Insolvency

Personal Insolvency

Scotland has varying types of debt relief that differs from the rest of the UK.

The main types of debt relief are as follows:

Sequestration: Sequestration is the Scottish legal term for personal bankruptcy. It starts when someone in debt (debtor) is declared bankrupt either via the court or by an application by the debtor to the Accountant in Bankruptcy. It means that the person who is declared bankrupt loses title to his assets, and they are then administered by a trustee. The trustee will dispose of these assets to pay off a part or the whole of the debts owed by the person made bankrupt. The normal term for bankruptcy is one year if the debtor cooperates with his trustee. If he doesn’t then this can be extended on an application by his trustee to the court.

Trust Deed:
A voluntary arrangement in which the person in debt can transfer all or part of his assets to a trustee to pay off part of the sums due to his creditors. This can have the same effect as sequestration as the Trust Deed can become protected. A trust deed normally runs for three years.

Compromise Agreements:
This is a legal agreement made between the debtor and his creditors that they will accept a reduced payment in full and final settlement of all his debts. This allows the debtor to continue as normal without any formal or informal debt relief and allows the creditors a quicker and cheaper settlement of monies owed.

Debt Rescheduling: This is where all your creditors agree to accept a repayment plan organised by a credit counselling service. There have been a number of problems in these schemes when commercial companies try to organise them. It transpires that most of the payments from the debtor go towards the management fees charged by organisers. Any party considering this method should use the Citizens Advice Bureau, Trading Standards Office, Welfare Rights Dept of the local authority or a Money Advice Centre. These organisations can help you try and reach agreement with your creditors and this assistance is normally free.

Debt Arrangement Scheme: Known better as a DAS or a Debt Payment Plan, this is a debt management tool introduced by the Scottish Government accessed through approved Money Advisors. To find a money advisor in your area you can check this on the DAS website at www.dasscotland.gov.uk/find-a-money-advisor  this scheme allows you to pay all your debts by giving you more time to pay without the threat of court action from your creditors. DAS freezes interest, fees and charges on your debt from the date your DAS payment programme is approved and these will be written off if you complete your programme.

If you are getting pressure from your creditors and would like a free consultation on the alternatives available to you then complete contact us and one of our experienced consultants will contact you within 24 hours.

Business Insolvency

The choice of Insolvency proceeding in Scotland is dependent on the type of legal entity.
The main types of legal entities in Scotland are as follows:

  1. Limited Liability Companies and LLP’S
  2. Individuals
  3. Partnerships
  4. Unincorporated associations and clubs
Limited Liability Companies.
Companies and LLP’s that are registered with the Register of Companies are subject to Insolvency proceeding based on the location of their registered office.

Companies and LLP’s with their registered offices in England and Wales come under the jurisdiction of The Insolvency Service who has Official Receivers.

Companies and LLP’s with their registered office in Scotland come under the jurisdiction of the Court of Session and if their issued share capital is under £150,000 then the Sheriff Court of where their registered office is located.

Types of Insolvency Proceedings for Limited Liability Companies and LLP’s

There are four main types of Company Insolvency Proceedings:
  1. Administration/Receivers
  2. Compulsory Liquidation
  3. Voluntary Liquidation
  4. Corporate Voluntary Arrangements(CVA’s)
Administration/Receivers
The current law concerning administration was introduced in 2003. Prior to this a holder of A Bond and Floating Charge normally appointed Receivers to try and sell the company as a going concern.

In Administration is when a person ,”the administrator”, is appointed to manage a company’s affairs, business and property for the benefit of the creditors, The person appointed must be an insolvency practitioner and has the status of an officer of the court(whether or not he or she is appointed by the court).

The objective of administration is to:
  • Rescue a company as a going concern
  • Achieve a better price for the company’s assets or otherwise realise their value more favourably for the creditors
  • In certain circumstances, realise the value of property in order to make a distribution to one or more preferential creditors
  • A company enters administration when the appointment of an administrator takes effect. An administrator may be appointed by:
  • An administration order made by the court
  • The holder of a floating charge, or
  • The company or its directors.
When a company enters administration:
  • Any pending winding-up petitions will be dismissed or suspended
  • There will be a moratorium on insolvency and other legal proceedings
  • If an administrative receiver/or a receiver of part of the company’s has been appointed they must vacate their office.
Administration ends in a number of ways:
  • After one year but this can be extended with the consent of creditors or the court
  • If appointed by a court order when the purpose of the administration cannot be achieved
  • If appointed by a holder of a floating charge when the purpose of the administration has sufficiently achieved.
  • If a CVA is agreed by all creditors
  • On application by the administrator

Receivers
There are many different kinds of receivers and their powers vary according to the terms of their appointment.

An administrative receiver is a receiver or manager of the whole, or substantially the whole, of a company’s property who is appointed by or on behalf of the holders of any debentures of the company secured by a floating charge. While it is still possible to appoint an administrative receiver nowadays an administrator is normally appointed.

Compulsory Liquidation
Compulsory liquidation of a company is when the company is ordered by a court to be wound up.

The Court of Session or a Sheriff Court with the appropriate jurisdiction may order the winding up of a company.

This maybe on the petition of a creditor or creditors on the grounds that the company cannot pay its debts.

