Tag Archives: Accountant in bankruptcy

Panorama Bankruptcy Expose Misses the Target

8th January 2018 0 comments

Monday evening’s bankruptcy expose by BBC Panorama, of former millionaires, now bankrupt and still apparently living the high life, was confused and misleading (Millionaire Bankrupts Exposed).

The investigation, which looked at a handful of bankrupts, attempted to show how they were still enjoying the benefits of luxury mansions and cars, whilst their creditors were being left out of pocket.

The investigation tried to apportion blame for these abuses on the UK state run Insolvency Service and the Accountant in Bankruptcy’s Office, and concluded with, Fiona Coulson of Moon Beaver Solicitors stating the only way to avoid such abuses was through increased use of private sector trustees.

However, where the programme fell short was it first focused purely on abuses that arose from formal bankruptcies, primarily provided for by the public sector, whilst ignoring the same abuses that occur in protected trust deeds and individual voluntary arrangements, which are wholly administered by the private sector.

The second shortcoming, was it presented the case of Alan Yeoman, a Derbyshire businessman, as an example of the abuse and fraud which occur in bankruptcy. However, Yeoman’s fraudulent attempts to hide assets was eventually uncovered by the Insolvency Service (IS), and Yeoman received a custodial sentence for an assortment of offences, which only became known as a result of their investigations.

It also presented the case of the ex-treasurer of the Scottish Conservative Party, Malcolm Scott, who after making himself bankrupt, attempted to hide his assets. Fortunately, this was uncovered by the Accountancy in Bankruptcy, and Scott was awarded a five-and-a-half-year Bankruptcy Restriction Order (BRO) by Edinburgh Sheriff Court.

However, in the case of Scott, the BBC have accused him of being in breach of his Bankruptcy Restriction Order, by being involved in the formation and management of companies. Conduct prohibited by his Order. These allegations were put to Dr Richard Dennis, the Accountant in Bankruptcy (AIB), during the programme.

Who is Responsible for Bankruptcy Restriction Orders?

This revealed another mistake made by the programmers, in assuming the AIB was responsible for monitoring and enforcing BROs.

The uncomfortable truth for Panorama, is it isn’t. In terms of Malcolm Scott, if he fails to abide by the terms of his BRO, then he may be committing an offence. Like other offences in Scotland, this is a matter for the Police and the Lord Advocate’s Office, not the Accountant in Bankruptcy.

The reality is, although the AIB can award BROs, and can apply to Court for them (when the order requested is for more than 5 years), the responsibility for enforcing them does not lie with them.

Equally, as Panorama highlighted, if Scott has been able to form a company, then responsibility for this lies with Company House which allowed him to do so, despite the Court ordered BRO, and not because of the actions of the Accountant in Bankruptcy (or lack of them).

Interestingly, since the programme has been broadcast, it has been revealed the number of BROs awarded by the AIB, fell by almost two-thirds in 2016/17, when compared with the previous year. The reason for this being the AIB are now using new powers, introduced in April 2015, to refuse non-cooperative debtors discharges, thereby allowing the AIB to retain scrutiny powers over debtors when they are non-compliant.

The programme also highlighted other bankrupts, with high levels of debt, who still appear to be driving around in high value cars, but failed to show in the programme where ownership of these cars lay. This is a common problem which arises in bankruptcy and a frustrating one for creditors, who often assume the debtors own the assets they have access to.

However, it is not unusual when things are good, for many people to share the benefits of their success with their family: so, homes do get put into the name of spouses; and children do acquire assets. These assets do not vest with a trustee in bankruptcy, once a debtor is made insolvent, and, therefore many bankrupts still have access to them during their insolvency, to the frustration of their creditors.

However, in some cases, it’s also true some debtors do dispose of assets in anticipation of their bankruptcy, either by sale or “gifting” them, or by moving them offshore. In the examples of this presented during the programme, it appears many of them were discovered, and appropriate action was taken against the debtor.

Bankruptcy Scrutiny is Robust, but also Proportionate

The final error the programme appeared to make was in suggesting that checks in bankruptcy were not robust enough. However, this is wrong. There are obviously routine checks performed in all bankruptcies, and then there are investigations which are performed when intelligence becomes available to suggest they are warranted.

