As the Scottish Government considers creating a new business Debt Arrangement Scheme, Alan McIntosh explains how the current scheme works and how it can be used to help flailing businesses and consumers.
If you are like me, you will have followed the demise of Rangers football club with some interest and probably participated in many discussions about Company Voluntary Arrangements (CVAs), Administration and Corporate liquidations that seemed to spring up everywhere, including online, over the water cooler and at dinner.
Remarkably much of it has been well informed and has led me to wonder whether there could be a Ranger’s effect: a silver lining in those dark clouds where more businesses, now their awareness has been heightened, begin seeking advice and assistance when they begin to experience financial difficulties.
I have seen a number of small businesses over the last year that fit this description, whether it’s been the result of rising fixed costs, adverse weather, falling sales or HMRC pursuing a more aggressive recovery strategy.
Although CVAs, Administrations and Corporate liquidations are inappropriate for these types of business models the Scottish Debt Arrangement Scheme can be used to assist them. A formal debt management tool that was introduced in 2004 by the Scottish Government, the Scheme was created to help debtors manage their personal liabilities and was provided for initially by the Debt Arrangement and Attachment (Scotland) Act 2002 and the Debt Arrangement Scheme (Scotland) Regulations 2004.
It was updated in 2007 to include provisions which allowed the freezing of interest and charges and again in 2011 to widen access to the scheme. The Scottish Government is now seeing over 4,000 applications being made each year to the Accountant in Bankruptcy, in her role as Debt Arrangement Scheme Administrator.
If debtors wish to apply to the Scheme they must do so through an approved money adviser or insolvency practitioner, who gives holistic advice to the debtor on their finances and options and then makes an application on their behalf. Creditors of the debtor get 21 days to agree or object to a plan and if they fail to do so are deemed to have consented. If no creditor objects or responds the plan is automatically approved. Where someone does object, it is sent to the Accountant in Bankruptcy who applies a fair and reasonable test to see if the plan should be approved.
Where plans are approved, it is not possible to sequestrate the client, execute a earning or bank arrestment or carry out any other form of diligence. Where an earnings arrestment has been executed, it is formally recalled.
Although an application to the Debt Arrangement Scheme will prevent a petition for bankruptcy being raised in the sheriff court by a creditor, where it has been raised prior to an application being made or intimated, the debtor can seek a continuation from the sheriff under s12 (3C) of the Bankruptcy (Scotland) Act 1985 to allow the DAS application to be decided.
The effect of approval is the debtor gets full protection and is allowed to repay their debts each month through an appointed payment distributor to the Scheme.
What makes the scheme suitable for sole traders and individual partners is not only does it protect individual debtors, but Regulation 25 (3) of the 2011 Regulations allows the DAS Administrator when considering whether a programme should be approved to consider anything she considers relevant. The fact certain business assets may have to be kept, therefore, to produce an income is relevant and means the owners of such businesses can often enter the scheme, obtain protection and continue trading to help pay off their debts.
Discretionary conditions are also possible in making an application to the Scheme and it can be proposed that the realisations of assets will be delayed until a later date or if at all or where it is known assets will become available, that at that point these will be used to reduce the outstanding balances.
The many businesses that are using this scheme at present may not be on the scale of Rangers Football Club, but it is providing many with vital breathing space to reorganise their affairs and seek advice for the first time. It is a credit to the scheme that this has been possible and is providing many small Scottish businesses with a life line during the current economic turmoil.
It also provides fantastic returns for creditors with the longest scheme running generally no more than 10 years, meaning in reality creditors receive a 10 pence dividend for each year a plan operates. These results compare favourably with other remedies such as protected trust deeds and sequestrations.
It may be some time before the Debt Arrangement Scheme attracts the same attention that corporate insolvency has, barring a high profile application being made by someone, but its popularity is only likely to continue to grow.