Scottish Public Finance Manual

Bankruptcy

Scope

1. This section gives guidance on the action to be taken in the event of the bankruptcy (sequestration) of an individual or firm; the liquidation of a company (whether insolvent or not); and the receivership of a company which may or may not be followed by liquidation. The guidance is aimed at all organisations to which the Scottish Public Finance Manual (SPFM) is directly applicable, including the core Scottish Government (SG), the Crown Office and Procurator Fiscal Service, SG Executive Agencies, non-ministerial departments and bodies sponsored by the SG.

Key points

2. As a general rule, when a public sector organisation learns of a bankruptcy etc it should stop all payments pending confirmation.

3. Once the bankruptcy etc has been confirmed it is essential for public sector organisations to ensure that any payment due by them is made only to the proper person, and that any claim by them is properly lodged. Organisations should also consider, in consultation with their legal advisers, whether any contract should be terminated.

Background

4. Information about any bankruptcy etc. relevant to a public sector organisation's business should be obtained as early as possible. All bankruptcies, corporate receiverships and liquidations in Scotland are registered on the Register of Insolvencies. Corporate liquidations are also advertised in the Edinburgh Gazette. In England, Wales and Northern Ireland all bankruptcies and liquidations are advertised as appropriate in the London or Belfast Gazettes. Receiverships are not so advertised, but notice of an appointment of a receiver of a company has to be filed with the Registrar of Companies.

Payments and claims

5. As a general rule, when an organisation learns of a bankruptcy etc it should stop all payments pending confirmation. It should then, in consultation with legal advisers, prepare a statement of amounts due to and from the organisation. Legal advice should be sought as soon as possible in respect of any relevant security held by organisations and on the status of any pre-existing debt recovery proceedings.

6. In each case of bankruptcy, liquidation or receivership a trustee, liquidator or receiver will, or may, be appointed as the representative responsible for the collection of monies due and the repayment of debt. A trustee/liquidator/receiver is required to write to (known) creditors of the individual/firm/company advising of their appointment and correspondence from a business that is subject to formal insolvency proceedings must indicate its status. It is essential for public sector organisations to ensure that any payment due by them is made only to the proper person, and that any claim by them is properly lodged. If an organisation inadvertently pays the wrong person it may fail to obtain a valid discharge for the payment and have to pay again. If it delays lodgement of a claim with the right party it may fail to recover the amount properly due.

Set Off

7. In any case where a public sector organisation is a debtor or creditor of a bankrupt or of a company in liquidation or receivership, it should investigate the need or possibility for set-off as described in the section on Overpayments. Cases involving more than one constituent part of the same public sector organisation should be handled jointly.

8. In Scotland, the balancing of accounts in bankruptcies rests on a common law principle which has been extended to apply to liquidations. In receiverships it may be taken that the general right of set-off under the common law applies. Under Scots law it is considered that set-off may first be effected against non-preferential debts. Set-off can raise difficult legal questions and legal advice should always be sought.

Contracts

9. If a public sector organisation learns of a bankruptcy etc affecting a person or body with which it has a contract, it has (under the normal form of contract) the right summarily to terminate the contract. Exercise of this right should therefore be considered since, if expedient, the terms of contract can be negotiated anew with the trustee/ liquidator/ receiver.

10. If the contract is not so terminated the public sector organisation remains bound by it. The trustee/ liquidator/ receiver, however, has no personal obligation to fulfil the contract. The organisation may therefore find that it is unable to enforce its rights under the contract and be left to claim as an unsecured creditor for any damage resulting from the non-fulfilment of the contract. Organisations should therefore take legal advice at an early stage.

Write-off

12. Any amounts to be written off as a result of bankruptcies etc will be subject to the guidance on Losses and Special Payments.

Page reviewed: March 2019