25th February 2015

Debt Arrangement Scheme for business not fit for business purposes?

Alastair Johnston, a solicitor within Blackadders’ Dispute Resolution Department, considers the impact of the extension of Debt Arrangement Scheme protection to businesses.

The Debt Arrangement Scheme (Scotland) Amendment Regulations 2014 are partially in force and will be fully implemented in April of this year. These regulations will bring the increasingly popular Debt Arrangement Scheme (‘DAS’) to Scottish businesses, but do the Regulations take account of the nuances of certain Scottish business structures?

DAS has been popular amongst individuals struggling with debt; the purpose of the scheme being to allow a proportion of a party’s debts to be repaid at a manageable rate and prevent creditors from applying interest or raising court action against the debtor whilst the scheme is ongoing. One of the Scheme’s perceived benefits for creditors is that the funds they receive are often greater than they would have received had traditional insolvency proceedings been instigated. An important feature of DAS for businesses is that it is only available to businesses which are considered viable and can remedy their defaults within five years. It would therefore be hoped that participation within the scheme will be restricted to businesses which are capable of recovery rather than businesses which would better be brought to an end for the benefit of all involved.

Presently the Scheme is accessible to a large variety of corporate bodies, namely:

  1. Partnerships
  2. Limited partnerships within the meaning of the Limited Partnership Act 1907
  3. Corporate bodies other than bodies registered under the Companies Act 2006
  4. Trusts
  5. Unincorporated bodies of persons
  6. Sole traders ( although these applications are made as individuals)

However, certain unique traits of particular Scottish businesses bring to light some potential shortcomings of the Regulations. In order for an application to be made all partners, or as the case may be the majority of trustees, must consent to the application. However, once an application has been made difficulties may arise in instances where one of the partners of a traditional Scottish Partnership resigns, thereby dissolving the partnership (the exception being that the partnership agreement provides for continuity of the firm post resignation), and along with it  the former partnership’s participation in the scheme.

The matter is further complicated when one considers that whilst the partnership may be participating in DAS, the partners themselves would remain jointly and severally liable for the debts of the partnership. This could result in creditors simply pursuing the partners as individuals instead of the partnership. In this case the partners would likely need to make applications to DAS as individuals in order to avoid this situation. However, this seems a little overly complicated and would perhaps benefit from streamlining.

The Regulations state that applications for other corporate and unincorporated bodies must be made by a nominated authorised person on behalf of the body through a money advisor and approved by a licensed insolvency practitioner. What the Regulations are less clear about is how the authority of the nominated person is to be verified. One has to wonder how long it will be before reduction of a business DAS scheme is sought on the basis that the authorised person acted ultra vires?

An important point for creditors to consider is that if a creditor objects to the Scheme being approved the DAS administrator can compel them to take part in the scheme if they find the proposals fair and reasonable. If the application is approved, a payment distributor will manage the scheme until completion the fee for which is met by the creditors.

It is also important to note that the businesses must have more than one debt, and it must be possible to repay their debts within five years. Creditors of businesses which are subject to a DAS application must consider that whilst the businesses’ application is being considered they will not be able to execute diligence or raise court actions to recover debts from the business for a period of 6 weeks.

If you would like to discuss how these changes will affect you or your business please get in touch with our Insolvency team who will be more than happy to assist.

Alastair Johnston
Solicitor – Dispute Resolution
www.blackadders.co.uk

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