The court may order the company to be wound up on the petition of:
  • The company itself
  • The company’s directors or one or more members
  • The Secretary of State for Business
  • The Financial Conduct Authority
Unless the court directs otherwise, the petition must be advertised in the Edinburgh Gazette and a local papers where the companies registered office is based.

An Insolvency Practitioner will be nominated in the petition so when a winding up order is granted this IP will become the Interim Liquidator.
A meeting of creditors will then be called to appoint the Liquidator.

Voluntary Liquidation
There are two kinds of voluntary liquidation:
  • Members voluntary liquidation(MVL)-which means the directors have made a statutory declaration of solvency
  • Creditors voluntary liquidation(CVL)-when the directors don’t make the statutory declaration of solvency
The liquidation starts when the members, in a general meeting, pass a resolution (Companies Act 2006) (usually a special resolution) to wind up the company voluntarily. They normally included the name of the Insolvency Practitioner in the resolution.

Creditors Voluntary Liquidation
A company may go into CVL when it cannot pay its debts.
The special resolution says that it cannot continue in business because of its liabilities and that it is advisable to wind up.
The resolution must be advertised in the Edinburgh Gazette within 14 days and sent to the Registrar of Companies within 15 days.
A meeting of creditors must be held within 14 days after passing the resolution and creditors must be given at least 7 days notice.
The meeting must be advertised in two papers in the area where the company has it principal place of business and in the Edinburgh Gazette.

Corporate Voluntary Arrangements
A corporate voluntary arrangement is when a company makes agreement with its creditors by proposing a ‘composition in satisfaction of its debt’ or a @scheme of arrangement of its affairs’. This means an arrangement, approved by the court, in which the company has formally agreed terms with its creditor for the settlement of its debts.

The scheme requires approval from 75% in value of creditors and 50% of members.

Personal Insolvency in Scotland
The Law of Bankruptcy in Scotland was amended drastically by the passing of The Bankruptcy (Scotland) Act 1985 and a number of amendments since then. It has given The Accountant in Bankruptcy (a civil servant) wide powers in the administration of personal insolvency in Scotland.

There are four main types of Insolvency relief in Scotland:
  1. Sequestration the Scottish name for bankruptcy
  2. Protected Trust Deeds
  3. Debt Arrangement Scheme
  4. Compromise Agreements

Sequestration
Sequestration can be granted against the following:
  • Living debtor
  • Deceased debtor
  • A partnership
  • Unincorporated bodies
Sequestration can be granted either by a petition to the Court of Session or to the Sheriff Court where the debtor has a place of business or resides. This is usually the route adopted by a creditor of the debtor, or the representative of a deceased debtor or an unincorporated body.

The debtor can make an application direct to the Accountant in Bankruptcy (AIB) for an award for Sequestration. This means that there are no court proceedings and the AIB can be appointed as the Trustee.
The grounds for making an application to the AIB are as follows, the first 3 below and any one of the following five:
  • Debts exceed £1500
  • Have not been made bankrupt in Scotland in the previous 5 years
  • Have lived in Scotland for over one year
  • Have signed a Trust Deed that has not become protected
  • Have been served with a charge for payment that has not been satisfied
  • Have been served with a Statutory Demand  that has not been satisfied
  • Has a Certificate for Sequestration signed by an authorised person
  • Has had a Debt Payment Plan revoked
The debtor can complete a Debtors Application form and pay a fee of £200 to apply for sequestration.

The effect of being sequestrated is as follows:
  • Your estate is transferred to a Trustee. This does not include normal living items such as household items and tools of a trade.
  • You are prohibited from taking part in the formation and management of a business for one year or longer if an application is made by your trustee.
  • You cannot obtain credit of £500 unless you declare that you are bankrupt
  • You cannot be an MP, or a Justice of the Peace or a local Councillor or be a member of a School Board.
If you have surplus income then your Trustee will expect you to make a contribution to your estate for up to 3 years.

Debtors are normally discharged after one year, although the Trustee can apply to the Courts to delay the discharge date for non co-operation or failing to disclose assets.

Trust Deeds
This is a voluntary transfer of your estate to a trustee for the benefit of your creditors. Ordinary Trust Deeds are not binding on creditors. The Trust Deed will normally have a contribution clause that includes a contribution from your income for 36 months.

The Trust Deed can become protected if you have agreement from 50% of your creditors and the creditors that agree must be owed one third of your total debts.

Once a Trust Deed becomes protected it is nearly the same as Sequestration.

Debt Arrangement Scheme
The Debt Arrangement Schemes (DAS) is a statutory scheme run by the Scottish Government to help debtors to pay multiple debts by giving them more time to pay without hassle or threat of court action from their creditors. DAS freezes interest, fees and charges on their debts from the date the DAS payment programme is approved. These charges, which would have become payable after the date of approval, will be written off if the programme is completed.

Under DAS, you can apply for a Debt Payment Programme (DPP) that allows you to pay off your debts over an extended period of time. Your DPP will take into account what you can reasonably pay back at regular intervals based on your disposable income.

Once approved, a DPP can prevent enforcement of debts by the court. Creditors included in your DPP are prevented from petitioning for your bankruptcy, as long as you maintain the agreed payments in your DPP under DAS.

Compromise Agreements
These are negotiated legal agreements between debtors and creditors that result in a full and final payment by the debtor to the creditor.
This normally occurs when there is one large creditor who is seeking to avoid formal insolvency of the debtor and come to an agreement.