Debt traps

The bankruptcy reform provisions of the Bankruptcy and Diligence etc (Scotland) Act 2007 came into force on 1 April 2008. A year on, how are the reforms playing out in practice? Change has taken place against the backdrop of a battered economy in which credit has largely dried up, and it is difficult to identify the influence of reform in the increased number of sequestrations being initiated.

Starting off

Entry requirements remain a mess. The qualifying threshold for a creditor petition is now £3,000, but remains £1,500 for a debtor petition. But the threshold for a concurring creditor to a debtor petition is £1,500, not £3,000 (reg 13, Bankruptcy (Scotland) Regulations 2008, for purposes of s 7(1)(d), Bankruptcy (Scotland) Act 1985). This means that a creditor owed more than £1,500 can serve a statutory demand which if not satisfied may constitute the apparent insolvency of the debtor, but only the debtor can seek sequestration based on this; the creditor has to find another creditor or creditors to aggregate in excess of £3,000 before the apparently insolvent debtor can be sequestrated.

Confused? Try explaining that to a creditor who knows he can petition for liquidation of a company which owes him more than £750!

The act and warrant previously issued to a trustee is now no more. The prescribed forms in the 2008 Regulations refer to the date of award of sequestration, and there is no reference to vesting. In time the profession may adjust to having no explicit evidence that the debtor’s assets have vested in his trustee, but for the moment, the debate needs to be had every time assets are being disposed of. There is no indication that the Accountant in Bankruptcy (“AiB”) is prepared to indulge the profession by amending the forms to include a reference to vesting, and the profession will need to accept that vesting occurs by virtue of the award.

Sequestration for rent has been abolished, although the landlord’s hypothec remains. Practitioners remain unclear how a security shorn of its enforcement or perfection mechanism is to work, and no guidance has been given as to how the authorities believe it is to work. It is accepted that it may give a landlord ranking in processes where there is ranking, but how and in what circumstances, and the nature of the ranking, are less than clear. A case for seeking judicial guidance? Time will tell.

Taking over

Section 18(2)(g) of the 1985 Act permitted an interim trustee to close down a debtor’s business. This has been repealed. The interim trustee must however still take control of the debtor’s assets to preserve the estate. Complex questions about liability and indemnity arise if the interim trustee allows the debtor to continue to trade; but is that possible if the trustee controls the assets? Presumably it is not intended that the interim trustee requires to trade whatever the commercial situation and imperatives. The reason for repeal of the right to close the business remains obscure, although the AiB has expressed the view that it would be inappropriate to close down the business as sequestration might not be awarded, so presumably her intention is that the interim trustee does trade the business in all circumstances.

The 2008 Regulations stipulate forms 21 and 22 for use by an insolvency practitioner and the AiB respectively to record abandonment of heritage. These are to be recorded in the Register of Inhibitions (the register in which the sequestration is recorded). Since these affect heritable property it would appear logical that such abandonment be (also) recorded in the Register of Sasines or Land Register, but it is unclear whether the Keeper will accept the form for registration. Meantime, given that the form includes a consent to registration for publication, it would seem wise to record it in the Books of Council and Session.

Section 21A of the 1985 Act (which deals with the statutory meeting of creditors) has been amended. Subsection (2) requires the trustee not later than 60 days after the date on which sequestration is awarded to advise creditors whether he intends to call the statutory meeting. If he so intends, subs (6) requires him to call the meeting within 28 days of his giving notice of his intention; if he does not so intend, creditors may subject to the conditions in subss (4) and (5) request that he do so and the same time limit applies. Notwithstanding all of this, subs (7) requires the trustee not less than seven days before the date fixed for the meeting to advise every creditor known to him of the date, time and place of the meeting.

It would seem sensible that a trustee intending to hold a statutory meeting should simply call the meeting (by notice giving place, date and time) within 60 days of the award of sequestration, but such a combined notice is certainly not compliant with the statutory provisions, which appear to require three separate communications to creditors. Efficient and creditor-friendly it is not.

Agreements and orders

Bankruptcy restriction orders and undertakings were introduced to great fanfare. Applications for an order may only be made by the AiB, and one searches in vain for provisions dealing with the consequences of breaches of undertakings or orders. Since these are intended to remain in effect long after the debtor has been discharged of his debts and the trustee may have been discharged of his administration, this begins to look like the proverbial toothless tiger.

An income payment agreement (“IPA”) can be made voluntarily by debtor and trustee following form 20 annexed to the 2008 Regulations, prior to the debtor’s automatic discharge (s 32(4B) and (4C)), for a period not exceeding three years

(s 32(4D), applying s 32(2XA) as it applies to an income payment order (“IPO”) made by the sheriff). It may be enforced as if it were an IPO except that s 32(2ZA) is disapplied, meaning that failure to comply with an IPA is not an offence rendering the debtor liable to a fine or imprisonment.

