Economy, Energy and Fair Work Committee

Meeting date: Tuesday, October 2, 2018

Official Report 805KB pdf

---

European Union (Withdrawal) Act 2018

---

Insolvency (Amendment etc) (EU Exit) Regulations 2018

Welcome back. We have with us Graham Fisher, head of branch in the constitutional and civil law division of the Scottish Government’s legal directorate; David Farr, policy manager on corporate insolvency with the Accountant in Bankruptcy; and Alex Reid, head of policy development with the Accountant in Bankruptcy.

Other members may wish to ask about the regulations, but I want to clarify one thing first. We are looking at the question of leaving the European Union and the technicalities that that will involve with regard to not only insolvency regulation but other areas. There is a protocol for obtaining the Scottish Parliament’s approval when UK ministers exercise powers over areas that are within the Scottish Parliament’s legislative competence. Correct me if you have a different understanding, but my understanding of the protocol is that, if we accede to what is before us today but the Scottish Government is not happy with what is eventually produced at UK level, the Scottish Government can bring the issue to the committee and the Parliament and a Scottish statutory instrument can be introduced and agreed to by the Parliament. On other occasions, there might be a slight alteration from what the Scottish Government had understood was to happen, but the Government might not consider that to be material, in which case it would be content. A third possibility is that the Scottish Government might be entirely content, and in that case the instrument would simply be laid before the Scottish Parliament.

My concern is that the committee would not then be in a position to scrutinise or review what UK ministers were proposing in relation to devolved powers or competences, should it choose to do so. From the protocol, it appears that the only time that the matter would come back to the committee or, potentially, the Parliament to review would be when the Scottish Government was not happy with what UK ministers had proposed whereas, if the Government is happy, in effect, scrutiny simply will not be possible, except—obviously—that which the Scottish Government has done.

Have I understood that correctly, or is there another way of looking at the situation?

Yes, I believe that you have understood the protocol correctly. It would certainly be open to the Government to write to the committee with a copy of the regulations as laid, if that would assist.

Could that be done on the basis that the committee could then take action with regard to the regulations or raise issues with them?

It would of course be open to the committee to raise any issue that it believed to be of concern. Given the process, and the overall process and timings for the Brexit legislation across the UK, that would be difficult, but it would of course be for the Parliament to decide what view to take on the final position that was reached at Westminster. The protocol works on the basis that, if the committee is content with the proposal that the matter be dealt with by United Kingdom statutory instrument, the Westminster Parliament will look at it.

If, for example, there were a procedure whereby the Scottish Government put the draft SI to the committee for comment, and if the committee made specific comment on provisions that it thought should be drafted differently and that were not being dealt with elsewhere, would it then be open to the Scottish Parliament to not agree to the instrument?

Under the protocol, there is no formal role in terms of disagreeing to an instrument that is considered at Westminster. In that sense, it is ultimately for the UK Government to decide what cognisance to take of any views that the Scottish Parliament expresses. However, the committee could certainly be provided with a copy of the instrument that is taken forward at Westminster, if that would help the committee with its consideration.

I may or may not come back to that.

This is a complicated area of policy and legislation, and there is an issue on which I seek clarification. Is the proposition that the UK should legislate in this area designed to address the prospects of there being a deal as well as the prospects of no deal?

At this time, the plans that have been made are based on the contingency of a no-deal Brexit and the deficiencies that would arise from it. They are the most appropriate way to deal with the issues that span competence and that would be complex or difficult to deal with using another route. The piece of work that is before us basically deals with the contingency of a no-deal Brexit. The approach would need to evolve to reflect any deal covering cross-border insolvency proceedings, if one is reached with the EU.

If there were a deal, the instrument that is developed would not have any effect. Is that the case?

11:45  

The instrument would certainly need to evolve in relation to the terms of a deal, because the instrument deals specifically with what would need to happen in relation to the deficiencies in legislation on the basis that there is no deal and that, under the EU regulation as it stands, there is not a reciprocal arrangement across EU states. There would need to be development to correspond to the nature of the deal that is reached.

From a policy perspective, is it your preference that a deal should include an agreement that basically retains the status quo on cross-border co-operation?

It is safe to say that we share the view of the UK and Scottish Governments that there are advantages to the existing reciprocal cross-border arrangements on insolvency. From a policy perspective, it would be desirable for those arrangements to continue post-Brexit.

As far as you are aware, could the negotiations on continuing those arrangements along existing lines lead to a positive outcome? Is agreement contingent on other aspects of a deal, such as trade and services?

The draft withdrawal agreement anticipates that, for example, the cross-border co-operation and recognition that exist in insolvency proceedings will continue after Brexit. However, that is subject to on-going negotiations. At this moment in time, we do not have any certainty on the continued reciprocal arrangements that might be agreed. We are working on a contingency arrangement that would enable there to be continuity in domestic law in the event of a no-deal Brexit under which the reciprocal arrangements no longer exist.

The draft withdrawal agreement—which is available—has provision for the transition and implementation periods. The UK Government has published a white paper that sets out that there would be a withdrawal and implementation bill, which—if there is a deal and agreement on the withdrawal agreement—would provide for the implementation period. The provision to be made in the no-deal SI would, in effect, be deferred until the end of the implementation period, which will be set out in the withdrawal agreement.

