BUSINESS-RELATED BANKRUPTCIES UNDER THE BANKRUPTCY (SCOTLAND) ACT 1985 (AS AMENDED)- PHASE 1: SCOPING STUDY
4 Main Study - Objectives
4.1 Introduction
4.1.1 The driving force behind such research into business-related bankruptcy would be to identify ways of helping the business start-up and survival rates in Scotland, and to encourage entrepreneurial activity in the business community:
- by reducing the likelihood of business failure and bankruptcy occurring;
- by encouraging (genuine) business people who have gone bankrupt to recover quickly, and to use their experience of failure to help build successful businesses;
- by reducing the negative impact that the fear of bankruptcy may have on entrepreneurial activity.
4.1.2 The aim of the study would be to advise Ministers on:
- ways of reducing business failure (and equivalently, encouraging the development and survival of strong businesses);
- recommendations for establishing routine statistical monitoring systems for business-related bankruptcy and its effects;
- recommendations for change to the bankruptcy legislation, including potentially the need for different treatment to apply to business and consumer bankrupts, or according to the degree of responsibility for the bankruptcy attributable to the debtor.
4.2 Addressing the objectives
4.2.1 In order to address these objectives and aims, a main study would need to focus on a range of issues. These would include:
- the development of an understanding of the incidence and characteristics of all bankruptcies, and of how to distinguish between business-related and consumer bankruptcies;
- the identification of how support could be provided more effectively at an early stage to businesses in difficulty, in order to reduce the incidence of business failure and the need for sequestration;
- the analysis of business-related bankruptcies according to the causes leading to them;
- the establishment of baseline figures on the incidence of business-related bankruptcy, to enable monitoring of trends in the future;
- the development of a better understanding of the pathways to bankruptcy in the business situation;
- examination of the effectiveness of sequestration against its key objectives;
- identification of whether there are alternatives to bankruptcy which could achieve the same overall objectives more effectively, perhaps for specific case types;
- assessment of the impact of bankruptcy on the individuals involved - the bankrupts themselves, their families, their creditors, professional practitioners, and the wider business community;
- the identification of ways in which bankruptcy law and practice could be altered, in order to result in better business sustainability, higher business start-up rates, and a reduced negative impact on genuine business people;
- learning from the best practices in other jurisdictions, and the identification of the extent to which they could work in Scotland.
4.3 Information to be gathered
4.3.1 In order to focus on these issues, the research in a main study would have to gather a range of information about:
- sources of business support and advice;
- the incidence and characteristics of business-related bankruptcies;
- the effectiveness of sequestration and of alternatives to sequestration;
- the impact and effects of business-related bankruptcy;
- how current bankruptcy legislation works in practice, and potential changes to existing bankruptcy law.
Sources of business support
4.3.2 The information required would include:
- sources of information, advice and support available to businesses in difficulty, and gaps in this provision;
- methods for detecting businesses in difficulty at an early stage, in order to provide the support needed;
- methods for encouraging businesses in difficulty to seek the support available;
- the most effective ways of providing advice and support to businesses in difficulty, and the extent to which it can prevent the need for sequestration in practice.
Number and characteristics of business-related bankruptcies
4.3.3 The information required would include:
- the numbers and characteristics of all bankruptcies, from which to examine the characteristics of those which are business-related;
- the causes and types of business-related bankruptcy, including the nature of the debts, the root cause of the debts and the degree of responsibility of the debtor;
- the numbers and characteristics of bankruptcies which involve apparent dishonesty;
- the outcomes for businesses involved in bankruptcy, and possible alternative outcomes, including an objective assessment of the viability of the business had sequestration not occurred;
- the distribution of business-related bankruptcies according to the various identifiable causes and types;
- the different pathways to bankruptcy, through looking at issues such as: how do people end up bankrupt? What factors influence the outcome? What factors influence the decision-making process along the way?
Effectiveness of sequestration
4.3.4 The information required would include:
- the effectiveness of sequestration in achieving its objectives, and those of the organisations/individuals who petition for sequestration, including as a means of debt recovery, and as a means of control over debt in business;
- how sequestration relates to alternatives (diligence, protected trust deeds) in terms of effects, costs, amount recovered by creditors and long term impact;
- how sequestration and other alternatives are viewed by businesses in general, and by those who have experienced sequestration;
- how the different players view the options at each stage leading to sequestration, and hence what other alternatives could be offered.
The impact and effects of business-related bankruptcy
4.3.5 The information required would include:
- how the possibility of bankruptcy effects those starting up in business or contemplating the prospect;
- how bankruptcy affect individuals: the immediate, short and long term effects; the impact of bankruptcy on the future business activity of those who experience it;
- the secondary effects of bankruptcy, which may be more to do with attitudes and practice, rather than with the law itself (for example, the reluctance of suppliers to offer credit to bankrupts);
- the different perceptions of the bankruptcy process of those involved, including debtors, creditors, insolvency practitioners, and the relations between these different perceptions.
Current bankruptcy legislation and potential changes
4.3.6 The information required would include:
- what can be done to reduce the negative impact of business-related bankruptcy on business start-up and legitimate entrepreneurial activity (if one exists);
- what can be done to reduce the negative impact of experiencing significant debt problems, and failing in business;
- what can be done, in relation to bankruptcy legislation, and in other respects, to improve business survival rates in Scotland;
- what can be learned from other jurisdictions.