Routinely, those applying for bankruptcy must provide 3 months bank statements, wage slips, proof of benefits, proof of employment and even proof of routine expenditure. In addition to this credit reports are run, and land searches are performed to find undisclosed assets.

If the aim of the programme was to suggest that a greater detection of abuse would be possible by the private sector, then this would also be wrong.

In Scotland, for example, most bankruptcies are already administered by private sector firms, who have service agreements with the Accountant in Bankruptcy. The cost of administering these cases are usually paid for from the public purse, but are now nowhere near what they used to be when between 1985 and 1993, they rose from £86,000 per annum to £26 million. This was at a time when only private sector insolvency practitioners could be trustees in bankruptcy.

Today the AIB’s costs are just over £12 million and most of these costs are recovered from cases themselves in the form of fees, minimising the impact on the tax payer.

The Panorama programme exposed, quite correctly, that there are some who do try and abuse the bankruptcy process: but rather than showing the system was failing, it showed a system, overall, that was working, as most of the abuses revealed had been detected.

However, if anything is required, it is probably greater awareness within the creditor industry and the public, that Trustees in Bankruptcy are heavily dependent on information being provided to them to stamp out abuses. That information, where it is available, therefore must be provided.

Equally, the limitations of Bankruptcy Restriction Orders must be appreciated. These are civil sanctions. If people want more severe sanctions to be used against the worst abuses, or for those who flagrantly ignore the restrictions of BROs to be punished, then the solutions lie not in the civil, but the criminal courts.

Gratuitous alienation did not breach human rights law

15th May 2017

Lord Armstrong has held in a decision dated the 11^th May 2017, that the provisions contained in s34 of the Bankruptcy (Scotland) Act 1985, relating to gratuitous alienations, were ECHR compliant.

The Background

Miss Farrell had married Mr Walker in November 2007 and they were subsequently divorced in August 2010. Mr Walker was sequestrated in April 2009. The Accountant in Bankruptcy was appointed the trustee in his sequestration.

Prior to the sequestration, Mr Walker was the sole owner of a property at 1A Beechwood Avenue, Rutherglen, but in December 2007 the property was sold for £435,000. After the mortgage on the property and the costs of sale were deducted, this left Mr Walker with £178,723.82.

Mr Walker then transferred this sum to Miss Farrell. Miss Farrell then purchased a new property using these funds and funds from the sale of her own home for £866,000. The purchase was funded by

The funds transferred to her by Mr Walker as a gift;
£313,000 from the sale of her own property; and
A mortgage of £380,000.

The Pursuer’s Case

The trustee in sequestration sought to challenge the transfer of the funds from Mr Walker to Miss Farrell as a gratuitous alienation under s34 of the Bankruptcy (Scotland) Act 1985 and raised an action for payment of money.

Arguments for the Defender

Miss Farrell did not dispute that the transfer of funds from Mr Walker was a gratuitous alienation. She instead claimed that the statutory defences available in s34(4) did not take into consideration the circumstances of the alienation, or the reasonability or proportionality of making the order on her personal or financial circumstances. She claimed in this regard s34(4) was incompatible with her rights under Articles, 6,8, 14 and Article 1 of the First Protocol of the European Convention of Human Rights.

Article 6 – The Right to a Fair Trial

The court held that Miss Farrell’s complaint that her right to a fair trial was denied was misconceived. Miss Farrell’s complaint was about the fact that s34(4) did not allow her a stateable defence, not that the process itself was unfair.

Article 8 – Right to Respect for Family life and Home

Miss Farrell argued that the effect of the order sought by the pursuer would be that she would have to sell her home and this would constitute an interference in her family life and that of her children. This argument, the court held, was also misconceived. The action was one for payment of money, not for the sale of her home, although if successful it may have resulted in Miss Farrell being sequestrated and her trustee looking to sell her home. However, in that event, Miss Farrell would have access to the defences allowed under s113(2) of the Bankruptcy (Scotland) Act 2016 (formerly S40 of the Bankruptcy (Scotland) Act 1985).

