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How does sequestration affect being a company director?

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Reviewed 4th November 2021

What happens to business owners in Scotland if they’re bankrupt?

Sequestration is the legal term used for bankruptcy in Scotland. It affects company directors in several ways, including the right to hold various types of office, and restrictions on borrowing.

You may take the decision to voluntarily enter sequestration, but sometimes a creditor can force you into bankruptcy – if you’ve provided a personal guarantee for business borrowing, for example.

A liquidator can also enforce sequestration under certain circumstances if a company is insolvent. This sometimes happens when an overdrawn Director’s Loan Account cannot be brought into line, and the liquidator pursues the director for repayment.

What is sequestration?

Sequestration involves handing over your personal assets to a Trustee. It typically lasts for 12 months, but there may be a requirement to continue contributing to your debts for four years.

Entering sequestration is commonly seen as a last resort, and it does have serious consequences if you’re an existing company director or are planning to become a director at some point.

So what are some of the effects of sequestration on company directors?

A ban on holding office as a limited company director

When you enter sequestration you’re banned from being a company director, or being involved in the formation, management or promotion of a limited company. Additionally, you cannot manage a business under a different name than the one you registered for as a bankrupt.

This means you’ll have to resign as a director, having first notified other directors of your situation. If you’re the sole director you must appoint a new director before entering sequestration, or allow the company to be dissolved on your resignation.

You are allowed to work as an employee of the company but must be very careful not to become involved in its management or promotion, as mentioned earlier. You may be reappointed as a director after you’ve been discharged from bankruptcy.

Failing to comply with these requirements can lead to an extension of your sequestration order for up to 15 years, and even criminal charges in some instances. You can also work as a sole trader but the business must carry your own name, or that by which you were known when you were sequestrated.

Ban on holding other offices and employments

In addition to the ban on being a company director, you won’t be able to hold other offices such as Member of the Scottish Parliament (MSP), school governor or treasurer. There may also be restrictions on other employments should you seek another job whilst being sequestrated.

Some employers such as those in the legal and financial sectors, for example, don’t allow members of staff who have been made bankrupt or who are in severe financial difficulty to work for them. 

Restriction on borrowing

There are restrictions on your ability to borrow money when you’ve been made bankrupt. Essentially, you have to disclose to any lender that you’ve been sequestrated if you want to borrow more than £500.

Adverse credit rating

Notice of your sequestration will remain on your credit file for six years after you’ve been discharged. This negatively affects your ability to obtain loans and credit in the future. If you’re successful in securing lending, it’s likely to attract less favourable terms and conditions than would otherwise be the case – a higher interest rate, for example.

How long does sequestration last?

Sequestration typically lasts for 12 months, after which time you may be discharged. Depending on your personal financial situation, however, there might be a requirement to contribute towards your debts for four years.

Your sequestration will also be publicly viewable, which could have an effect on you as a former company director. All sequestrations are recorded in the Scottish Register of Insolvencies for up to three years.

This means if you’re reinstated as a company director after being discharged from bankruptcy, the register will still note the date and details of your sequestration order for this period of time.

For more information on how sequestration could affect you as a company director, please get in touch with Scotland Debt Solutions. We help people in Scotland to deal with debt in the most effective way possible, and can provide trustworthy unbiased advice. Our team offers free, same-day consultations, and works from offices around Scotland.

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