Navigating Post-Brexit: The Impact and Opportunities of the EU Proposed Insolvency Directive on Scottish Law

By Charles Ho Wang Mak (Robert Gordon University)

Introduction

Insolvency law is a cornerstone in maintaining economic stability and facilitating growth, offering structured relief to financially distressed entities while balancing creditor and debtor interests. In an increasingly globalised world, harmonising such laws gains paramount importance, notably within the European Union (‘EU’), where cross-border commercial activities are prevalent. The recent Proposal for a Directive of the European Parliament and of the Council seeking to harmonise certain aspects of insolvency law (‘EU Proposed Insolvency Directive’), aimed at standardising insolvency proceedings across its member states, presents a distinct scenario for Scotland, especially post-Brexit. My recent article, entitled “The Impact of the Recent EU Insolvency Directive on Scottish Insolvency Law”, considers the challenges and implications for Scottish insolvency law of the EU’s Proposed Insolvency Directive.

Scotland’s Insolvency Law

Scotland has a rich and fascinating history of insolvency law. Over the years, insolvency law in Scotland has undergone several changes to cater to the needs of its people and economy. The primary objective of Scotland's insolvency law is to assist those in debt while safeguarding the rights of creditors. This objective, while common to many jurisdictions, is implemented in Scotland through unique mechanisms and procedures. Scotland’s insolvency laws are unique and distinctive, with specific attributes that set them apart from other jurisdictions. One such attribute is the role of trustees. In Scotland, there is no official receiver, unlike in England and Wales. In every corporate insolvency, a qualified insolvency practitioner must have consented to act as administrator, liquidator, or receiver. This means that there is no liquidator of last resort in Scotland. Another unique aspect of Scottish insolvency law is the concept of protected trust deeds. These are voluntary arrangements where a debtor transfers their estate to a trustee to be realised for the benefit of creditors.

Implications for Scotland After Brexit

Even after leaving the EU, Scotland must consider the effects of the EU Proposed Insolvency Directive. While this proposed directive might not directly change things in Scotland, it is essential for Scottish legal practitioners. This is especially true for those dealing with businesses that operate in the EU. Scotland needs to understand and, if needed, align with the Directive to ensure efficient and consistent handling of cross-border insolvency cases.

Challenges and Opportunities Ahead

Adapting to the EU Proposed Insolvency Directive brings challenges and chances for Scotland. The EU text pushes for harmonising certain aspects of insolvency law across EU member states may result in changes to Scotland's typical approach to managing insolvency. Scottish legal practitioners must be skilled in local and EU insolvency laws, particularly for cases that span borders. The EU Proposed Insolvency Directive may also question some traditional insolvency rules and practices in Scotland, such as trustees' roles and protected trust deeds.

However, this time also offers unique opportunities. Aligning with the Directive could enhance Scotland’s appeal to businesses by establishing a more predictable and transparent insolvency framework. The EU Proposed Insolvency Directive’s approach to insolvency emphasises the protection of creditor rights and provides mechanisms to aid debtors in recovery. This is achieved by ensuring creditors have a say in the insolvency proceedings and by providing debtors with a second chance through debt discharge. These provisions align with Scotland’s balanced approach, potentially making it a more attractive destination for businesses. Furthermore, the EU text’s emphasis on early restructuring could help businesses avoid insolvency, fostering an environment conducive to innovation and growth.

Conclusion

The EU Proposed Insolvency Directive is a pivotal moment for Scottish insolvency law. As Scotland adjusts to its life after Brexit, the Directive’s indirect influence is significant. The challenges it brings necessitate a deep understanding and strategic responses from Scottish legal experts. However, these challenges also present opportunities to enhance Scotland’s insolvency system by aligning it with current European standards. The European rules are designed to streamline insolvency proceedings, making them more efficient and predictable. This efficiency can make Scottish insolvency law more attractive by reducing the time and cost associated with insolvency proceedings. This period of reflection and change is crucial. It ensures that Scotland’s respected legal traditions blend with and benefit from the unifying trends in European insolvency laws. As Scottish insolvency law evolves in this new era, legal professionals, policymakers, and other key stakeholders must strike the right balance. They need to preserve the unique features of Scottish law while incorporating the beneficial aspects of European unity. This balance will safeguard Scotland’s legal heritage and ensure its active role in the evolving field of European insolvency law.

* A revised version of this article was first published by the Scots Law Times.