shall be applied to
discharging the sums payable under the hire-purchase agreement.
Even in a business of little complexity it would be difficult for directors to put a
system in place to deal with this and any Monitor appointed in respect of the
Moratorium would be concerned that he is being asked to confirm that the
directors are dealing with this properly.
Unless this issue is addressed, the consultation and any legislation which may
flow from it will be a waste of time, cost and effort.
In addition to the above there are some peculiarities in Scots Law which need
to be addressed. They are as follows:
1. The Insolvency Act 1986 Sch B1 moratorium refers specifically in para
43(5) to irritancy (as the Scottish equivalent to forfeiture of leases) where
the Sch.A1 version mentioned in the paper does not. This will need
changed in any legislation to ensure irritancy is also precluded.
2. The reference in para 4.21 of the paper to altering the "onset of
insolvency" for the purposes of the challenge of prior transactions
doesn't work for the Scottish provisions in sections 242 & 243 of the
Insolvency Act 1986 as they are formulated in a different way. The
Scottish common law provisions probably do not require to be altered as
they have no time limits anyway.
3. The adjusted cut-off date for set-off referred to in para 4.25 will need to
be looked at specifically for Scotland as Scottish insolvency set-off
operates in a different way from English insolvency set-off. It is not
governed by the Scottish insolvency rules but rather by a combination of
general set-off rules under the 1592 Compensation Act and the common
law, adjusted by common law principles in their application in insolvency.

26 Drumsheugh Gardens
Edinburgh EH3 7YR
Legal Post LPI Edinburgh -1
T: 0131 226 7411
F: 0131 225 2934
Textphone: 0131 476 8359
4. The moratorium will not apply to Scottish partnerships as they are
subject in Scotland to the personal rather than the corporate insolvency
regimes. The committee suspects it would be too involved to apply the
new moratorium to Scottish partnerships and that it may not often be
relevant to them in practice.
If you have any further questions, please do not hesitate to contact me.
Yours sincerely
Louise Docherty
Communications Assistant, Law Reform
DD: 0131 476 8204
E: louisedocherty@lawscot.org.uk