This is the second article in ‘Back to Basics’, a series of articles examining insolvency processes in Scotland. This article will examine the judicial receivership process, focusing on the claims of creditors.
Receivership is the Scottish legal term for personal bankruptcy. In a court order for receivership, a trustee is appointed to collect and realize the debtor’s estate in order to pay a dividend to the debtor’s creditors in settlement of their claims. Receivership can have serious consequences for the debtor and, as such, a receivership petition can be a very powerful debt collection tool for creditors. The law is governed by the Bankruptcy Act (Scotland) 2016 (“the Act”).
What criteria must be met in order for a creditor to bring a request for receivership to the court?
In summary, a creditor can request the sequestration of the debtor’s assets if the following criteria are met:
- the debtor owes the obligee at least £ 3,000 * (* – due to Covid-19 this amount has been temporarily increased to £ 10,000 – see below);
- the apparent insolvency of the debtor has arisen within four months of the filing of the claim (there are different ways of constituting the apparent insolvency, but one of the most common is the expiration of a right to payment); and
- before the presentation of the request, the creditor has provided the debtor with a notice of debt and an information package no earlier than 12 weeks before the presentation of the request.
What is the legal procedure for forcible confinement in Scotland?
Once a petition has been brought by a creditor, the sheriff must grant a warrant to summon the debtor to appear in court on a specified date not less than six and not more than 14 days after the date of the summons to show why the receivership should not be rewarded.
A summons warrant will normally be granted without a hearing being necessary and the application will be presented to the court on the date specified in the summons warrant. The debtor can appear personally or be represented at the hearing.
By law, the sheriff must grant receivership if they are satisfied that the following conditions are met:
- if the debtor does not appear at the hearing, that the debtor has been duly summoned;
- that the request was made in accordance with the Act;
- that the petitioner sent a copy of the petition to the bankruptcy accountant on the day the petition is brought to court; and
- that the conditions relating to the debtor’s apparent insolvency have been fulfilled.
The sheriff will not grant receivership in cases where:
- the cause is shown why the receivership cannot be granted competently (for example, because the court has no jurisdiction);
- the debtor pays, satisfies or produces written proof of the payment or satisfaction of the sums due to the applicant (and to any creditor concurring in the application);
- the sheriff is satisfied that the debtor will pay or settle the debts owed to the applicant within 42 days. In these circumstances, the sheriff can pursue the petition for up to 42 days; and
- the sheriff can also pursue the petition if he is satisfied that the debtor has requested a debt payment program that has not yet been approved or rejected.
Format of the request for receivership
The request must be in form 6.1-A as indicated in Schedule 1 of the Act of Sederunt (Sheriff Court Bankruptcy Rules) 2016.
The requesting creditor must also produce an oath in the prescribed form, together with an account or supporting document evidencing the debt and the evidence available to the creditor to demonstrate the debtor’s apparent insolvency.
In addition, the petition may designate a particular insolvency practitioner to be appointed as the receivership trustee or, alternatively, the bankrupt accountant. Once appointed, the trustee will manage the receivership process going forward.
How did the Coronavirus (COVID-19) affect kidnappings?
First, the Coronavirus (Scotland) Act 2020 extended the moratorium on due diligence from six weeks to six months and temporarily removed the ban on a debtor requesting more than one moratorium in a 12-month period.
The Coronavirus (Scotland) Act 2020 (No.2) then temporarily increased the minimum level of debt a debtor must owe a creditor before they can bring a request for receivership from £ 3,000 to 10 £ 000. This temporary increase in the debt threshold is currently due to end on March 31, 2022.
However, the Scottish Government has released a consultation document (‘Covid Recovery: A consultation on public services, justice systems and other reforms‘) in August 2021 which recognized that the protection offered to debtors by raising the threshold for creditors’ claims would most likely be required beyond March 2022.
The difficulty with the minimum remaining debt level of £ 10,000 is that it limits the number of options available to small creditors who have debts greater than £ 3,000 but less than £ 10,000. In the past, it was often sufficient for a creditor to threaten an application for receivership to obtain payment. However, due to the measures currently in place, small creditors must rely entirely on other enforcement options which may not be as effective.
The fact that the £ 10,000 threshold frustrates small creditors and prevents them from initiating receivership proceedings was acknowledged in the consultation paper and, as a result, the government sought advice on the debt threshold. appropriate minimum and on whether a figure of £ 5,000 would strike a more appropriate balance between the interests of debtors and creditors was an increase of £ 3,000 to be placed on a more permanent basis. The consultation also sought views on the appropriate moratorium period going forward.
Conclusion
The court process in Scotland to sequester a debtor is generally an efficient 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 receivership petitions has dropped significantly during the pandemic as small creditors have been unable to utilize the process.
The consultation is now closed and we are awaiting the introduction of the Covid Recovery Bill to see if the temporary COVID-19 measures currently in place become permanent or if the minimum debt level will be reduced, allowing more creditors the possibility, once moreover, to petition. for the sequestration of the estate of a debtor.
