Notes for Guidance - Bankruptcy (Scotland) Act 2016 (as amended)

Section 109(5) of the Act allows a trustee to carry on or close down the debtor’s business.

However, the trustee is required to consult with and comply with general or specific directions from creditors, the Accountant and the sheriff following an application by the commissioners. 

The trustee must consider the financial benefits to the estate of any actions they may take over the debtor’s business, under section 50(9) of the Act.

Since it will be probably be the failure of the business which has led to the debtor’s bankruptcy, the business will be by definition unprofitable, and the trustee should consider if it is in the interests of the creditors to continue trading.

Nevertheless, it is recognised circumstances may arise when continuing to trade is either unavoidable, because of the nature of the business, or is judged likely to be ultimately beneficial to the estate. Another circumstance which might lead to a decision to trade-on, is when the debtor is not insolvent and a petition for recall is deemed likely to succeed. Finally a decision to trade-on might be a matter of necessity, if the business involves a livestock enterprise or a nursing home for example.

There are accordingly three basic options in a trading case:

• to close down the business and realise the assets
• to trade to a close, for example, when the stock is perishable or when it is judged a better realisation will be achieved if the assets are sold in the normal course of business than if they were separately disposed of
• to trade-on pending a sale of the business as a going concern, or its reversion to the debtor

If the decision is to trade to a close, or to trade-on to disposal, it will clearly be in the best interest of the trustee that such period of trading is the minimum time possible. In any circumstances, the continuation of an already failed business is a highly speculative venture and should a trustee wish to do so, they must be clear in their own mind that it is their personal responsibility.

The trustee, in such circumstances, is in a delicate position because they will incur personal liability in respect of contracts adopted or made by them, though they will have a right of recourse against the estate (but in no circumstances from public funds).

However unfortunate it may be for a trustee who makes that decision and subsequently incurs losses for which they are personally liable, whether through initial misinformation or whatever, that is a risk they take, even though they do so in furtherance of their statutory duties and obligations.

Although not legally binding it is nevertheless of interest to note a decision of the HMRC Commissioners which found a trustee personally responsible for PAYE liabilities incurred during a sustained period of trading on. The trustee’s defence that it was the debtor’s responsibility was not accepted.