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BUSINESS-RELATED BANKRUPTCIES UNDER THE BANKRUPTCY (SCOTLAND) ACT 1985 (AS AMENDED)- PHASE 1: SCOPING STUDY

5 Main Study - Methodologies

5.1 Introduction

5.1.1 In order to gather the information required by a main study, and to address its objectives (as described in Section 4), it is envisaged that the study would comprise seven main strands:

• a literature review, based on, but not limited to, the list of relevant references provided in the scoping study's Second Strand Working Paper (LR);
• a statistical data collection exercise to collect objective data on the incidence and causes of business-related bankruptcy, and alternatives to it (SD);
• questionnaire-based surveys, involving entrepreneurs and key groups of individuals affected by, and working with, bankruptcy, trust deeds or diligence, to collect both qualitative and quantitative information on the causes, processes and implications of sequestration and associated measures (QS);
• interview-based research with a selection of questionnaire respondents, to provide more in-depth information (IR);
• case study-based research, following through a number of selected bankruptcies, involving interviews with all the key players involved - to provide a greater understanding of the processes involved in bankruptcy, of the differences of perception between different key players, and the interactions between them (CS);
• review of sources of advice and support to businesses, and their applicability to businesses experiencing difficulty; assessment of their current services in relation to business needs and identification of potential development areas to serve business need better (AS);
• an action research study, to examine potential alternatives or diversions from the sequestration process (AR).

5.1.2 Table 5 (overleaf) illustrates how each of the suggested methodologies would contribute towards providing the information required by a main study.

Table 5. Contribution of different methodologies towards required information

5.2 Literature review

5.2.1 The scoping study has included a survey of the literature available on insolvency both in Scotland and elsewhere, and provides a starting point for a detailed literature review in a main study ²⁰.

5.2.2 The literature identified to date provides useful information on a number of key areas:

• the aims and objectives of bankruptcy law - the role and function of bankruptcy in society; bankruptcy in relation to other means of recovering debts;
• legislation - reviews of the current and past legislation on bankruptcy and debt recovery, both in Scotland and elsewhere; problems identified with existing legislation, and proposed reforms;
• data on the incidence of bankruptcy - analysis of data sources both in Scotland and elsewhere, comparisons, identification of gaps and discrepancies;
• case studies - of how businesses fail, of consumer and business bankruptcies; factors affecting progress towards bankruptcy;
• issues affecting business growth, failure, rescue and long-term survival; entrepreneurial activity; corporate insolvency legislation;
• money and debt management advice - sources of advice and support to businesses; details of their effectiveness.

5.2.3 The purpose of the literature review would be to contribute towards identifying the strengths and weaknesses of the current Scottish bankruptcy legislation. It would involve comparing the experience in Scotland with that of other jurisdictions, with different bankruptcy legislation, and different approaches to the management of business debt and business failure, identifying the strengths and weaknesses of each, and their applicability in Scotland. This may suggest alternative means of meeting the needs of creditors, reducing the incidence of business failure, and reducing the negative impact of bankruptcy on the individuals concerned.

5.3 Statistical data collection

5.3.1 There are two reasons behind the need for a statistical data collection exercise in a main study.

• Firstly, on a short-term basis, it would be necessary to gather together as much information as possible on the incidence and characteristics of bankruptcies - both consumer- and business-related. For practicality's sake, and to enable sufficient numbers to be collected in the timespan for the study, this data collection exercise would be partly retrospective - looking at records of past sequestrations to identify their characteristics and to examine how bankruptcies can best be classified in order to distinguish between business and consumer. In addition to the retrospective analysis, some research with current bankrupts would also be undertaken.
• Secondly, on a continuing basis, to design a statistical monitoring system to enable routine information on the incidence and nature of business-related bankruptcies to be collected.

Short term, detailed study

5.3.2 Two main approaches exist for the collection of retrospective data on business-related bankruptcies, these being analysis of the computerised Register of Insolvencies, and analysis of information in the individual bankruptcy files held at the Office of the Accountant in Bankruptcy. Using these two approaches it would be possible to make an accurate assessment of the number of bankruptcies which have involved businesses, during recent years, and of the nature of the debts involved in the bankruptcy, in terms of their balance between business and consumer debts. It would also be possible to compare the business-related bankruptcies with purely consumer bankruptcies in terms of the proportion of debtor and creditor petitions, the gender of the debtor, value of assets and liabilities, the return to creditors, and other significant factors. Analysis of this data would help to design the basis of the ongoing statistical recording system proposed for a main study, and to allow its continuation beyond completion.

5.3.3 For current bankruptcies, the approach would be based on research with recently bankrupt people themselves, including specific accountancy investigation of their business books, in cases where a business is involved. This investigation could focus on issues such as: the profitability of the business; market placement; the level of working capital, drawings, and bad debts; the quality of management and financial control; personal problems, and evidence for dishonesty/fraud. This additional research would enable identification of the root cause(s) of the bankruptcy, the extent of the debtor's responsibility, the outcome of bankruptcy for the business, and the viability of the business at the time of sequestration.

