In Scotland, we recognise that a partnership is a separate legal entity and while partners have always been liable to the extent of their personal assets for partnership obligations, the normal stance is that someone who becomes a partner anticipates being able to share profits rather than face the prospect of dealing with losses. However, not all businesses run smoothly and financial challenges can arise.
Until this month, a partnership in financial difficulty that could not rely upon a partner, or partners, to introduce sufficient cash to pay debts faced the prospect of a formal insolvency procedure – trust deed or bankruptcy – which generally sounded the death knell for such business.
Further, the partners would often face personal bankruptcy with consequent inability to continue to act as a partner in a new business.
After due consultation, the Scottish government, through the Bankruptcy and Diligence Advice (Scotland) Act 2014, introduced the Debt Arrangement Scheme (DAS) to partnerships. Such legislation is welcome because it recognises that a business partnership can experience a severe financial difficulty, but it does not have to collapse and disappear.
A business DAS anticipates creating a Debt Payment Programme (DPP) which will be completed within a five-year period and thereby allow a viable business to deal with whatever financial difficulty has arisen.
A business DAS requires a partnership to seek advice from an Insolvency Practitioner (IP) who will assess the viability of the partnership and prepare a report which demonstrates that the business is viable either in its current form or with appropriate amendments.
A partnership subject to a business DAS must ensure that all assets are disclosed to the IP and non-trading assets that might accrue to the partnership cannot be sold during the period of the business DAS unless for the benefit of creditors.
As with all new legislation, there will be teething problems and common sense brought to bear in order to create a useful framework.
On the basis that the working group which produced the business DAS regulations includes representation from the Institute of Chartered Accountants of Scotland, Insolvency Practitioners Association, British Bankers Association and HMRC, one might suggest that the Scottish government are keen to make the regulations work.