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Decisions at the End of the Road


BBM Solicitors are often consulted by business owners whose company or business is suffering financial difficulties. Sometimes following advice it is clear to the business owner that given the legal risks to them personally of continuing to trade, the end of the road has been reached and the business has to be brought to an end. Unfortunately the media often mix up the various types of insolvency under UK and Scots Law. Business owners are therefore sometimes confused about what options are open to them to best bring matters to a head.

Taking Control

The question might reasonably be asked, why not simply wait for creditors to force the business down an insolvency route?       

Sometimes that choice will be taken away from business owners if they wait to long, in that creditors will take action before the business takes the opportunity to make arrangements itself.        There will also be times where it is considered more pragmatic to let a creditor to take action (for example in the case of a limited company where there are no assets and there will be no fees to pay a liquidator, a director and shareholder may well decide it is far better to have creditor pay the cost of a liquidation rather than under write the liquidator’s fees personally).

However, in general terms, it is far better if businesses try to take control of their own destiny. It gives certainty over timings. It removes the stress in relation to the unknowns of the process to a great extent.      

It means that insolvency practitioners, as discussed below, are fully briefed on the business position and the reasons for failure, before an appointment is made. It gives the opportunity for more accurate and best advice on the appropriate restructuring option to be chosen with the effect that on some occasions jobs could be saved that otherwise would be lost, and value is retained or obtained for assets that would become almost worthless in a creditor driven process.       

In many cases, whether sole traders or partnerships (or indeed limited companies where directors have granted personal guarantees) obtaining value may be incredibly important if the business owners owned personal property that is somehow secured to a bank or some other creditor (or in the case of the unincorporated business open for the creditor to attack).

We work with a trusted network of insolvency practitioners (who are the officers of court, regulated ultimately by government, who have the power to accept appointments for formal insolvency options). The insolvency practitioner, has however, a difficult balancing act. He or she must act in the interests of the general body of creditors. BBM are in a different position – we represent the interests of the business owner who is instructing us.

Types of Options Insolvency and restructuring options for the SME market in Scotland are broadly divided into two. There are options for incorporated businesses (that is limited companies) and options for unincorporated businesses (that is sole traders or partnerships). The difference between the two is that in the ordinary course of events (unless the director has breached some duty or has removed assets or monies belonging to the company or has failed to account to the company) a director’s personal assets should be protected upon the demise or insolvency of

a limited company. The case is unfortunately different with it comes to sole traders (where   one person carries on business trading as a particular name on their own account) or a partnership. In these cases the sole trader or partner’s personal property (including their home) is potentially open to attack from creditors.

The correct option in each case and each company will very much depend on the exact circumstances of the business. It will also often depend on what business owner wants to do. Do they wish to continue to trade in the same line of business if that is possible? Do they have resources and finances to set up another business?       

Is the customer base supportive?       

Is there a strong core business?       

The correct restructuring option can be chosen after careful advice is offered about what would best fulfil the business owner’s objectives.

This Briefing attempts to give a brief description on the Insolvency/Restructuring Options available in Scotland.

Personal Insolvency Options

Informal Debt Management Many businesses operate informal debt management arrangements with creditors when cash flow means that creditors cannot be paid on time. Arrangements are made informally with creditors to accept payment on extended credit terms, or in instalments. For simply dealing with minor blips in cash flow, this can be a useful tool, and indeed is often used by limited companies too. However, it does have disadvantages. It does not stop creditors charging interest. The full amount remains due to be paid, and perhaps most importantly there is nothing to stop one creditor or another proceeding to take enforcement action to sequestrate, see below, the business even if all other creditors are happy with the position.

Debt management plans are not generally suitable for businesses with systemic financial difficulties that are not going to get any better.        There are companies who advertise themselves as debt management advisors or brokers who charge high fees to collect one payment from a business and distribute it to creditors. Very often such an arrangement will not be in the interests of the business or the business owner. Advice ought to be taken before agreeing to such an agreement.

Debt Arrangement Scheme The Debt Arrangement Scheme is a tool that is being used in growing numbers in relation to sole traders and partnerships.       

There are a number of misconceptions about the debt arrangement scheme, because when it was first set up the scheme allowed creditors to be paid over a period of time based on a debtor’s ability to pay, but interest charges were not frozen.       

This is now changed.       

As DAS now operates a debtor (which can be an unincorporated business) takes advice from a registered DAS advisor (who will often be a money advisor or at a local authority, but in the case of businesses, we would normally refer to a regulated insolvency practitioner who is registered to administer the DAS scheme, because it does mean that if another insolvency option is necessary, then that is available in the same place).       

