Scottish Court of Session Decisions

At advising, on 12th February 1993, the opinion of the court was delivered by the Lord Justice-Clerk (Ross).

OPINION OF THE COURT—The estates of the defender were sequestrated as at 18th January 1989. The pursuers are creditors on his estate, and were in fact the petitioning creditors in relation to the application for sequestration.

Section 54 of the Bankruptcy (Scotland) Act 1985 contains provisions for the automatic discharge of a debtor on the expiry of three years from the date of sequestration. The section also contains provisions enabling the permanent trustee or any creditor to apply to the sheriff for a deferment of the debtor's discharge.

The pursuers made timeous application to the sheriff for deferment of the defender's discharge, and after sundry procedure the sheriff on 30th January 1992 granted the application and deferred the defender's discharge from sequestration for a period of two years from 18th January 1992. Against that interlocutor of the sheriff the defender has now appealed.

Detailed amended grounds of appeal have been put forward on behalf of the defender, but in essence two principal grounds of appeal have been advanced. The first ground of appeal is that the sheriff erred in law in not holding that the application made to him was incompetent. The second ground of appeal is to the effect that if the application was competent, the sheriff had erred in exercising his discretion when dealing with the application in that he had failed to take account of various material considerations and had failed to carry out a proper balancing exercise. It was also submitted for the defender that if the sheriff had erred in exercising his discretion, and the issue of whether the application should be granted was at large for this court, this court should refuse the application for deferment.

Section 54 of the Bankruptcy (Scotland) Act 1985 is one of three sections headed "Discharge of debtor". Section 54 itself is prefixed with the words "Automatic discharge after three years". The section is in the following terms:

"54—(1) Subject to the following provisions of this section the debtor shall be discharged on the expiry of three years from the date of sequestration.

"

(2) Every debtor who has been discharged under or by virtue of this section or sec. 75 (4) of this Act may apply to the Accountant in Bankruptcy for a certificate that he has been so discharged; and the Accountant in Bankruptcy, if satisfied of such discharge, shall grant a certificate of discharge in the prescribed form. "

"(3) The permanent trustee or any creditor may, not later than two years and nine months after the date of sequestration, apply to the sheriff for a deferment of the debtor's discharge by virtue of subsection (1) above. "

"(4) On an application being made to him under subsection (3) above, the sheriff shall order—(a) the applicant to serve the application on the debtor and (if he is not himself the applicant and is not discharged) the permanent trustee; and (b) the debtor to lodge in court a declaration—(i) that he has made a full and fair surrender of his estate and a full disclosure of all claims which he is entitled to make against other persons; and (ii) that he has delivered to the interim or permanent trustee every document under his control relating to his estate or his business or financial affairs; and, if the debtor fails to lodge such a declaration in court within 14 days of being required to do so, the sheriff shall defer his discharge without a hearing for a period not exceeding two years. "

"(5) If the debtor lodges the declaration in court within the said period of 14 days, the sheriff shall—(a) fix a date for a hearing not earlier than 28 days after the date of the lodging of the declaration; and (b) order the applicant to notify the debtor and the permanent trustee or (if he has been discharged) the Accountant in Bankruptcy of the date of the hearing; and the permanent trustee or (if he has been discharged) the Accountant in Bankruptcy shall, not later than seven days before the date fixed under paragraph (a) above, lodge in court a report upon the debtor's assets and liabilities, his financial and business affairs and his conduct in relation thereto and upon the sequestration and his conduct in the course of it. "

"(6) After considering at the hearing any representations made by the applicant, the debtor or any creditor, the sheriff shall make an order either deferring the discharge for such period not exceeding two years as he thinks appropriate or dismissing the application: Provided that the applicant or the debtor may appeal against an order under this subsection within 14 days after it is made .... "

"(9) The permanent trustee or any creditor may, not later than three months before the end of a period of deferment, apply to the sheriff for a further deferment of the discharge; and subsections (4) to (8) above and this subsection shall apply in relation to that further deferment."