Article 14 – Protection Against Discrimination

The defender also argued s34(4) discriminated against her in that it allowed gratuitous alienations, made for the benefit of associates, to be challenged where they occurred within five years of the date of sequestration, rather than for two, where the beneficiary was not an associate. The court dismissed this argument as although Miss Farrell had argued her family had been discriminated against, she failed to specify the basis of the discrimination under any grounds prohibited by Article 14.

In addition, under the circumstances of the cases, the gratuitous alienation had taken place within two years of the debtor’s sequestration, so would have been challengeable even if Miss Farrell had not been an associate.

Article 1, First Protection – Peaceful Enjoyment of Property

Finally, Miss Farrell argued that the order sought would interfere with her peaceful enjoyment of her property, namely her home. Again the court dismissed this argument, as the order sought was for payment of money, not for the sale of the debtor’s home.

The court also held that aims of S34 of the Bankruptcy (Scotland) Act 1985 were legitimate and did strike the correct balance between the interests of the debtor’s creditors and Miss Farrell. It held they were reasonably proportionate to that aim.

Unjustified Enrichment

Interestingly, the Court also held that Miss Farrell would not be able to claim unjustified enrichment or be able to make a claim in the sequestration, if the order sought was granted and payment made, as the transfer of funds were a gift and unjustified enrichment could not be claimed.

The full case can be read here.

Bankruptcy Policies Unravelling

27th January 2014

Fergus Ewing has acknowledged that he got his decision to increase the application fee for bankruptcy wrong. Speaking in response to the third quarter insolvency statistics for 2013-14, he has said “Scotland’s bankruptcy legislation has to do more to provide a safety net for vulnerable, low-income debtors and their families.”

However, despite this, with the new Bankruptcy and Debt Advice (Scotland) Bill 2013, lessons are still not being learned

For the fourth quarter in a row, Low Income, Low Asset bankruptcies (LILA) in Scotland have increased as an overall percentage of all bankruptcies, now representing 39.6% of all bankruptcy awards in Scotland.

The increase, reported in the Accountant in Bankruptcy’s (AIB) third quarter insolvency statistics for 2013-14, show that LILA bankruptcies as a total percentage of all sequestrations are now returning to their pre-first quarter levels for 2012-13, when the application fee was increased by 100% from £100 to £200, which reduced LILA awards by 60%.

However, although as a proportion of all bankruptcies the numbers of LILA awards continue to increase, LILA numbers themselves remain significantly reduced from their pre-fee increase levels, with many organisations such as Citizen Advice Scotland and Money Advice Scotland, claiming many debtors are still being priced out of any formal remedy for dealing with their debts.

In acknowledgement that they got it wrong, the Scottish Government in the Bankruptcy and Debt Advice (Scotland) Bill 2013 are now proposing a new Minimum Asset Procedure (MAP) to replace the LILA route into bankruptcy.

This new type of bankruptcy it is anticipated will reduce fees to £100 or less, but it is anticipated will only be available to 75% of all current LILA applicants with debtors only being able to apply if they have debts of less than £17,000, whereas under the current LILA route, there is no debt level cap.

For those debtors unable to apply using the new route, they will have to apply for normal bankruptcy and pay the full application fee, which is likely to be significantly more.

Although it is to be welcomed that the Scottish Government are now beginning to accept that for most bankrupts the purpose of bankruptcy legislation is to provide a social safety net, with more than eighty percent of all applications being debtor applications, and more than three quarters being unable to make a contribution from their income to their bankruptcy, more needs to be done.

This includes looking again at their decision in the new bill to increase contribution periods from 36 to 48 months against overwhelming evidence from debt charity NGOs, regulatory professional bodies and even creditor organisations that such a policy is wrong. They also need to reconsider their decision to replace the Low Income, Low Asset route into bankruptcy with a more restrictive type of bankruptcy which will exclude rather than include more debtors.

They also need to ask themselves, although it is commendable that they have accepted in sequestration and protected trust deeds it is wrong (and illegal) for debtors to make contributions from social security benefits, why is it correct for those debtors to have to use those same social security benefits to apply for bankruptcy, when prior to 2008 (and the SNP minority Government) they would have been covered by a fee waiver.