5.3.4 A number of additional options also exist for the collection of data from insolvency practitioners about the individual cases they are dealing with. One option would be to collect data about the realisation of debtors' assets, and particularly their home, in order to build up statistics about the number of evictions, voluntary sales, etc. A second option, would be to collect data about bankruptcies where offences have been suspected and/or prosecuted, and a third to collect data about the protected trust deeds entered into by trustees, their circumstances, and characteristics.

Continuing statistical data collection

5.3.5 The long-term approach to the creation of an easily administered statistical data collection system would be likely (at least at this stage) to be based on the inclusion of a number of additional questions in the Supplementary Questionnaire currently completed by trustees/agents about each individual bankruptcy. This additional information might be held in the computer-based register of bankruptcies, for later extraction of the statistical data, or input to a separate statistical system.

5.3.6 The purpose of the data collection would be to provide objective baseline data on the incidence of business-related bankruptcy and its various causes and outcomes. This data will be crucial to developing an understanding of the scale, and nature, of the problem being caused to Scottish enterprise by existing bankruptcy law. Analysis of the data would provide the background against which any possible changes to bankruptcy law should be developed, and their implications assessed. In addition, analysis of the data would enable development of a set of questions for permanent inclusion in the Supplementary Questionnaire, to enable on-going statistical monitoring of business-related bankruptcies.

5.4 Questionnaire surveys

5.4.1 During the scoping study, a range of issues has been identified about which more information would be required by a main study, including data for quantitative analysis. A number of questionnaire-based surveys would therefore be required in a main study, to gather information about the experiences and views of a statistically valid sample of relevant individuals. Groups to be covered by questionnaire surveys would include debtors, creditors, insolvency practitioners, solicitors, business people, and advisors - both business advisors and money advisors. The business people to be surveyed would include the full range, from those running new business start-ups, and successful mature businesses, to those experiencing varying degrees of debt problems, including diligence, and sequestration itself.

5.4.2 The sampling approach taken for each group covered by questionnaire surveys would be to draw a random sample from available registers, stratified by geographical location, and in some cases by additional factors (such as size of business, business sector, legal status of business, etc.). Although the detailed questionnaire design and content would be specifically tailored for each of the groups surveyed, as much as possible will be made common to all, to aid comparison of the results. The areas to be covered by the questionnaires would include:

• sources of information, advice and support to businesses in difficulty, and gaps in these;
• the causes of business-related debt and bankruptcy;
• business-related debt, consumer debt, and the relationship between the two;
• options for dealing with debt, how decisions are made about these;
• pathways that lead to bankruptcy;
• what can be done to tackle the causes of debt in order to avoid bankruptcy;
• the objectives underlying bankruptcy law, and the process of bankruptcy;
• the alternatives to sequestration;
• the relative efficacy of sequestration and of alternatives to it, in terms of benefits achieved for creditors, relief for the debtor, benefits to society as a whole, cost to the public purse, and preservation of enterprise;
• the impact of business failure and sequestration on the debtor;
• the impact of sequestration on start-up, growth and entrepreneurial activity;
• the secondary effects of bankruptcy;
• the objectives of the practitioners, advisors, officials, policy makers etc;
• the extent to which these objectives are currently fulfilled, and what the constraints on their fulfilment are.

5.4.3 The completed questionnaires would provide quantitative data on the experiences and views of people who have had involvement with bankruptcy, either personally or professionally. In addition, the completed questionnaires would help to identify cases for further, more detailed study, including through face-to-face interviews and using a full case study approach.

5.4.4 The data from the questionnaires would be compiled into an appropriate form of database, in anonymised form, to assist other, later, research.

5.5 Interview surveys

5.5.1 In-depth face-to-face interviews (or telephone interviews in some instances) would be necessary for following up the more subjective elements of the experiences of bankruptcy, the options open to creditors and debtors, and the possibilities for action to help businesses out of trouble. The people and/or organisations selected for interview would be drawn from those responding to the questionnaires, with the addition of other groups such as policy makers, business-related organisations, money advice organisations, organisations supporting ethnic minority groups in business, academics, credit agencies and credit rating organisations.

5.5.2 Interview design and content would be required to be different in each case, though consistent lines of questioning would be used whenever possible, to aid comparison of the results. The subjects to be examined during interviews would be the same as those covered by the questionnaires, but this methodology would enable a much more detailed in-depth coverage of the issues.

5.5.3 The results of each interview (with personal identification details removed) would be compiled into a suitable form of database for later analysis and in order to contribute to other research studies.