Essentially, under DAS the debtor enters in to a Debt Payment Programme (DPP), where they make one regular payment to the scheme administrator who then distributes instalment payments to creditors.

A DPP under the DAS can theoretically be for any amount or for any “reasonable” length of time, but will usually be for 10 years or less.

Intimation of the DPP is made to creditors for them to consider and they have 21 days to confirm whether they are going to accept it or reject it. If no response is forthcoming then after 21 days the creditor will be deemed to having consented to the DPP. If one of the

creditors rejects it (and for example, HMRC normally do) then it is up to the scheme administrator (who for present purposes is the Accountant in Bankruptcy the government official responsible for overseeing personal insolvency law in Scotland) as to whether the DPP in question is approved or not. Essentially, she has to come to a view about whether it is fair and reasonable to approve it or not.

A DPP can be varied to take into account a change in circumstances on the part of the individual debtor. If the Accountant in Bankruptcy rejects a DPP then an appeal can be made to the Sheriff on a point of law (but there is only 14 days from the date of the decision to present the appeal).

It is important to note (and it is sometimes not realised) that it is sometimes still possible for a debtor to make a debt arrangement scheme application, even after a petition has been presented to court for their sequestration (bankruptcy) under the Bankruptcy (Scotland) Act 1985. In these circumstances a Sheriff has the discretion to continue the case if it appears to him or her likely that a debt arrangement scheme will be applied for. That in itself makes the debt arrangement scheme a very useful tool; although clearly it is far better if planning and advice and applications are made much earlier than when court papers are presented.

Protected Trust Deed There are occasions where it is simply not viable for a business to repay all of their debt. A Protected Trust Deed is roughly equivalent to an English Individual Voluntary Arrangement (IVA). Under a Protected Trust Deed the debtor enters into a voluntary agreement with a trustee (who has to be an insolvency practitioner). The trust deed transfers the debtor’s rights to everything they own to the insolvency practitioner, who then has the job of realising anything of value for the benefit of the creditors. Depending on the debtor’s situation (for example if it is a continuing business that will be ingathering income) regular contributions may be required from the debtor.        The effect of a protected trust deed is fairly similar to bankruptcy. Any insolvency option will have an effect on credit ratings etc for a period of time following the insolvency but this will be most so in the cases of a trust deed and bankruptcy, because in these cases creditors will very rarely be repaid even the majority of what they are due.

Usually a trust deed will last for three years, but can be extended up to five years.

In most Scottish cases the debtor’s house will form part of the trust deed (unless it is included the main creditors like banks or HMRC would be expected to object to the trust deed).

Once a trust deed is signed it is intimated to the creditors and will become protected (i.e the creditors cannot continue to pursue the debtor or make them bankrupt) if they do not object within set statutory timescales.

Sequestration Creditors can still pursue sequestration as a court process. However, a debtor in business can apply directly to the accountant in bankruptcy or to an insolvency practitioner who can certify sequestration.      

Sometimes sequestration is the only option.      

It has become more attractive (although its seriousness should not be under estimated) because routinely now the main part of the bankruptcy will only last for one year.       

As with trust deeds, being sequestrated will prevent people doing certain jobs (for example police officers or solicitors or accountants could lose their ability to work if they become sequestrated) and being sequestrated can affect any desire to hold public office or do work for public authorities in future. Normally again any property owned by the debtor will form part of the estate that the trustee in sequestration has to realise. That means if there is equity in the family there may

be a need to sell the property (although in certain circumstances a business owner’s spouse   could object to the family home being sold, and it would be up to the discretion of the Sheriff as to whether a sale was authorised – although in most cases it will be). Again, the principal effect of sequestration is to wipe the slate clean in relation to the debts that the debtor cannot afford to repay.

Corporate Insolvency Options If a business is an incorporated limited company there are different restructuring options open, and many other factors to bear in mind.

In particular, although it is not the direct topic of this briefing, directors ought to remember they owe various duties to the company, and this includes in the event of insolvency, a duty to act in the best interests of the creditors. We are of course delighted to discuss directors’ duties and how they apply in particular cases in more detail.

As discussed above in connection with unincorporated businesses, there are informal options open to corporate debtors. These include informal debt management plans and essentially extending trade credit by waiting longer to make payments.       

Frequently, corporates will also try to arrange time to pay arrangements with HMRC.       

However, negotiating time to pay is becoming more difficult particularly if there is no cogent explanation as to why cash flow and performance is going to get better in the future.

