Are you a property factor? Are you owed over £5,000 in factoring debt from an owner? If so, a petition for sequestration may be a way to recover these debts. Sequestration, otherwise known as bankruptcy, is a means for debt recovery, where the debt is £5,000 or more, and is commonly identified as the process where a debtor is deemed insolvent. Sequestration is often identified as the most drastic form of debt recovery that a creditor may wish to take against a debtor.

If an owner is incapable of settling their factoring debts, their property’s factor may seek to recover the debt by petitioning the Sheriff Court to sequestrate the debtor. A creditor should be aware that if they have pursued any other means of diligence (for example, if there is an active earnings arrestment in place with a debtor’s employer), these will cease when the debtor is sequestrated. Therefore, it is often advised that a creditor should only consider sequestration as a last resort for recovering debt.

A petition for sequestration can be effective in two separate ways:

• A debtor who has the means to settle an outstanding debt and has simply disregarded any requests for payment from the creditor may be prompted to settle the debt upon service of the sequestration petition. This can be particularly useful in terms of recovering large factoring debts or fees for major works where owners are simply refusing to pay their debts. The weight that a petition carries may urge owners in this category to take action to settle their debts.
• Alternatively, a debtor who is simply unable to meet the debt following repeated demands by a creditor will have their debts “written off”. Ultimately, sequestration can be viewed as a means for debt relief.

Before a creditor presents a petition for a debtor’s sequestration, a creditor must be able to show the debtor’s “apparent insolvency”. Apparent insolvency is the basis for sequestrating a debtor by showing the court that the debtor cannot pay their debts as they fall due. Apparent insolvency can be demonstrated in two separate ways:

• Following service of a charge for payment a creditor can prove that a debtor is unable to pay their debts if the time limit of a charge for payment on an extract decree has expired, which is 14 days, and payment remains outstanding.
• Alternatively, a “statutory demand” can be served on a debtor. A statutory demand is a warning that states if the debtor does not make payment of the debt in full or agree another arrangement with a creditor within 21 days of the demand being served, then the creditor may proceed to sequestrate the debtor.

Once the court has granted a creditor’s sequestration petition, the creditor will nominate an insolvency practitioner or the Accountancy in Bankruptcy to be the trustee of the debtor’s estate. The trustee is mainly responsible for recovering, managing and realising the debtor’s estate. Thereafter, the trustee will seek to distribute the debtor’s estate to the creditors.

Registered social landlords and other property factors should be aware that unsecured debts are ranked lower in the defined hierarchy of creditors. Therefore, a debtor’s estate may not be of great enough value for these unsecured debts to be repaid.

The sheriff court fee for lodging a petition for sequestration is currently £124.

For more information or advice, contact our team.