Debt Arrangement Scheme

The other revealing figures from the third quarter statistics relate to the Scottish Debt Arrangement Scheme.

Although still very much the little brother of all Scotland’s formal statutory debt remedies (representing 26.1% of all remedies used), the Scottish Government have wrongly reported in their press statements that applications have increase by 20.9% on the same period last year.

The actual increase is only 10.7% (applications 3rd quarter 2012-13: 1,067; applications 3rdquarter 2013-14: 1,181).

On the last quarter, the increase is less than 1%, confirming the view of many that, allowing for occasional seasonal variations, take up of the Scheme has now plateaued.

What is increasingly of concern, however, is the number of Schemes being revoked. Although the Minister has claimed only 3% of Debt Payment Programmes under administration are being revoked quarterly, some research by others in the insolvency industry suggests this amounts to 13.9% per annum and the cumulative effect of which will mean over 50% of all average length programmes (6.8 years) will fail.

Evidence of this can be seen in the figures for 2013-14, which show although 3,551 programmes were approved by the end of the third quarter, 1,064 have been revoked.

There are clearly a significant number of debtors entering the Debt Arrangement Scheme for whom the Scheme is not suitable and for whom it is failing to provide a sustainable, lasting solution.

There was always a danger with the Debt Arrangement Scheme that it would be seen, for political reasons, as a panacea for all debtor’s debt problems, but it has never been more than just another tool in the toolbox: suitable for some, but not others.

As the fee increase for bankruptcy has shown, policy decisions in this area without supporting evidence from those at the coal face or other empirical evidence risks unintended consequences. The danger now is we will see more of those unintended consequences if the Scottish Government continues with its policy of trying to make bankrupts pay more in sequestration, whilst hailing the Debt Arrangement Scheme as a one size fits all solution for all debtors, whilst failing to research why, for so many debtors, it continues to fail to provide solutions for their problems.

Bankruptcy Consultation Cancelled

5th April 2012

A consultation on the reform of bankruptcy law appears to have broken down as reforms opposed by consultees appear to be proceeding regardless. Alan Mcintosh untangles the mess.

Anger has broken out amongst money advisers over the Scottish Governments Bankruptcy Law Reform. Within a day of the first of a number of industry consultations, many advisers have been left furious and angry at what appears to be the contempt the Accountant in Bankruptcy (AIB) is treating the process and those participating in it.

One of the key issues is should the AIB be able to provide advice.

The day after a consultation event organised by Money Advice Scotland, where the proposal was unanimously rejected by the members present, the Accountant in Bankruptcy advertised it was seeking two advisers to be seconded to a pilot project beginning next year.

The Accountant in Bankruptcy has no legal powers to deliver such a service and no bill is presently in front of parliament proposing they have such powers. Even the consultation proposing they should have such power is not complete. Yet despite it being expected that opposition to it will be overwhelming, the AIB appear to have decided the proposal will go ahead.

The issue is an old one and first arose with the passage of the Bankruptcy (Scotland) Act 1993. The then conservative government rejected the idea as there was a conflict of interest. Since then the idea has repeatedly re emerged and has lead to accusations of empire building by the AIB. More recently in the current consultation, the proposal was made with the assurance that the project will be ring fenced in acknowledgement of the conflict of interest.

The AIB claim they regularly receive calls from debtors asking for help or arriving at their office and need to be able to assist them by delivering advice. The Scottish Government, however, already funds the National Debt Line and either North Ayrshire Council or Irvine Citizen Advice Bureau could easily, with funding, serve the AIBs office.

Why then the need for a duplicate service?

In launching the Bankruptcy Law Reform consultation, Rosemary Winter Scott, the Accountant in Bankruptcy called for “vision and ambition” in redrafting Scotland’s bankruptcy laws, but also worryingly indicated this was a good time for the reforms with the majority government. It’s clear now what she meant with such comments: legislation will be driven through parliament and Government dominated committees will be expected to rubber stamp provisions.

Many like me fear the AIB’s vision of rebalancing Scotland’s bankruptcy law is gradually about eroding independent debt advice and replacing it with more pro-creditor advice. This is an erosion of the principles that advice should be non-judgemental and always in the best interest of the client.

