This Comment piece was written by our Senior Manager Ian Brown and published in Business Insider on Friday 13th February 2015. 

Most recent official figures published by the Accountant in Bankruptcy suggest the level of both corporate and personal bankruptcies in Scotland have fallen back to levels last seen before the recession.

The Accountant in Bankruptcy (AiB) figures, covering the three months to December 31, revealed the number of Scottish registered companies becoming insolvent or entering receivership had fallen for the second consecutive quarter – this time down 7.7 per cent – and the total in the three months to December was down almost 16 per cent year on year – a welcome sign of a strengthening Scottish economy.

With corporate insolvencies, it is all too easy to forget the cost is not just measured in pounds and pence; the fallout inevitably leads to long-serving employees losing their jobs, suppliers and creditors being left high and dry and HM Revenue and Customs (HMRC) ultimately losing out on tax revenue.

A client recently reported difficulties with his tax bill which stemmed from an urgent demand issued by HMRC.

The scenario was all too obvious.

They assumed, given the circumstances, the only solution was insolvency, which would have seen 50 people lose their jobs.

What saved them, and the business, was a Debt Arrangement Scheme (DAS), a repayment system which has grown in stature in recent years and has proven, in many cases, highly effective in rescuing businesses struggling with short-term cash flow issues.

DAS was originally for individuals struggling with debt and is not formal insolvency but a voluntary arrangement with creditors.

An increase in consumer debt prompted the Scottish Government to establish the scheme back in 2004 as a way to allow individuals to repay their debts through a Debt Payment Programme and avoid court action.

The Scottish Government recognised the DAS models success in tackling consumer debt could also be applied to help businesses struggling with debt issues.

I represented the Insolvency Practitioners Association in the Scottish Government’s Business DAS working group and helped structure what is now a Government-backed, formally recognised debt support tool for a sector which is paramount to the economy and local community.

Business DAS has now been included in legislation under The Debt Arrangement Scheme (Scotland) Amendment Regulations 2014.

Business DAS allows debts, such as VAT and PAYE arrears, as well as debts to other creditors, to be repaid while a business maintains the on-going credit facilities which are often essential for survival.

Once a scheme is approved, creditors must agree to freeze interest and charges and cannot take further action to enforce payment of the debt as long as monthly payments are maintained.

If a creditor objects to a proposal then the fair and reasonable test is applied.

It is carried out by the Accountant in Bankruptcy as DAS Administrator.

If they decide that the case is fair and reasonable they can overturn the objection of the creditor.

This is based on specific criteria, for example; the period over which the DAS will operate, the total amount of the debt, the method and frequency of payments, and the percentage of the debt which the objecting creditor holds, any comments by the money adviser and any other information which the AiB deems relevant.

The criteria for the new scheme was discussed at the Business DAS working group which also had representatives from the AiB and HMRC.

It was agreed that legal persons and other entities could apply.

A legal person means a partnership, a limited partnership within the meaning of The Limited Partnerships Act 1907, or a corporate body other than a company registered under The Companies Act 2006.

It also applies to a Trust, charity or an incorporated body of persons.

Unlike a personal DAS, all cases must be completed within five years and payment breaks while allowed, cannot be added on to the term, but, if taken, would have to be made up by a future increase in payments to ensure completion within five years.

A qualified insolvency practitioner must sign off, based on the information supplied, that the scheme is viable and review it every 12 months.

If they are not happy at any of these intervals then the agreement can be revoked.

This gives the creditors more confidence that it’s not all going to fall apart. It also gives the debtor more confidence.

DAS also protects assets, including the family home.

When creditors threaten to raise legal proceedings to secure payment, a business owner has two options: try to save the business while attempting to settle outstanding accounts or allow the business to fail by implementing an exit strategy that minimises the financial consequences.

The Business DAS allows small businesses to fulfil their obligations to creditors and continue to trade: a win-win scenario for the economy.

Insolvency is, in most cases, not the best option for either the tax man, other creditors or the business as the debt is rarely repaid in full.

The more damaging aspect of the insolvency process is the loss of businesses, and many of those lost during what was a lengthy economic recession had been established for many years, and in some family-owned businesses, generations of development was lost.

They know little else but their chosen field, so the loss of their business can also equate as a loss of sector talent.

The latest figures suggest that the number of bankruptcies is in decline and I have no doubt that the Business DAS can help drive that number down further, to the benefit of our economy and the people of Scotland.