Sequestration changes could trigger wave of bankruptcies, experts warn

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Changes to the sequestration limits in Scotland could spark a flurry of bankruptcies, experts have warned.

On September 30, the limit for pursuing sequestration will be lowered from £10,000 to £5,000. It was originally increased from £3,000 to £10,000 following the initial onset of the Covid-19 pandemic during March 2020 to provide support for smaller businesses and sole traders, in particular.

Unlike under English law, in Scotland a creditor cannot force an individual to sell their property to repay a debt. Instead, they have to pursue sequestration - also known as bankruptcy - to recover the money due to them.

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Any creditor - a business, a lender, or in certain cases a landlord - owed debts of between £5,000 and £10,000 will, from the start of October, be able to pursue legal action by beginning the proceedings for bankruptcy against anyone who has so far refused to repay.

Businesses with no employees - sole proprietors and partnerships comprising only the owner-managers, or companies with only the employee director - account for almost 70 per cent of all private sector businesses north of the Border.

Legal experts have warned that the bankruptcy of the principal individual in those sorts of firms could have a significant effect on not only their own business, but also their customers and suppliers.

David Alexander, head of debt recovery at Scottish law firm Gilson Gray, said: “The increasing of the sequestration limit to £10,000 was designed to give financial breathing space to small businesses and sole traders during the worst of the pandemic. However, there are many debts that have never been repaid and the reduction of the limit to £5,000 is likely to see more companies try to recover money they are rightfully due and may well need to protect their own interests - especially with the economy expected to take a turn for the worse.

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“It is important to take action now, rather than waiting for the deadline to pass, even if you already have a decree or judgment allowing you to recover the debt. These processes take time and there will almost inevitably be a backlog of cases.”

David Alexander, head of debt recovery at Scottish legal firm Gilson Gray.David Alexander, head of debt recovery at Scottish legal firm Gilson Gray.
David Alexander, head of debt recovery at Scottish legal firm Gilson Gray.

Steven Jansch, head of insolvency at Gilson Gray, said: “Even if businesses are not directly affected by the sequestration limit change, they will want to carefully consider if it affects their supply chain - this is particularly true in sectors like construction, where subcontractors and tradespeople are often sole traders or self-employed.

“If one project is unfortunate enough to have multiple suppliers affected, then steps can be taken now to sanitise debtor books, mitigate potential disruption, and to seek out potential alternatives to preserve a project's completion date.

“It is also worth considering whether action is worth pursuing. Any individual creditor may be one in a long line, so if the debtor is made bankrupt they may receive little of their debt back and they may not recover the cost of the court process, which they have had to pay for to get to that stage,” he added.

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