What is shocking in relation to the Accountant in Bankruptcy actions, however, is the cynicism of what they have done. No mention was made of the pilot project at the Money Advice Scotland consultation the day before, despite the attendance of a senior AIB staff member. Instead it was only after the extent of feeling became clear it was announced, possibly to instil a sense of defeatism in people or to entice others fearing job cuts.

Equally disturbing is that the announcement was made through Money Advice Scotland, who knowing the strength of its own member’s feelings, circulated the advertisement seeking advisers to apply. This raises questions about the influence the AIB now have, now they control significant portions of their funding and The Chief Executive is a non executive member of the AIB’s Board.

The decision to announce this project is in bad taste and signals contempt towards the consultation process and those involved in it. If this matter is already decided, what others are?

Rosemary Winter Scott said she wanted vision and ambition during this reform, but already it appears cynicism and distrust is creeping in.

You have to wonder if there is any point continuing with the consultation.

Scotland’s Debt Landscape Possibly Changing

21st July 2010 0 comments

The recent statistics producced by the Accountant in Bankruptcy has shown that the Scottish debt landscape has begun to change.

The number of sequestrations (formal bankruptcies) in the first quarter of this year remained the same with the number for the previous quarter (3,139), but showed a 16 % decrease on the numbers from the same quarter last year.

A similar story can be told for protected trust deeds, with only 2,239 becoming protected in the first quarter, which although up 10 % on the previous quarter was down 13% on the same quarter for last year.

The real story, however, is the 495 debt payment programmes entered into under the Debt Arrangement Scheme, showing a 19% increase on the previous quarter and a 60% increase on the same quarter last year.

The Debt Arrangement Scheme is a statutory alternative to personal insolvency and allows debtor to repay their debts in full, whilst providing them with protection from their creditors. Importantly, it also avoids debtors having to realise assets and allows interest and charges on debts to be frozen and eventually written off if the programme is succesfully completed.

Launched in October 2004, the scheme has had a troubled beginning with a poor uptake and problems with debtors unable to access it. This has largely been because access is exclusively through an approved money adviser and there has been a shortage of approved money advisers. This has now been partly solved with increased private sector involvement and it is now believe up to 10% of all applications may now be originating in the private sector. Concerns have, however, been raised in relation to private sector involvement with some private sector providers charging debtors up to £1,800 to access the scheme.

However, the increase in the number of the debt payment programmes may not just be a sign that debtors are keen to repay their debts, but that they have no other remedy available to them.

Those who enter the Debt Arrangement Scheme have to have disposable income to make payments and, therefore, it may be that increasing numbers of white collar debtors may be using the Scheme where there has been a drop in the household income and they are unable to use personal insolvency as a remedy. This may be as in personal insolvency debtors are required to realise the value of assets, such as homes and cars for the benefit of creditors. One of the advantages of the Debt Arrangement Scheme is that debtors do not normally have to realise their assets for the benefit of their creditors.

This creates a problem, however, for those debtors with assets, if they are unable to realise those assets (it may make them homeless or leave them unable to get back and forth to work), resulting in them having to enter repayment plans with their creditors that could take 10 years or more.

The Scottish Government will be introducing a new route into seqeustration also in October, which will allow debtors who cannot repay their debts as they fall due to apply for bankruptcy. This may result in an increase in the number of bankruptcies each year, but may equally result in a reduction in the number of protected trust deeds. In addition to this, the Government, as part of the new Act, will also be introducing new forms of protected trust deeds that will allow debtors to exclude their home from it, allowing them to keep it even though they are personally insolvent. This, however, is likely only to be in cases where there are small amounts of equity in the home.

It is clear that Scotland’s debt remedy landscape is now beginning to shift with one debt payment programme being entered into for every four protected trust deeds being signed. It could be tomorrows debtor landscape is one where there is more debt payment programmes and less personal insolvencies. It could also be with the decreasing number of personal insolvencies and increasing numbers of debt payment programmes, Scotland’s personal insolvency industry will now begin diversifying to offer the Debt Arrangement Scheme as one of the services they can offer.

Debt Arrangement Scheme

Accountant in Bankruptcy