If it is clear that the company is insolvent then the only safe option for the directors is to consider one of the formal restructuring options (not to do so may leave them open to personal liability for breach of their duties-for example, for wrongfully trading and so making the Company’s position worse). What is in their interests and in the interests of the company will depend on the exact circumstances, and again we are happy to discuss matters.

The normal options will be:-

Creditors Voluntary Arrangement A Creditors Voluntary Arrangement is similar in nature to a protected trust deed for a personal debtor. It is perhaps most useful where there has been some past event that has caused some legacy debt problem but there are good future performance prospects. Or alternatively it can be used to good effect where there is a profitable core but some residual drag on the business that requires to be sorted out. For example, CVA’s have been used quite effectively from time to time in the retail sector where rents on loss leading stores have proved a difficulty and arrangements with Landlords in relation to those stores (where they agree to take a reduction or rent free period) means that an agreement of all creditors can be entered into. In that case often the difficulty arises because some landlords are unhappy that some trade creditors are being paid 100p in a pound and they are being asked to take a much smaller dividend.

In short, proposals are supervised and produced by an insolvency practitioner. If creditors accede to those the company finds itself in a moratorium where creditors cannot due diligence against the company.

It is probably important to note that HMRC have a general policy of not consenting to CVA’s.

Receiverships Receiverships are a dying breed. If a floating charge was registered by a company (that obviously gives a floating charge holder security over all of a company’s movable assets upon crystalisation) before 2003 then the floating charge holder will be entitled to call in a receiver or ask the company to appoint a receiver if there is default by the debtor.

The way this works normally is the bank would be asking company directors to appoint a receiver. In a receivership the insolvency practitioner’s job is to realise the assets for the benefit of the floating charge holder. They are not under the same duty to make realisation on behalf of the general body of creditors. Following the end of a receivership companies will often then be liquidated.

Administration Administration was a scheme brought into law by the Enterprise Act 2002. An administration has to satisfy one of the statutory purposes of the Enterprise Act. In short, however, an administration will be preferred to liquidation if there is a core business that can be saved (even if the corporate vehicle cannot be saved, which is the first objective) or there are parts of the constituent business that have value.

In administration, like the other formal options, involves a moratorium whereby, without the leave of the court, further action or enforcement cannot be taken against the company in administration.

Again, the Insolvency Practitioner realises the assets, distributing them as follows: 1. Costs/Expenses of the Administration (Including IP fees); 2. Fixed Security Holders; 3. Security Holders; and 4. Unsecured Creditors. By law a small portion of assets (called the prescribed part) is always reserved to be shared between unsecured creditors.

Administrators are generally appointed by the out of court route (a form filling exercise if matters are straight forward) and by Petition to the Court if there is any controversy or if creditors are being competed with to obtain an appointment first.

Liquidation Liquidation is often described as giving a company a decent funeral.       

An insolvency practitioner is appointed to wind up the company, realise its assets on behalf of the creditors and distribute any dividend.

It is now very rare for an IP to trade a liquidation upon appointment. In fact, the majority of Scottish companies which enter liquidation have long since stopped trading.

The most common route for companies to enter liquidation in Scotland is to petition the court (if the issued share capital of the Company is less than £120,000 this will be the Sheriff Court, alternatively if more, the Court of Session). When Directors are petitioning the IP can normally be appointed provisionally the day the petition is presented. The appointment is normally confirmed by the court once the petition has been advertised for at least 8 days (in the Edinburgh Gazette and in another relevant newspaper).

Directors’ Conduct It is important to note that in these forms of corporate insolvency the IP will have a duty to complete a report on the conduct of the directors and submit it to the department of business. If his report is to the effect that the director’s conduct has been below what would have been expected, the department can investigate and may seek to have the director or directors in question disqualified from holding office for a period of between two and fifteen years (if the directors will not undertake to refrain from holding office or acting as a director). The investigation can also be into shadow directors – that is individuals who where not formally appointed as directors but were acting as one in the course of running the business.

Let us Help You   Particularly for SMEs, choosing the timing and method of restructuring, while directors also fulfil their statutory duties, can be stressful and complex. BBM pride ourselves in being able to provide strong specialist and independent advice to business owners in order to achieve the best results. We are delighted to have an initial no obligation regarding decisions about restructuring strategies.

Our contact details are as follows: 27 George Street, Edinburgh, EH2 2PA Tel: 0131 5263280 Fax: 0131 6080032; 5 Wick Business Park, Wick, Caithness, KW1 4QR Tel: 01955 604188 Fax: 01955 605926; ; This guide is current 10 December 2012 and is our understanding of the position described at that date. It does not constitute legal advice. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).


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