Wednesday, 20 June 2012

Using the Debt Arrangement Scheme ("DAS") to assist sole traders and partnerships

The Debt Arrangement Scheme (‘DAS’) is a Scottish Government scheme that was introduced in 2004 to aid and assist those struggling to pay their debts.

The regulations have been updated a couple of times since the introduction and awareness of the scheme is slowly growing with numbers increasing year on year.   Once approved creditors have to agree to freeze interest and charges and cannot take further action to enforce payment of the debt as long as monthly payments are maintained. It also protects assets.

While it’s mostly been used to help individuals repay debts, at MLM Solutions we have the expertise in successfully utilising the Debt Arrangement Scheme (‘DAS’) for the benefit of sole traders AND partnerships.   As such, VAT and PAYE arrears and other debts can be transferred to the DAS whilst maintaining their on-going creditors to keep their business running.

The process, while fairly straight forward, is not without its challenges.   After the available disposable income and length of time for the DAS is established, proposals are submitted to all disclosed creditors. The creditors then have 21 days to respond and can either consent, object, or if they don’t respond in 21 days, it’s taken as deemed consent. If all creditors agree to the proposal the DAS will be approved and the monthly payment from the debtor distributed to all creditors.  

If one or more of the creditors object to the proposal and the DAS is set to run for less than ten years, the case can be submitted to the Accountant in Bankruptcy as DAS Administrator for a ‘Fair and Reasonable’ test.   Under the ‘Fair and Reasonable’ test the Accountant in Bankruptcy use set criteria, as follows:-

  • the total amount of debt;  the period over which a DAS will operate; 
  • the amount (if any) by which it appears to the DAS Administrator, on the basis of such information as the creditors and the debtor have provided, that the value of any land owned by the debtor exceeds so much of the total amount of debt, as is secured by way of a standard security over any interest in that land; 
  • the method and frequency of payments under a DAS; 
  • any other factors considered relevant.

Once the DAS is approved, as long as the debtor maintains the monthly payments, the debt will be cleared in the set time period.   If the DAS is NOT approved then creditors may continue to enforce further action against any debtor failing to meet their obligations to that creditor.

If an existing debt is accidentally omitted from the DAS at the outset, or if the client’s circumstances change significantly, a variation on the DAS can be applied for. This allows the DAS to be extended or reduced in order to incorporate the further debt.   If a client has a drop in income of 50% or more, they may apply for a payment holiday, for up to six months, which will then be added on to the term of the DAS.

So, all in all, is a DAS a good vehicle to help small businesses?

In my opinion and from my own professional experience... YES! As a qualified expert, we have a team to manage all the processes and procedural requirements on your behalf and this vehicle can help sole traders or partnerships to maintain their business and repay their debts. Each individual DAS is reviewed on an annual basis to allow for any changes to your own circumstances or to account for any legislative updates.

Examples of 2 small businesses that I have recently assisted and where a DAS has been effectively applied, to ensure minimum disruption and continuity of trading, are illustrated in the case studies below:

Case Study 1
Partnership - 4 Family members
1. Multiple Debts Including Large HMRC debt of £80,000
2. Commercial Property - value approximately £750,000 with mortgage of £500,000
3. House - Value approximately £220,000 with mortgage of £200,000
Total debts of £160,000
Following a meeting with the clients to conduct a thorough fact find, a DAS was decided upon as a suitable option to allow them to:
1. repay their debts,
2. keep their business running and
3. protect their assets.
The case was proposed to all creditors, but rejected by HMRC.
The case was then submitted to the Accountant in Bankruptcy for the ‘Fair and Reasonable' test, along with a comparison to show that if the clients were sequestrated, as opposed to being allowed to proceed with the DAS, then all creditors would receive a very low dividend. In the DAS they would receive approximately 90% of the debt due.
Outcome: Based on the information submitted the AiB ruled that the DAS should be approved and the clients are now continuing to trade their business whilst paying monthly to their DAS. This also saved 10 jobs.

Case Study 2
Sole Trader running a company established in 1950
Employs 60 staff
1. Assets in Land and vehicles of approximately £300,000
2. Multiple debts including larger HMRC debt £350,000
Following a thorough fact find after meeting with the client, a DAS was deemed as the most suitable option to allow the client to:
1. repay the debts,
2. keep the business running and
3. protect the assets.
The case was proposed to all creditors, but rejected by HMRC.
Similarly, the case was then submitted to the Accountant in Bankruptcy for the ‘Fair and Reasonable' test along with a comparison of sequestration against a DAS and other relevant information in support of the application.
Based on the information submitted, the AiB ruled that the DAS should be approved and the client is now continuing to run the company and paying monthly to the DAS. This also saved 60 jobs and avoided any impact on the local economy through job losses and the demise of a local service.
For confidentiality reasons, the identity of the Companies are protected and remain anonymous.
Applications must reside in Scotland and can only apply through an approved money adviser.

Ian Brown is an approved money adviser and DAS Manager at MLM Solutions, who has extensive training and experience in financial services and compliance.  

He is available to discuss any questions you may have on 0845 051 1616, if you are considering using a DAS to help find a solution for your business.

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