As already observed the date of sequestration in the present case was 18th January 1989. An application for deferment was timeously made, and the interlocutors show that a hearing on the application was fixed for 18th December 1991 which was well within the time limit of three years. The interlocutors also show however that due to lack of court time, the court on 18th December 1991 ex proprio motu discharged the diet of hearing fixed for that date and assigned 30th January 1992 as a fresh diet of hearing. That date was, of course, more than three years after the date of sequestration. The issue before the sheriff was whether an order for deferment required to be issued by the court before the lapse of three years from the date of sequestration, or whether it was competent for the court to deal with such an application after the three year period had expired. On this issue the sheriff held that since the statutory provisions for deferment had ben invoked timeously, the discharge provided for in sec. 54 (1) did not take effect until the deferment procedure had been concluded.

In presenting this appeal, counsel for the defender maintained that the sheriff had erred in law in so concluding. He maintained that in the absence of a successful application for an interim deferment under sec. 63 (1) of the Bankruptcy (Scotland) Act 1985, the defender was automatically discharged on 18th January 1992, and that thereafter it was not competent for the sheriff to entertain and deal with the application for deferment. He emphasised that the provisions of sec. 54 required a considerable degree of expedition, and that the hearing on the application required to take place prior to the expiry of the three year period. He maintained that if it appeared that the application was not to be disposed of within the three year period, it was necessary, if automatic discharge was to be avoided, to make application to the sheriff for an interim order suspending ad interim the discharge. In the present case, he submitted that when the court on 18th December 1991 assigned a new diet of 30th January 1992 which was more than three years after the date of sequestration, it was incumbent upon the pursuers to seek an interim order from the sheriff suspending automatic discharge, otherwise the automatic discharge took effect.

Counsel for the defender stressed that there was no express provision in the statute to the effect that the lodging of an application would suspend automatic discharge. He further submitted that it was not for the court ex proprio motu to make any interim order, but that it was up to the parties to seek any order required from the court. He further submitted that since what the sheriff was empowered to do was to make an order "deferring the discharge", that meant that such an order could only be made if the three year period had not expired, and that there was no suggestion that the sheriff could make an order deferring a discharge retrospectively. He also contended that his argument was supported by a consideration of the provisions of sec. 32 of the Act of 1985. In particular he pointed out, under reference to sec. 32 (7), that a debtor required immediately to notify the permanent trustee of any assets acquired by him. He maintained that it was wrong that a debtor who ought to have been discharged, would be required to pay to the permanent trustee property which he had acquired by inheritance after the date when he ought to have been discharged merely because of delays on the part of either the court or the applicant in proceeding with the application for deferment. He maintained that the clear purpose of the provisions was to promote means whereby those under disability of bankruptcy should be able to obtain their discharge. That purpose could not be avoided unless some judicial step (such as an application for an interim order) was made before the date when automatic discharge was due to occur.

Counsel for the pursuers on the other hand maintained that there was no lacuna in the legislation, nor was the section badly drafted. There was no need for an express provision to the effect that deferment would be suspended in circumstances such as had arisen in the present case. Counsel emphasised that sec. 54 (1) opens with the words "Subject to the following provisions of this section". He maintained that these words showed that discharge was not automatic but was subject to an application for deferment being made, and the exercise by the court of its power to order deferment. From the time limits referred to in sec. 54, it might appear that in the ordinary case the whole procedure, including the hearing at which the order applied for could be made, would take place before the expiry of the three year period, but it was clear from the provisions of the Act that this would not always be so. For example sec. 54 (6) contains provisions enabling the unsuccessful party to appeal against an order made by the sheriff, and if an appeal were to be taken, it might well be that before that appeal would be disposed of the three year period would have expired. The provisions relating to appeal were part of the provisions to which automatic discharge under sec. 54 (1) was subject. Counsel also contended that sec. 32 did not produce any anomaly. Any payments made to a trustee in respect of, for example, estate inherited after the expiry of the three year period would be held by the trustee in accordance with the rules contained in the statute. In such a case, if at the end of the day and after the expiry of the three year period, it was decided that deferment should not be granted, the money would then be repayable to the debtor.

