Insolvency in Scotland: Back to Basics – Part 2, Sequestration (Bankruptcy)
This is the second article in 'Back to Basics', a series of articles looking at insolvency processes in Scotland. This article will examine the court process for sequestration, focusing on petitions by creditors.
Sequestration is the Scottish legal term for personal bankruptcy. Upon an award of sequestration being made by the court, a trustee is appointed to ingather and realise the debtor’s estate in order to make payment of a dividend to the debtor’s creditors in satisfaction of their claims. Sequestration can have severe consequences for the debtor and as such, a petition for sequestration can operate as a very powerful debt recovery tool for creditors. The law is governed by the Bankruptcy (Scotland) Act 2016 (“the Act”).
What criteria needs to be met to allow a creditor to present a sequestration petition to the Court?
In summary, a creditor may petition for sequestration of the debtor’s estate if the following criteria are met:
What is the Court procedure for sequestration in Scotland?
Once a petition has been presented by a creditor, the Sheriff must grant warrant to cite the debtor to appear in Court on a specified date not less than six and not more than 14 days after the date of citation to show cause why the sequestration should not be awarded.
A warrant to cite will normally be granted without the need for a hearing and the petition will call in court on the date specified in the warrant to cite. The debtor may appear personally or be represented at the hearing.
In terms of the Act, the Sheriff must award sequestration if they are satisfied that the following conditions have been met:
The Sheriff will not award sequestration in circumstances where:
Format of the sequestration petition
The petition must be in Form 6.1-A as set out in Schedule 1 of the Act of Sederunt (Sheriff Court Bankruptcy Rules) 2016.
The petitioning creditor must also produce an oath in the prescribed form, together with an account or voucher evidencing the debt and such evidence as is available to the creditor to show the debtor’s apparent insolvency.
Furthermore, the petition may nominate a particular insolvency practitioner to be appointed as the trustee in the sequestration or, alternatively, The Accountant in Bankruptcy. Once appointed, the trustee will manage the sequestration process going forward.
How has Coronavirus (COVID-19) affected sequestrations?
Firstly, the Coronavirus (Scotland) Act 2020 extended the moratorium on diligence from six weeks to six months and temporarily removed the prohibition on a debtor applying for more than one moratorium in a 12-month period.
The Coronavirus (Scotland) (No 2) Act 2020 then temporarily increased the minimum debt level which a debtor must owe a creditor before being able to commence a petition for sequestration from £3,000 to £10,000. This temporary increase in the debt threshold is currently due to come to an end on 31 March 2022.
However, the Scottish Government published a consultation paper (‘Covid Recovery: A consultation on public services, justice systems and other reforms’) in August 2021 which recognised that the protection afforded to debtors through the increased creditor petition threshold would very likely be required beyond March 2022.
The difficulty with the minimum debt level remaining at £10,000 is that it limits the number of options available to smaller creditors who have debts which amount to more than £3,000 but less than £10,000. In the past, it would often be enough for a creditor to threaten a sequestration petition in order to obtain payment. However, because of the measures currently in place, smaller creditors are having to rely entirely on other enforcement options which may not be as effective.
The fact that the £10,000 threshold does frustrate smaller creditors and prevent them from initiating sequestration proceedings was recognised in the consultation paper, and as a result the Government sought views on the appropriate minimum debt threshold, and whether a figure of £5,000 would strike a more appropriate balance between the interests of debtors and creditors were an increase from £3,000 to be placed on a more permanent footing. The consultation also sought views on the appropriate moratorium period going forward.
The court procedure in Scotland for sequestrating a debtor is generally an effective process, making it a popular option for many creditors. However, the temporary increase in the minimum debt level, coupled with increased use of the extended moratorium, has meant that the number of sequestration petitions has dramatically reduced during the pandemic as smaller creditors have been unable to make use of the process.
The consultation has now closed and we await the introduction of the Covid Recovery Bill to see whether the temporary COVID-19 measures currently in place become permanent or whether the minimum debt level will be reduced, allowing more creditors the option, once again, of petitioning for sequestration of a debtor’s estate.
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