That suggests the only remedy is for the trustee to apply to the sheriff to convert the IPA to an IPO under s 32(4L), which specifically requires the sheriff to make an IPO on the same terms as the IPA. This in turn suggests that a second application would then be required for a variation to take account for example of any default by the debtor. Whether any missed contributions on a three year IPA or IPO can be collected, and if so how, remains obscure; the AiB is of the view that an IPO cannot be extended to collect missed contributions. There may be issues to be resolved as to the liability of a trustee who allows a debtor to miss more than one contribution – what indulgence is reasonable if there is no mechanism to collect a missed payment?

The time factor

Accounting periods for sequestration are now intended to be of 12 months’ duration, but the wording of the requirements for accounts leaves a lot to be desired in terms of clarity. Whilst s 52 allows for adjustment to the length of the second or subsequent accounting period, there appears to be no mechanism to vary the statutory requirement that the first accounting period be 12 months from date of award of sequestration, and apparently none is intended.

Section 12 as amended now expressly allows a sheriff to continue a petition for sequestration in two circumstances: per subs (3B), for no more than 42 days if he is satisfied that the debtor “shall... pay or satisfy the debt in respect of which he is apparently insolvent and any other debt due to the petitioner and any concurring creditor” within 42 days; and per subs (3C) if satisfied that a debt payment programme has been applied for and not yet approved or rejected, for such period as he thinks fit.

It is not clear whether these provisions are intended to be mutually exclusive, or whether they could be granted consecutively. This would not matter a great deal were it not for the fact that the date of sequestration is backdated (if awarded) to the first warrant to cite when the petition is to the sheriff court. How long might such delays eat into the 12 months before automatic discharge? The AiB is of the view that this is a matter for the discretion of the sheriff, so we will need to wait and see how this may be exercised (if at all).

Finally, an interesting but possibly obscure point. An undischarged bankrupt or a person subject to a BRO may not act as a company director without leave of the court (s 11, Company Directors Disqualification Act 1986), which for these purposes is the court in which sequestration was awarded. Whither the bankrupt who applied for his own sequestration to the AIB?

Note: Practitioners with answers on any of these points are invited to contact the writer.

Alistair S Burrow, Head of Recovery, Tods Murray LLPL

Pre-packs: judicial guidance

In Re Kayley Vending Ltd [2009] EWHC 904 (Ch), directors petitioned for an administration order after HMRC lodged a winding-up petition over a debt of £79,000 (Alistair Burrow writes). An out-of-court appointment by the directors pursuant to para 22 of sched B1, Insolvency Act 1986 is not competent if a winding-up petition has been presented (para 25). HMRC had previously voted down a proposed voluntary arrangement, but took no position on the petition. The court was satisfied the company was unable to pay its debts, but noted that (a) it was important that the petitioning creditor was sufficiently well informed by the information lodged to be able to decide whether or not to oppose the application; and (b) the court required to be satisfied by that information that an administration order was appropriate. If made, the winding-up petition is dismissed.

The judge noted that the (English) insolvency rule 2.4(2)(e) required the applicant in general terms to provide information on matters which in their opinion would assist the court to decide the application. Here the applicants disclosed that with the proposed administrator’s assistance, the directors were negotiating with two parties unconnected with them for sale of the business as a going concern. The court was satisfied that there was a reasonable prospect of achieving a better return for creditors as a whole from such a pre-pack sale when compared with the likely outcome of a liquidation, and nothing which favoured refusal of an administration order. The application was therefore granted.

The court also authorised the proposed administrator’s pre-appointment costs being treated as an administration expense, exercising its discretion under para 13 of sched B1 (power to make any other order the court thinks appropriate), rather than as applicant’s costs to be dealt with under rule 2.67(1)(c) (ranking of expenses in administration). The judge thought the evidence showed a potential benefit to creditors by reason of the administration, and no question of purchase by the management; and felt the order was appropriate, having regard also to some unreported decisions cited.

In response to a suggestion by counsel for the applicants, the judge issued a fully argued decision commenting on the court’s approach to pre-packs in light of the recent Statement of Insolvency Practice (SIP) 16, and suggesting that in a pre-pack situation the evidence in support of an application should be pretty similar to the SIP16 requirements for reporting to creditors, save that some matters may be commercially confidential prior to completion, and always subject to what is known and ascertainable at that stage. He also set out fairly fully his reasons for authorising the pre-appointment costs as an administration expense. He declined however to give guidance to the profession in light of SIP16 and the continuing debate over pre-packs.