The arrangements would be maintained in the wider partnership, as set out in “The Future Relationship between the United Kingdom and the European Union” paper, which the UK Government has published and in which it has set out its desire to reach a wider deal with the EU. As Alex Reid said, the policy preference of the Scottish and UK Governments is to maintain those arrangements and to reach an agreement. The arrangements have not yet been agreed, but they would be agreed as part of that wider partnership. The EU says that the arrangements are still up for negotiation, and the wider aspects that Andy Wightman mentioned might come into the negotiation in determining whether a deal can be agreed.

How clear were the Accountant in Bankruptcy and the Scottish Government in their view that the instrument should be allocated to category A as opposed to category B? Was that a marginal view?

I do not think that it would be classed as a marginal decision. It was based purely on the arrangements that have been put in place in other contexts to deal with difficult areas that span competence—for example, the general legal effect of a company winding up is reserved and the process of a company winding up is devolved. We need to think of practical ways in which to deal with that.

We have previous examples of where such an approach has been taken. It seems to be the only feasible approach that can result in legislation that is effective for the user and which does not try to unpick the issues of reserved and devolved competence in separate instruments. We had no doubts about the category that this fell into.

I wonder why you did not consider separate Scottish legislation in areas in which there was clear responsibility, such as personal insolvency and receivership—or maybe you did. You have legislated before in Scotland; why are you passing responsibility to the UK Government?

The approach that is taken in the draft instrument is not to have those issues covered by UK legislation. The plan is to address deficiencies that relate to purely devolved matters in a Scottish statutory instrument.

When can we expect to see that? I am conscious that it is not the only instrument that the Accountant in Bankruptcy needs to deal with—I am sure that Mr Fisher is ageing rapidly as he considers all the instruments that need to be introduced. I am interested in teasing out how you will manage the process.

We have already undertaken work to address the deficiencies and plan what needs to happen in Scottish legislation. The timing for developing and laying that legislation will need to take account of other Scottish Parliament priorities that come along and of the impact of not making such an SI, but there should certainly be no difficulty in introducing it within the bounds of those priorities well in advance of Brexit.

I appreciate how difficult it is to speculate, but I am interested in unintended consequences. What would be the likely impact of not legislating quickly in the areas of devolved responsibility?

In the areas of devolved competence, I do not think that there would be a significant impact. The volume of cross-border activity in the areas of personal insolvency and receivership is not high—that is certainly fair to say. Receivership appointments are diminishing; receivership action is raised by a floating charge holder, and the floating charge would need to emanate from before 2003. In the last two years of receivership, there have been only six receivership appointments in Scotland. They are few and far between, and even fewer involve cross-border insolvency. In personal insolvency, there are certainly very few cross-border cases.

The impact is not likely to be significant, but that is not to say that we would not need to address the deficiencies that would certainly be created in a no-deal scenario.

Okay. I would like to explore something with Mr Fisher. We were told that we are talking about in the order of 100 SSIs and legislative consent motions, taken as a package. How many are we asking the UK Government to run with and how many are we legislating for? I appreciate that it is a bit of a blancmange at the moment, but it would be useful to get an order of magnitude.

I am afraid that I do not have a breakdown of the figures to hand. I will have to give you that information later.

That would be very acceptable.

To continue that line of thinking, is the subject of insolvency unusual in that it is so intertwined with Scotland and the UK that it makes a lot of sense for one jurisdiction—the UK—to deal with it? Is that unusual? Are there many other similar subjects?

I will take that one. It is safe to say that it is unusual. The section C2 reservation in schedule 5 to the Scotland Act 1998 is particularly difficult when it comes to corporate insolvency, especially in the area of winding up, where the process of insolvency is devolved, but the general legal effect of such insolvency is reserved. That leads to difficulties.

However, there are certainly other areas of regulation where there are mixed areas of responsibility. It is relatively common in particular areas. On EU matters, there is a practice of using section 57(1) of the Scotland Act 1998 in some cases to allow those very mixed areas to be dealt with more straightforwardly.

I know that the committee has considered insolvency in that context in relation to the mixed area of winding up, particularly in approving the Scotland Act 1998 order that would allow the corporate insolvency rules to be made together with the UK Government. There is an on-going project to replace the corporate insolvency rules.

I do not know whether I can say yes to both parts of the question.

That is fair. I share the convener’s concern that the committee is being asked to approve something that we have not really seen, but I accept that that is not the responsibility of officials.

Finally, we received a briefing from R3, the Association of Business Recovery Professionals, which is concerned that if we go down this route and there is no deal, UK practitioners will recognise what people in the EU are doing, but there is no guarantee that EU practitioners will recognise what we are doing in the UK, which would put the UK at something of a disadvantage. Is that a fair comment from R3?

Maybe Graham Fisher could refer to the statutory instrument on whether EU insolvency procedures would be recognised here.

That is part of the provision that would be made in the SI. Broadly, we agree with what R3 is saying about the potential impact of Brexit in general and how the reciprocal arrangements could fall down, which would put people in Scotland at a disadvantage.

Thank you. That was helpful.

As there are no further questions, I will allow the witnesses to go back to the blancmange of EU directives and trust that it does not age them too much. I thank them for coming in.

11:58 Meeting continued in private until 12:53.