Insolvency - an effective weapon for creditors?

The Bankruptcy and Diligence (Scotland) Act 2007, which has gradually come into force in recent years, allows a review of recent Scottish Government bankruptcy statistics. Dealing firstly with the sequestration of individuals or non corporate bodies, in the year to November 2011, there were approximately 5,000 granted in Scotland.  Most of these were on application of the debtor rather than the creditor. 

If a creditor wishes to petition for bankruptcy, they must be due £3,000 or more.  All sequestration petitions must be raised in the Sheriff Court which is more accessible and less expensive than the Court of Session.  The process generally takes around 8 weeks from commencement through to bankruptcy being granted.  It is worth noting that most Sheriff Court Petitions are raised by HM Revenue & Customs.

There may be many reasons why a debtor would not want to be declared bankrupt:

• credit ratings will be seriously prejudiced;
• if  property (or a share) is owned, it could be lost;
• disqualification from holding certain offices such as a directorship;
• some contracts of employment allow termination on bankruptcy.

As a general rule, debtors with the most to lose are likely to resist sequestration.  From a creditor’s view point, these are the most attractive targets when raising bankruptcy proceedings.

Freezing of assets can also force early resolution.  The recent Court of Session case of Martin Bain v Rangers Football Club (23.9.2011) highlights this.  Here, the former Ibrox Chief Executive successfully arrested a club bank account on the dependence of an action for breach of contract.  Any successful arrestment puts pressure on cash-flow and hurts a debtor where it matters most.

In almost all corporate entities there exist personal guarantees by directors and these coupled with the threat of bankruptcy and the powers of the Liquidator to report potential criminal actions such as non co-operation and actions to defraud creditors, are an effective lever. 

For more information, please contact Martin Sinclair.