Lecture 14 - Insolvency

Question 1

What is insolvency

Answer 1

Money problems
Insolvency procedures
Informal solutions to money problems
Procedures governed by statute involve the appointment of an licensed insolvency practitioner to investigate the financial affairs of the debtor and to realise the debtors assets to make payment or part payment to the creditors

Question 2

Absolute insolvency

Answer 2

Liabilities exceed assets

Question 3

Practical insolvency

Answer 3

Not enough cash to pay the bills

Prolonged problems can lead to absolute insolvency

Question 4

Apparent insolvency

Answer 4

Define in bankruptcy act 2016 - Scotland

Question 5

Personal insolvency causes

Answer 5

Consumer debt
Redundancy 
Illness 
Dependency problems 
Relationship breakdown 
Business difficulties

Question 6

Informal solutions to money problems

Answer 6

Debt rescheduling and informal arrangements

E.g refinancing, payments out of income, debt management plans
Not binding on creditors
They may not agree to freezing interest/suspending penalties
They can dispense with any agreement immediately on default

Suitable if

• repayments will finish after a short period of time
• Total debt relatively small
• affordable contributions/loan repayments
• seeking to exclude valuable assets

Question 7

Personal insolvency procedure

Debt Arrangement Scheme

Answer 7

Statutory Debt Management Plan
Envisages payment in full therefore can be a long repayment term
Interest is frozen
A debtor must seek advice from a money advisor
A money advisor acting for s debtor can make a moratorium application to the Accountant in Bankruptcy in advance of applying for for a Debt Payment Plan which lasts 6 weeks
A creditor cannot raise action against a debtor or petition for his sequestration while the moratorium is in force
Excludes family home from proposals to creditors (although creditors can object to a DPP ON grounds of ownership of property)
Business debt arrangement now enacted (lasts for 5 years maximum)

Question 8

Personal insolvency procedures - current legislation

Answer 8

Bankruptcy ACT 2016
The bankruptcy regulations 2016
In force 30 November 2016
Consolidated the previous legislation for sequestration and trust deed e..g no change to previous legislation
Provides a coherent structure to Scottish personal insolvency law

Question 9

Sequestration

Answer 9

Scottish term for bankruptcy
When a person’s estate is sequestrated a Trustee is appointed to take control of their assets and deal with their creditors
The trustee has the power to sell their assets and use the proceed to pay the creditors in accordance with their legal ranking

Question 10

Award of sequestration

Answer 10

Debtor can ask for an award to be granted against a person
Debtor makes an online application to the accountant in bankruptcy
As a way of relief from creditor pressure
Prospect of a discharge from debts after one year
Failure to get a Trust Deed protracted

Question 11

Creditor

Answer 11

A person or business to whom money is owed
Credit petitions are presented to a court
To get an insolvency practitioner appointed to secure the debtor’s assets and realise them to get payment or part payment of their debt

Trustee under a deed
Because a debtor under a Trust Deed is not co-operating

Question 12

Debtor applications

Answer 12

The debtor must qualify under either
The Minimal Asset Process
Or
The Full Administration Process

Entry to the full administration process requires either
- a certificate for sequestration
Or
By Being apparently insolvent

Question 13

Debtor applications part 2

Answer 13

Total amount owed must be at least
£1,500 (MAP)
£3,000 ( full administration process)

Serial bankrupts - a debtor cannot make a sequestration application if he was made bankrupt in the last 5 years
A debtor must receive advice from an approved Money Advisor before applying for sequestration and if identified as vulnerable to financial problems arising from recurring debt he must undertake a course of targeted financial education which may be a condition of him receiving a discharge from his sequestration

Question 14

Minimal asset price

Answer 14

Came into force 1 April 2015
Only the Accountant in Bankruptcy can be appointed as Trustee
Assessed as not able to make a contribution by reference to the common financial tool or has been on benefits for 6 months
Debts must be at least £1,500 but must not exceed £17,000
Debtor must not own land or buildings
Total assets must not exceed £2,000 and there must be no single asset worth more than £1,000 - with the exception of car = £3,000
Requirement for certificate of sequestration
Provision for automatic discharge after 6 months
A debtor may only use the minimal asset Process route to sequestration once every ten years

Question 15

Certificate for sequestration

Answer 15

A qualified person certifies a person has demonstrated he or she is unable to repay their debts as they fall due
Debtor just has to be practically insolvent
The qualified person who grants the certificate may rely on information provided by the debtor
Only available to debtors (e.g a creditor cannot use it to make someone else bankrupt)
Can nominated an insolvency practitioner to act as the Trustee (unlike MAP) minimal asset price

Question 16

Apparent insolvency

Answer 16

As an alternative to obtaining a certificate for sequestration, a debtor can lead instead apparent insolvency before making a sequestration application
Statutory definition of events which can make a person apparently insolvent include:
An expired charge for payment following a decree
Written notice to creditors that a debtor has ceased to pay his debts in the ordinary course of business
Revocation of a debt payment programme under the debt arrangement programme scheme
No payment or security offered 21 days after the delivery of a statutory demand for payment where the debt is £1,500 or more

Question 17

Moratorium or diligence

Answer 17

Diligence is a creditor’s right to take action to enforce payment of their debt e.g attachment of wages or of funds in a bank account
If a debtor is to apply for sequestration, he/she must give written Notice of Intention in the Register of Insolvencies
The debtor receives the benefit of a moratorium on diligence for a maximum period of 6 weeks e.g he is protected from creditors enforcing their debt, or completing enforcement action already started
Only one notice of intention can be registered during any 12 month period

Question 18

Creditor petitions

Answer 18

A petition is presented to court by a creditor and therefore legal presentation is usually required

Creditor petitions, if awarded, always proceed under the full sequestration process e.g MAP only available to a debtor

Petitioning creditors must be owed £3,000 or more

Must be able to prove debtor was apparently insolvent during the 4 month period prior to the date of presentation of the sequestration petition (usually established by action already take by a creditor)

A petitioning creditor has no preferred right to receive payment of their debt over any other creditor but their petitioning costs are paid before any other payment is made to creditors.