Dealing with creditor pressure until normality returns

A large number of people in Scotland operate as either a sole trader or partnership, preferring the flexibility compared with a limited liability company or LLP.  All types of trades and professions have self-employed people, and we have all read media reports of complaints that the level of Government support has been insufficient to help deal with the myriad of Covid-19 challenges.

That said, the furlough arrangement has been available to all employers which has proved to be a lifeline in terms of keeping a business alive until Covid-19 has dissipated and giving some income to employees. Scottish Government statistics published in February of this year report that as at 31 December 2020, 282,800 Scots were on furlough : representing 11% of those eligible.  However, as business activity begins to resume and Government support falls away, the self-employed are likely to face cash flow challenges in terms of funding their business, whilst many employees will return to work and find that, in reality, there is no work and hence face redundancy.

It is probably fair to say that over the last 12 months or so, business and personal debts have increased for many. For example, sole traders and partnerships may have been in short-term hibernation or have operated only on a care and maintenance basis, meaning that debts that existed in March 2020 have yet to be settled and/or new ones have arisen in the subsequent 12 month period for rent, loan servicing, utilities etc.

From an individual’s standpoint, the debt level may have increased as a result of a mortgage/rent holiday, reduction in payment of finance agreements or credit card liabilities, or increasing indebtedness as a result of more internet spending.

In order to try and help self-employed traders and individuals manage debts and take appropriate advice before deciding whether a debt relief option such as a trust deed, sequestration or debt arrangement scheme is the best way forward, those with debt problems in Scotland could apply for a six week moratorium period i.e. during this period a creditor could not instigate action against an individual as long as the moratorium had been registered with the Accountant in Bankruptcy (State civil service department that deals with people suffering financial problems).  Recognising that six weeks was relatively short, the Scottish Government introduced legislation in mid 2020 which increased the moratorium period to six months : a significant benefit to anyone seeking shelter from creditor pressure. The legislation also disallowed a creditor bankrupting either an unincorporated business or an individual for a debt less than £10,000 and stopped a secured creditor evicting someone from their house.

Has this helped ? Well, in terms of providing perspective on the issue, a recent Scottish Government report  for the quarter ended 31 March 2021 revealed 778 moratorium applications, but only 25 creditor bankruptcy petitions.

These changes were scheduled to cease on 31 March 2021 but the rather snappily entitled Coronavirus (Scotland) Act (Amendment of Expiry Dates) Regulations 2021 extended the date to 30 September 2021 i.e. an individual now has a further six month period during which steps can be taken to regularise financial difficulties and  reach repayment agreement with creditors. One view is that a key purpose of the extension is to stop a huge wave of bankruptcies before the economic picture is clearer. Such a wave of insolvencies would be devastating for individuals in terms of losing their business, house and other possessions without being given a realistic chance to salvage the position.

Clearly, the debt moratorium process and inability to bankrupt a business/person by a creditor has resulted in a lack of debt pressure in the last twelve months or so and some commentators suggest that a false sense of debt-impunity may have developed where individuals have been able to ignore the level of debt piling up behind them.

Whilst the current legal provisions allow one to keep creditors at bay meantime, the law remains unchanged in terms of an individual seeking to make himself/herself bankrupt in order to address debt problems. The Meston Reid & Co experience shows that secured lenders are becoming increasingly supportive of a trustee in sequestration when seeking a voluntary repossession/sale of heritable property.  After all, if the property market does not improve considerably and mortgage servicing is ignored for a further six month period, the secured lender will often find that the ultimate loss on disposal is even larger and be less receptive to dealing with the houseowner.  Accordingly, when discussing personal insolvency proceedings, the issue of the family home is even more central to a decision on the way forward than ever before.

Experience suggests that it is usually better to seek advice early and take action under one’s  own hand once the effects are explained/accepted rather than wait until a creditor who has lost both patience and understanding over an extended period is allowed to pursue through court again.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen.  They do not purport to represent those of the firm in general.