5.6 Case studies

5.6.1 When a bankruptcy occurs a number of different players are involved, of whom the debtor, the creditors and the trustee/agent are perhaps the most significant. The scoping study has found that the perceptions these key players have of the events leading up to, and following, sequestration are often markedly divergent. Debtors frequently feel that their creditors have treated them badly, while creditors have the same view of their debtors. Debtors may also feel that they have been treated unreasonably by their trustee, while trustees acknowledge that debtors feel this way, but suggest that this is due to the debtor's failure to accept responsibility for the situation they find themselves in. As part of a main study into business-related bankruptcy, it is proposed that adopting a case study approach could enable exploration of these different perspectives, with a view to better understanding them, how they arise, and how they can be reconciled.

5.6.2 The case study-based research would involve the selection of a small number of bankruptcies for in-depth study, including interviews with a range of key players who have been involved in the same bankruptcy case. Cases would be selected from completed questionnaires following initial interviews with debtors; the case studies would include interviews with key creditors, the trustee(s), and supervisory staff at the Office of the Accountant in Bankruptcy. Potentially, case studies could also include interviews with money advice workers, business counsellors, the debtor's accountant, creditors' solicitors, sheriff officers, court staff and the relevant member of the judiciary. Interviews would focus on the detail of the particular case, in order to build up a complete picture of the case, and the divergent views of those involved in it.

5.6.3 Adoption of the case study approach would enable investigation of the decisions made by both debtors and creditors, in the lead up to bankruptcy, and the consequences of these - both intended and unintended. In addition, it would enable investigation of how trustees administer cases, and the consequences of their actions - both intended, and unintended - for debtors. The purpose of the case study approach would thus be to develop a more detailed understanding of the processes involved in bankruptcy, including both the lead up to bankruptcy and the process of sequestration itself.

5.6.4 Each case study would be written up in full (with all personal identification details removed) and would be available to future research studies, to provide material for training Insolvency Practitioners, debt advice professionals and others involved in the administration of bankruptcy or in business advice and guidance.

5.7 Review of sources of advice and support

5.7.1 The scoping study suggests that the key to reducing business-related bankruptcies in the future will be the availability and provision at an early stage of appropriate advice and support to businesses in difficulty. It also suggests that suitable sources of advice are not always readily available to businesses, though there is an increasing awareness of the need for it. The current focus of business advice and support agencies is primarily on business start-up and growth, less on routinely trading businesses, and even less on businesses in difficulty.

5.7.2 As part of the research in a main study, we are proposing a systematic identification and review of the services available to businesses in difficulty, and how relevant these are to the needs of businesses as currently identified.

5.8 Action research

5.8.1 Research undertaken during the scoping study has suggested that, in many cases, it may be possible for bankruptcy to be averted, if the debtor receives appropriate business advice and support at the right time. One aim of the data collection element of a main study would be clearly to establish the proportion of bankruptcies in which this is the case. It is proposed that a main study should also include an action research project, actually to trial the provision of appropriate business support, and to assess its efficacy in promoting business survival and averting bankruptcy.

5.8.2 The action research approach was first developed after the 2 ^nd World War, and has since been used extensively within complex social situations, though especially within education. The design of an action research project is typically iterative, with the different parts of the process being cyclically repeated, these being:

• exploration - of the problem and development of understanding;
• planning - the action to be taken;
• implementation - of the planned action or intervention;
• observation - including monitoring the intervention and its effects;
• reflection - consideration of the effects of the intervention.

5.8.3 Within a main study it is proposed that one or more schemes for providing highly focused support to businesses experiencing difficulty should be tried. The effects of such schemes would then be monitored, and evaluation undertaken of how they are contributing towards both increasing business survival rates, and averting bankruptcy. Evaluation would include consideration of the practicality of rolling out the schemes on a national basis, the costs of doing so, and the benefits to be gained. The purpose of including action research within a main study would therefore be to establish clearly the benefits of providing appropriate support to businesses in difficulty.

5.8.4 An initial exploration of the issue has already taken place during the scoping study, and a number of suggestions for possible action research projects have emerged, including:

• well business clinic - a source of information and advice to be offered to businesses trading normally, or those in some trouble at an early stage - often before the business itself knows it is in trouble. Such a clinic could offer a free check-up and diagnostic information on businesses, and sound professional advice for those in, or heading for, trouble;
• key performance indicators - publication of a set of key performance indicators that might help to highlight to businesses that they may be heading for trouble;
• debtline - an anonymous telephone helpline to provide information and advice to businesses in difficulty, to offer professional advice, and encourage management action to be taken on debt before the burden becomes insuperable;
• intensive care unit - aimed at rescuing businesses that are in severe difficulty and where the owner, partner or director is heading for sequestration. This service could offer an independent assessment of the viability of a business, and - if considered worth rescuing - provision of the support and resources required to attempt rescue;
• recovery and rehabilitation - aimed at assisting bankrupt people return to business, this service would include finding practical ways of tackling the barriers bankrupt people encounter, as well as providing the advice and support they need.

5.8.5 The first stage of an action research project to take place during a main study would be detailed planning of the action to be taken, and of its evaluation.

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