Finding the Right Debt Collection Process for You: Insolvency Procedures
Insolvency procedures provide creditors with a fast and effective way of recovering debt as an alternative to the usual court methods. Where the court is satisfied that an individual debtor or debtor company is unable to pay its debts as they fall due then insolvency proceedings can begin. There are many approaches clients can take when it comes to insolvency action in Scotland, among the most commonly used are Liquidation and Sequestration.
Sequestrations are the Scottish form of Bankruptcies. The creditor can proceed by either serving a statutory demand for sequestration, which then expires without denial after 21 days from service, or on expiry of a Charge for Payment of Money.
To use this course of action the debtor is required to owe at least £3000 and the demand or charge must have been served within 4 months of the date of presentation of the Petition to Sequestrate.
Where a creditor is taking action a petition is presented to the Court by a qualified creditor or creditors (a creditor to whom the debtor owes at least £3,000 or 2 or more creditors who are together owed at least £3,000 can petition jointly). The creditor can choose to appoint an Interim Trustee who can be a privately appointed trustee, or the Accountant in Bankruptcy. The court appoints the Interim Trustee if cause is shown and fixes a date, usually about 6 weeks later, for the calling date.
A petition should be served personally upon the debtor by sheriff officers not more than 14 and not less than 6 days before the calling date. If the debtor does not wish to be sequestrated they have to pay the debt and the expenses, otherwise a Trustee would be appointed and sequestration would be granted.
Where sequestration is granted by the Court, the Trustee gathers any assets and uses funds generated to pay creditors. If the petition is dismissed, either because the debtor paid in full prior to the hearing or the Sheriff decided another approach to enforcement was more appropriate, then the creditor should still recover the expenses incurred in raising the action.
If a private Trustee is appointed the debtor is responsible for these expenses provided they are able to make payment but in the event they are not, the creditor will be liable for some of the costs. The Accountant in Bankruptcy can also be appointed at no cost to creditors if preferred or if a private trustee does not wish to proceed with the case, due to insufficient assets.
Sequestration is most successful in cases where your debtors have assets which can be realised, such as houses, cars etc. It is important that pre-action enquiries are carried out to establish as far as possible what assets the debtor owns and our enquiry team can help with that. We will also liaise closely with insolvency practitioners to minimise the potential for sequestration actions being unsuccessful.
Liquidation is an option where debts are owed to a creditor by a limited company. Although there is no minimum amount required for liquidation it is uncommon for a petition to be raised by a creditor for debts of less than £1500. For this action to proceed the creditor has to establish apparent insolvency, they can then petition the court for an appointment of a Liquidator (also called a winding up petition). Apparent insolvency is established on expiry of a Charge of Payment of Money (ie 14 days after service) or following on from service of either a Short Form Demand or a Statutory Demand and no dispute being received from the debtor company.
Where apparent insolvency has been established, the share capital does not exceed £120,000, and an Insolvency practitioner has provided their consent to act a Winding Up Petition can then be raised at the Sheriff Court. Where the share capital exceeds £120,000 the Petition would be presented to the Court of Session. In all cases the petition must be served to the debtor company at their registered office and advertised in the Edinburgh Gazette and a local newspaper. The debtor company may then lodge answers and try to defend the petition, including claiming the sums are not due.
If the Petition is successful the appointed liquidator will take control of the company and will usually stop doing business, and therefore employing people, selling its assets and paying off debts in accordance with a prescribed ranking process. Although the liquidator’s fees are usually paid from the funds realised from the selling of assets, where they are insufficient creditors will be required to cover those expenses.
We would recommend that creditors only consider proceeding with liquidation where detailed enquiries into the debtor company have been undertaken which indicate there is a good prospect of a return allowing for the costs of carrying out the liquidation. AMA can help with those enquiries and we have well established partnerships with firms of insolvency practitioners who can provide critical insight prior to any action commencing.