When a company is in financial distress, directors face difficult choices. Should they trade on to try to “trade out” of the company’s financial difficulties or should they file for insolvency? If they act too soon, will creditors complain that they should have done more to save the business? A recent English High Court case raises the prospect of directors potentially being held to account for decisions that “merely postpone the inevitable.”

When a company is in financial distress, its directors will face difficult choices. Should they trade on to trade out of the company's financial difficulties or should they file for insolvency? If they delay filing and the company goes into administration or liquidation, will the directors be at risk from a wrongful trading claim by the subsequently appointed liquidator? Once in liquidation, will they be held to have separately breached their duties as directors and face a misfeasance claim? If they file precipitously, will creditors complain they did not do enough to save the business?

When individuals and certain entities (such as partnerships, trusts and other unincorporated bodies) have debts that they are unable to repay to their creditors, they may consider or be faced with bankruptcy, which is known as sequestration in Scotland. However, sequestration is just one avenue. Alternative statutory debt solutions are available, which can provide breathing space and allow debts to be repaid over time, without creditor pressure.

Although the law, rules and procedures governing corporate insolvency in Scotland and England and Wales are similar in many respects, Scotland has a separate legal system and there are some important differences in the provisions and rules applicable north and south of the border. The differences include:

For RSLs who are routinely contracting with housebuilders for golden brick delivery of affordable housing across multiple phases, we discuss the four key actions that can help if the housebuilder becomes insolvent.

1. Pre-Insolvency – Financial Distress Provisions and Due Diligence

Whilst most people would hope it could never happen to them, in our experience it often can. As such it pays to be prepared.

The first quarter of the year can often be a pinch point for tenants as they assess Christmas trading and scrutinise financial results. Where profits have failed to meet expectations then a tenant may require to consider formal insolvency proceedings but how does this affect the landlord? Here we consider some of the key questions for a landlord in Scotland facing tenant insolvency.

What is the status of the tenant?

Landlords might be starting to feel a little uneasy given the news that Superdry is considering a Company Voluntary Arrangement (CVA). Superdry is reportedly working with accountants to hash out a plan that will likely involve shutting down certain stores and cutting rent liabilities. The accountants instructed will be exploring whether either a CVA or a Restructuring Plan - both of which are processes which allow businesses to seek to reduce their liabilities to creditors – would be appropriate.

What exactly is a CVA?

When individuals are made bankrupt in Scotland, the formal term is 'sequestration', a trustee will be appointed to deal with the sequestration. That trustee will be responsible, amongst other things, for contacting creditors, assessing their claims, ingathering the assets of the debtor and converting them into cash in order to settle the costs of the sequestration and pay dividends to creditors.

The latest quarterly figures from The Insolvency Service for Q4 of 2023, covering the period October to December, show that company insolvency volumes in England and Wales reached a 30-year high. 25,158 registered companies entered some form of insolvency in 2023. The food and drink sector has not been immune to this, and indeed has seen some of the biggest rises in insolvency as many businesses face significant financial challenges.

Multiple headwinds