Scottish businesses in financial difficulty now have the option of a Business Debt Arrangement Scheme service if they are unable to take part in formal company insolvency arrangements. (This article first appeared in the January 2015 edition of The Journal of The Law Society of Scotland).
Scottish businesses currently unable to access formal rescue measures like administration and company voluntary arrangements are now able to access a new formal debt rescue remedy known as business DAS, as a result of the Debt Arrangement Scheme (Scotland) Amendment Regulations 2014.
The new provisions, which came into force on 11 December 2014, amend the Debt Arrangement Scheme (Scotland) Regulations 2011 and extend access to the scheme to a number of different legal persons.
Who can apply?
The types of persons that can access the new scheme are partnerships, limited partnerships within the meaning of the Limited Partnership Act 1907, corporate bodies (other than bodies registered under the Companies Act 2006), trusts and unincorporated bodies of persons.
Sole traders are not covered by the new provisions, but are still able to apply under the existing scheme as individuals.
Where applications are made by partnerships, the agreement of all partners will be required; where a limited partnership applies, all general partners will have to consent to the application, as will limited partners where they have at any time been involved in the management of the business.
Only a majority of trustees will be required to consent to an application for a trust to apply, and in the case of corporate and unincorporated bodies, applications will be made by a nominated person authorised to act on behalf of the body.
Like the existing scheme, all applications will need to be made by a money adviser, but the definition of who constitutes a money adviser will be limited to a licensed insolvency practitioner, who in making any proposals will have to make a declaration of viability for the business.
Approval of programmes
Proposals under the scheme will operate like current proposals under the existing scheme, but applications will only be possible where businesses have more than one debt, and will have to be completed within five years.
The option of using the current intimation procedure will also be available, providing businesses with a six week moratorium period during which creditors will not be able to execute diligence or raise petitions for the sequestration of the business.
The benefit of using the scheme will be to provide distressed businesses with a vital breathing space, during which they can explore the viability of any programme before making an application. Where petitions for sequestration have been raised, sheriffs will also have the option of not making an award immediately, to allow an application for a business DAS to proceed.
It will also be possible to compel creditors to participate in any programme, where they object, if the Debt Arrangement Scheme administrator finds the proposals fair and reasonable, with all interest, charges, penalties and other fees on debts being frozen from the point the application is made.
Once approved, programmes will provide for payments to be made through a payment distributor, with the cost of the payment distribution being a cost creditors will have to bear.
Benefits of the scheme
The primary benefit of extending the Debt Arrangement Scheme to now include businesses is that it closes a gap in Scots law that allows a number of different legal persons to be subject to creditor petitions for sequestration and diligence, but does not provide them with the same protection that is available to individuals, limited liability partnerships and companies registered under the Companies Act 2006.
It further extends these protections to individuals involved in the business, where they are also liable for the business’s debts, in that one of the effects of a proposal being approved is that the protections will also cover them for their liability.
Business DAS is a rescue procedure that will provide businesses with a lifeline where they are at the latter stages of creditors taking recovery action through the courts and demanding ransom payments; but importantly tempers that protection by ensuring it is only available to those businesses that are viable and can remedy their distress within five years.
It may even provide a lifeline to so-called zombie or walking dead businesses, which are only able to pay interest on debts, in that programmes will freeze interest and write it off on the successful completion of a programme, whilst the capital amounts are paid off.