Introduction
The 2007 festive
period is behind us and, as we head towards Burns Night
the media continues to forecast doom and gloom in both the
domestic and corporate sectors. There will always be corporate
failures, large and small, for a number of reasons but the
general trend during 2007 was downwards and business sentiment
remains largely positive.
A study of Scottish corporate insolvencies advertised in
the Edinburgh Gazette shows a disproportionately high number
of cases in the central belt and this tends to reflect personal
insolvency numbers. Indeed the 2006/07 annual report from
the Accountant in Bankruptcy shows that about 12% of sequestrations
arose in the entire area of Aberdeen Highland and Islands.
The Sheriff at Dornoch has a particularly low workload of
3 sequestration petitions, whereas the Sheriff Courts in
Glasgow, Hamilton and Airdrie granted 6 sequestration petitions
between them for each working day of the year.
It might be easy to be complacent in the North East of Scotland
where employers are struggling to find employees and the
shops are as busy as ever, but there appears to be a preponderance
of buy-to-let properties which means that an increase in
interest rates, coupled with a general decline in property
values, might see many individuals unable to service the
loan commitment, with lenders becoming uneasy about recovery.
General market uncertainty tends to breed worry and concern.
The media will have a lot to answer for if they panic lenders
into making credit more difficult to obtain and retain.
2008 may well prove an interesting year.
Sequestration:
In by the back door
The recent regulations issued by the Scottish Executive,
and expected to come into effect this April, allow an individual
with low income and low assets “LILA” to circumvent
the difficulty in proving apparent insolvency by completing
a form and submitting it to the Accountant in Bankruptcy.
The form must show that the individual has low income: the
guidelines suggest an average working week of 40 hours at
the national minimum wage rate, no heritable property and
other assets less than £10,000 in total with no one
asset valued at more than £1,000. Once the LILA petition
has been accepted by the Accountant in Bankruptcy, the individual
is sequestrated and the normal process continues. Many commentators
have suggested that this may be a “rogues charter”
in that an individual could transfer assets the day before
the petition is signed and declare a total asset value below
£10,000. Will it be inappropriate to be economical
with the truth when completing the petition? One wonders
what will happen once an award of sequestration has been
made and it transpires that the debtor had assets in excess
of £10,000: particularly if the trustee has closed
a business, sold a vehicle or otherwise dealt with the debtor’s
assets which make it difficult to re-establish the position
before the petition was presented. Further, a debtor might
be well aware that gifting say, a car, prior to submitting
the petition will be challenged and accept the view that
the car will have to be made available to the trustee for
sale.
It is the experience of many insolvency practitioners that
there are a large number of individuals who are under significant
creditor pressure and would be happy to sign anything in
order to alleviate the financial and domestic pressure being
experienced.
It remains to be seen how this new procedure will operate
and be policed such that it is not abused.
That said, if the method of proving apparent insolvency
had been eased e.g. by adopting the self certification process
used in England, a whole raft of legislation and bureaucracy
would have been avoided.
The debt administration scheme
The debt administration scheme “DAS” was introduced
in Scotland at the end of 2004. It proved remarkably unpopular
compared with the personal insolvency options of sequestration
and trust deed, but a number of regulation changes and working
practices during 2007 are beginning to show DAS in a more
positive light. DAS may well become more popular in 2008
and beyond because the Scottish Executive have expressed
concerns over the trust deed process and the new Bankruptcy
Act allows them virtually unfettered access to change every
aspect of a trust deed i.e. to make it less desirable. A
trust deed tended to last for 3 years because if it did
not become protected i.e. accepted by creditors, sequestration
was the option and the current sequestration period is 3
years. However, with effect from 1 April 2008 the new Bankruptcy
Act will reduce the sequestration period to one year and
it is debatable as to whether a trust deed will follow this
timetable or whether trustees will have to offer a repayment
programme to creditors for anything up to, say 5 years.
If this occurs, DAS is likely to become the option of choice
for many debtors because:
- it allows a person to retain his/her house.
- an approved money advisor works in conjunction with
the debtor and creditors in order to provide acceptable
proposals based on a debtor’s ability to pay i.e.
not on a specific dividend rate.
- it is unlikely, in the interests of human rights and
life’s equity, that the Accountant in Bankruptcy,
who is the DAS administrator, will accept. a repayment
programme longer than 5 years otherwise than in exceptional
circumstances and hence, a debtor will have a specific
period for debt repayment.
- interest is frozen on all unsecured debts.
An interesting
challenge lies ahead.
Becoming a payments distributor
Having been involved in the consultation process over the
last 2 years or so regarding personal insolvency legislation
developments, Meston Reid & Co opted to apply to become
an approved payments distributor under DAS. Meston Reid
& Co is pleased to note that the application process
has proved successful and is the first firm of chartered
accountants in Scotland to have achieved payments distributor
accreditation. This means that the firm’s insolvency
systems will be used to organise payments to creditors for
those who use DAS as a means of dealing with debt.
If DAS becomes more popular in 2008 and beyond, Meston Reid
& Co is well placed to cope with the workload.
Insolvency website
The firm’s dedicated insolvency website has proved
popular, as evidenced by the number of website hits during
2007. In response to user feedback, a number of changes
will be made in 2008. The objective of the exercise is to
make the website more informative and easier to navigate
because, for example, many individuals want to complete
an income and expenditure statement or asset and liability
summary online prior to attending a free consultation in
order to review the options available. It is not too late
for website feedback should a reader have ideas which might
be useful.
Why not visit www.scotdebt.net and let
us have your thoughts.
Return to Top
