INTRODUCTION

Insolvency describes a situation in which a legal person is unable to meet their obligations to creditors. In certain circumstances, the law allows the creditors of a debtor in this position to seize the debtor's assets and sell them off in satisfaction of the debts. The creditors will receive a percentage of what is owed. The remainder of the debts are written off, and the debtor is able to start afresh. Where the debtor is a company or limited liability partnership, the relevant insolvency process may be receivership, administration or liquidation. These processes are discussed in Chapter Fourteen. Where the debtor is a natural person, trust, partnership, body corporate or unincorporated association, the relevant insolvency process is sequestration, otherwise known as bankruptcy. This chapter sets out the rules of sequestration: when it can happen, the legal effect and the results for both debtor and creditors.

Personal insolvency processes have existed in Scotland for centuries. At the time of its introduction, the Bankruptcy (Scotland) Act 1985 represented a substantial revision and restatement of that earlier law. However, rapidly evolving economic factors resulted in the 1985 Act itself being subject to a number of significant pieces of amending legislation over the following thirty years. A further consolidation was carried out in the Bankruptcy (Scotland) Act 2016 (the ‘2016 Act’), which is now the key piece of legislation in this area.

Why have insolvency law?

Imagine that Gordon owes money to four different creditors. The debts amount to £100,000, with interest continuing to accrue. When the loans were taken out, Gordon was a sole trader and his business was doing well, and he was confident he could repay on the agreed terms. Since then, a recession has struck, and Gordon's business is failing. Despite using all of his meagre income towards his debt repayments, there is not enough to make his minimum payments. Each month, he borrows more money to service existing debts, which puts him only further into debt. It is hard to see how Gordon will ever recover.

The law allows sequestration to happen in this context for two reasons. In the first place, the law aims to ensure creditors are treated equally.