Back to Basics – Part 2, Sequestration (Bankruptcy)

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This is the second article in ‘Back to Basics’, a series of articles focusing on insolvency processes in Scotland. This article will examine the court process for sequestration, focusing on creditor claims.

Sequestration is the Scottish legal term for personal bankruptcy. In a receivership decision rendered by the court, a trustee is appointed to collect and realize the debtor’s estate in order to pay a dividend to the debtor’s creditors in settlement of their claims. Sequestration can have serious consequences for the debtor, and as such, a motion for sequestration can be a very powerful debt collection tool for creditors. The law is governed by the Bankruptcy (Scotland) Act 2016 (“the Act”).

What criteria must be met in order for a creditor to submit a receivership application to the court?

In summary, a creditor can request the sequestration of the debtor’s assets if the following criteria are met:

  • the debtor owes the creditor not less than £3,000* (* – due to Covid-19 this amount has been temporarily increased to £10,000 – see below);
  • the apparent insolvency of the debtor was established within four months prior to the presentation of the petition (there are different ways to constitute apparent insolvency, but one of the most common is the expiration of a payment charge); and
  • before the presentation of the petition, the creditor has provided the debtor with a notice of debt and an information package no earlier than 12 weeks before the presentation of the petition.

What is the legal procedure for forcible confinement in Scotland?

Once a petition has been made by a creditor, the sheriff must issue a warrant to summon the debtor to appear in court on a specified date not less than six and not more than 14 days after the date of summons for show why sequestration should not be rewarded.

A warrant of summons will normally be granted without the need for a hearing and the application will be brought before the court on the date specified in the warrant of summons. The debtor may appear personally or be represented at the hearing.

By law, the sheriff must grant confinement if satisfied that the following conditions are met:

  • if the debtor does not appear at the hearing, that the debtor has been duly summoned;
  • that the request was made in accordance with the law;
  • that the Petitioner sent a copy of the Petition to the Accountant in Bankruptcy on the day the Petition is presented to the Court; and
  • that the conditions relating to the apparent insolvency of the debtor are met.

The sheriff will not grant confinement where:

  • the reason why sequestration cannot be competently granted is demonstrated (for example, because the court lacks jurisdiction);
  • the debtor pays, discharges or produces written proof of payment or discharge of the sums due to the petitioner (and any creditors contributing to the petition);
  • the sheriff is satisfied that the debtor will pay or settle the debts owed to the petitioner within 42 days. In these circumstances, the sheriff can pursue the petition for up to 42 days; and
  • the sheriff may also proceed with the petition if satisfied that the debtor has requested a debt payment schedule that has not yet been approved or denied.

Receiver Application Format

The petition should be in Form 6.1-A as set out in Schedule 1 of the Act of Sederunt (Sheriff Court Bankruptcy Rules) 2016.

The petitioning creditor must also produce an oath in the prescribed form, together with an account or voucher evidencing the debt and any evidence available to the creditor to show the apparent insolvency of the debtor.

Additionally, the petition may designate a particular insolvency practitioner to be appointed receivership trustee or, alternatively, the bankruptcy accountant. Once appointed, the trustee will manage the sequestration process going forward.

How has the coronavirus (COVID-19) affected sequestrations?

Firstly, the Coronavirus (Scotland) Act 2020 extended the moratorium on due diligence from six weeks to six months and temporarily removed the prohibition on a debtor requesting more than one moratorium in a 12 month period.

The Coronavirus (Scotland) (No 2) Act 2020 then temporarily increased the minimum level of indebtedness a debtor must have to a creditor before they can start a motion for sequestration from £3,000 to £10,000. This temporary increase in the debt threshold is currently due to end on March 31, 2022.

However, the Scottish Government has published a consultation document (“Covid Recovery: A consultation on public services, justice systems and other reforms‘) in August 2021, which recognized that the protection afforded to debtors through the increased creditor petition threshold would most likely be required beyond March 2022.

The difficulty with the minimum debt level remaining at £10,000 is that it limits the options available to small creditors who have debts above £3,000 but below £10,000. In the past, it was often enough for a creditor to threaten a motion for sequestration to obtain payment. However, due to the measures currently in place, small creditors must rely entirely on other enforcement options which may not be as effective.

The fact that the £10,000 threshold frustrates small creditors and prevents them from initiating sequestration proceedings was acknowledged in the consultation paper, and therefore the government has sought views on the appropriate minimum debt threshold and if a figure of £5,000 would strike a more appropriate balance between the interests of debtors and creditors was an increase of £3,000 to be placed on a more permanent basis. The consultation also aimed to gather opinions on the appropriate moratorium period in the future.

Conclusion

The legal process in Scotland for a debtor’s receivership is generally an efficient process, making it a popular option for many creditors. However, the temporary increase in the minimum debt level, coupled with the increased use of the extended moratorium, has led to a dramatic reduction in the number of receivership applications during the pandemic, as small creditors have not been able to use the process.

The consultation is now complete and we await the introduction of the Covid Recovery Bill to see if the temporary COVID-19 measures currently in place will become permanent or if the minimum debt level will be reduced, allowing more creditors the opportunity, once moreover, to petition for the sequestration of the patrimony of a debtor.

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