How does sequestration work in Scotland? Eoghann Green and Shirley Li-Ting of Brodies LLP explain the restrictions and advantages of sequestration, as well as the alternative options available for those with debt problems.

What is sequestration in Scotland?

Sequestration is the term used in Scottish Law for entering bankruptcy. Sequestration can affect:

• an individual
• a deceased individual's estate
• a trust
• a partnership
• limited partnerships
• any other non-incorporated body

Upon sequestration, a bankrupt party's estate falls to an appointed trustee to administer for the benefit of creditors. If there is any money remaining in the sequestrated estate at the end of the process, it is returned by the trustee to the bankrupt party; otherwise all unsecured debts incurred prior to the date of sequestration (subject to certain limited exceptions), are written off.

How does sequestration work in Scotland?

When an individual or any other non-incorporated body is sequestrated, all its assets, including all heritable and moveable property, are entrusted to the appointed trustee; an insolvency practitioner appointed to administer the sequestrated estate. However, there are some exceptions to this. For example, essential household items or trade tools valued at less than £1,000 should be secure.

An individual is also subject to a Debtor Contribution Order while they remain undischarged from their sequestration; this collects a percentage of a bankrupt party's income to their sequestration for four or more years. The trustee then takes their fees and outlays for administering the estate from the bankrupt party's assets, before paying a dividend to all non-secured creditors on a pro-rata basis, returning any surplus to the bankrupt party.

As part of the sequestration process the bankrupt party will have to cooperate with their trustee, including attending an interview and providing information on their assets and liabilities. Failure to cooperate with a trustee can result in a sequestration being extended and/or restrictive orders being imposed by the courts.

The sequestration process is a matter of public record in Scotland. All sequestrations are recorded and available to the public to view in the Register of Insolvencies.

What restrictions are there during sequestration?

The sequestration process includes various restrictions on parties while they are undischarged from bankruptcy, such as:

• an individual cannot be a company director
• an individual cannot be an MP or MSP
• an individual must inform any lender about their sequestration when applying for credit valued at more than £500

There may also be non-legislative restrictions imposed by regulatory bodies or employers on individuals who are sequestrated. For example, it is common for those working in financial services to have their employment terminated.

What are the advantages of sequestration?

Despite the restrictions there are some advantages to sequestration. The most obvious is that a bankrupt party no longer must deal with their creditors. Instead creditors are required to cease any enforcement action and lodge a claim with the appointed trustee for consideration.

At the end of the sequestration process all unsecured debt, except for certain debts such as student loans and court fines, are written off allowing the bankrupt party a fresh start, free from historic debts. They will also be able to delay the sale of their family home for up to three years, to avoid any undue hardship on their immediate family.

What are the alternatives to sequestration in Scotland?

There are alternatives to sequestration for those wishing to avoid it, to protect their home or specific assets. The two most popular alternatives are:

• Protected Trust Deed - a binding agreement on all unsecured creditors, which prevents them from taking enforcement action and enables a debtor to determine what assets will be protected
• Debt Arrangement Scheme (DAS) - a payment programme applied for via a money adviser to repay unsecured creditors over time - generally two to 10 years - and can be applied for by an individual debtor at any point prior to the award of their sequestration

An individual considering either of these alternatives should bear in mind creditors can successfully object to them and continue to seek to enforce a debt.

How can you apply for sequestration in Scotland?

A creditor can apply to the court to sequestrate an individual who owes more than £3,000* (*due to coronavirus, this may soon temporarily change to £10,000), subject to the debt not being part of a Protected Trust Deed or a DAS.

An individual can apply for their own sequestration, provided they:

• have unsecured debts of over £1,500
• have not been sequestrated within five years of their application
• reside in Scotland
• are unable to pay their debts when they are due

Provided an individual meets the above criteria, they will have to speak to a money adviser before applying to the Accountant in Bankruptcy for their sequestration. The fee for an ordinary sequestration is currently £200 and £90 for a Minimal Asset Process (MAP) bankruptcy. A MAP bankruptcy is an expedited insolvency process designed for those with low income and minimal assets who owe between £1,500 and £17,000 to unsecured creditors.

About the author

Eoghann Green and Shirley Li-Ting are an Associate and Managing Associate in the Restructuring & Advisory Team at Brodies LLP.

See also

What you need to know about protected trust deeds in Scotland

What is the Debt Arrangement Scheme (DAS) in Scotland?

Scottish insolvency vs England and Wales - What you need to know

The company liquidation process in Scotland

Find out more

Register of Insolvencies (AiB)

Bankruptcy (Scotland) Act 2016 (Legislation)

Image: Getty Images

Publication date: 12 May 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.