Creditor Beware: what BADA might mean for you

Fiona-McKerrell-1

Creditors are being faced with new laws which will allow debtors a new way to protect themselves against legal proceedings.

rom 1 April 2015 the Bankruptcy and Debt Advice (Scotland) Act 2014 (“BADA”) will come into effect, which will give individual debtors a new mechanism to delay creditors’ actions against them.

One of the changes being introduced gives debtors who have made a Notice of Intention to Apply (NOIA) an opportunity, in certain instances, to invoke a six week moratorium on creditor action.

Corporate v Individual

The concept of a moratorium is already well-known in the world of corporate administrations and CVAs. However, it is a relatively new concept to the personal insolvency world.

While it may not be unreasonable to give such a protection to the non-corporate debtor, the six-week timescale to be afforded is significantly lengthier, granting the non-corporate debtor more breathing space than an equivalent corporate debtor.

More protection for debtors

This move towards a more ‘debtor friendly’ approach in circumstances of financial distress is not new.
Indeed, over the years, the personal insolvency world has seen various changes to give individuals or other non-corporate debtors new options and protective measures in times of financial trouble. These include:

• The Debt Arrangement Scheme (DAS)
• Protected Trust Deeds
• A reduction in the bankruptcy period to 1 year
• The Debtor Application for Sequestration (Bankruptcy) process for debtor with Low Income Low Assets,
• The Home Owner and Debtor Protection (Scotland) Act 2010 (HODPSA),
• Regulated Mortgage Contracts
• The newly awaited Business Debt Arrangement Scheme for partnerships and certain other unincorporated bodies.

Even without the introduction of the moratorium, enforcement action by a creditor is rarely an immediate process, with debtors being given time to deal with the relevant issues as best they can. For example, a secured creditor wishing to enforce a security over a residential property for non-payment is currently

required to deal with The Mortgage and Conduct of Business Rules regarding Treating Customers Fairly , a two month calling up period, and a number of pre-action requirements and Court processes under the Home Owner and Debtor Protection (Scotland) Act 2010. In sequestration, a creditor requires taking action to prove the debt, or to await expiry of a charge or demand; and in certain circumstances, a debtor can seek a 42 day continuation of sequestration proceedings.

The six week BADA moratorium will therefore supplement the assistance already available to individuals. Creditors will in turn be required to consider the potential impact on costs and timescales in evaluating any proposed enforcement strategy. (It is worth highlighting, however, that there can be only one NOIA in a 12 month period.)

While the latest legislation is intended to reduce the distress on individuals in financial difficulty, this particular mechanism might also hinder a creditor’s ability to exercise the rights and remedies afforded to it in recovering monies due to it. The legislation could also potentially enable debtors to use its provisions as a means of frustrating action which they are aware a creditor might take.

Ultimately, this could affect the terms of personal debt with the potential for tighter lending policies and increased costs, which in turn could make it more difficult for future borrowers to secure fresh funding packages. However, the introduction of the NOIA is not the only change, and other changes could potentially benefit creditors.

Accordingly, the true effect of BADA remains to be seen.

If you would like further advice on the Bankruptcy and Debt Advice (Scotland) Act 2014, please contact Fiona McKerrell, Partner, Corporate Recovery at FMckerrell@hbjgateley.com or Allana Sweeney, Associate Corporate Recovery at ASweeney@hbjgateley.com.