In our opinion the submissions of counsel for the pursuers are soundly based and are to be preferred. We regard the opening words of sec. 54 (1) as of prime importance. Despite the heading of the section and the reference to "automatic discharge", discharge is not automatic but is subject to an application for deferment being made and that application being disposed of by the court in accordance with the provisions of the section. It is difficult to see what other content the opening words of sec. 54 (1) could have. We are unable to read sec. 54 as meaning that automatic discharge is to take place unless any application for deferment has been finally disposed of before the expiry of the three year period. Having regard to pressure on court time, we recognise that it may not always be possible for applications for deferment to be dealt with before the three year period has expired. This will be so particularly where an appeal has been taken in terms of sec. 54 (6). We are not persuaded that Parliament can have intended automatic discharge to take place where an application has been timeously made for deferment, and has not been finally disposed of before the three year period has elapsed.

In submitting that where deferment was sought and could not be obtained before the expiry of the three year period, it was necessary for an application to be made for interim suspension of the automatic discharge, counsel for the defender relied upon a recent case in Paisley sheriff court—Slater Hogg & Howison v. Frew .In the note annexed to his interlocutor Sheriff Principal Hay, under reference to Partisan v. Halliday 1991 S.L.T. 645, agreed that it is competent in proceedings under sec. 54 to make an interim order deferring discharge. In his note the sheriff principal also stated:

"The sheriff was not invited to make an interim order suspending the operation of sec. 54 (1) pending resolution of the application under sec. 54 (3). In my opinion, absent such an interim order, sec. 54 (1) operated automatically so as to discharge the debtor as at 14th March 1992."

Slater Hogg & Howison v. Frew was quite different on its facts to the present case because the application for deferment in that case had not been lodged timeously, and the sheriff principal's observations must all be read in that context. We do not find it necessary to consider whether an interim order deferring discharge is competent, and, if so, necessary in all cases. In the present case, we are satisfied that there was no need for an interim order deferring discharge, but that on a proper construction of sec. 54 (1) discharge is not automatic, but is subject to an application for deferment being made and the court pronouncing an order disposing of the application. Where an application for deferment has been timeously made and the three year period has subsequently expired, discharge will not take place automatically until the court has pronounced an order in terms of the subsequent subsections of sec. 54. It follows that the sheriff was well founded in concluding that the present application was competent.

Counsel for the defender maintained that even if the application were held to be competent, the sheriff had failed to exercise his discretion properly in that he had failed to take into account certain matters placed before him. In particular counsel maintained that the sheriff had failed to take into account that the pursuers had delayed unduly in prosecuting the three actions for recovery or possession which are referred to in Art. 2 of the condescendence. The defender contended that he was fully justified in defending these various actions, but he maintained that the fact that it had taken three years for these actions to come to debate showed that the pursuers had delayed unduly in proceeding with the actions. He referred to the interlocutors in the case. Having studied these interlocutors, we are quite satisfied that there is no reason to think that the pursuers did delay unduly. The interlocutors to which we were referred show that the cause was tabled on 27th September 1989. On 22nd November 1989 on the motion of the third and fourth defenders the action was sisted for legal aid. On 21st November 1990 the sist was recalled on the pursuers' motion. Any delay in the third and fourth defenders obtaining legal aid can hardly be attributed to the pursuers. The interlocutors show that on 23rd January 1991 the pursuers sought to have the record closed, but that the third and fifth defenders succeeded in persuading the sheriff to continue the cause on the adjustment roll. On 20th March 1991 the record was closed on the pursuers' motion, and a debate was fixed for 23rd May 1991. On that date the diet of debate was discharged on the motion of the first defender. The case was continued to the procedure roll of 19th June 1991 but on that date the sheriff ex proprio motu continued the cause again until 26th June 1991. On that date the record was amended in terms of a minute of amendment for the third defender, and a diet of debate was fixed for 21st August 1991. Subsequently on the motion of the first and sixth defenders and of consent of the pursuers and other parties that diet was discharged and a new diet was fixed for 26th September 1991. In these circumstances we are not persuaded that the pursuers "had gone about seeking possession of the security subjects in a manner which was more lengthy than necessary".

Counsel for the defender also made the point that in terms of sec. 39 (4) (c) (ii) the permanent trustee could have taken steps to sell the heritable subjects. We are not persuaded that this is so. The power conferred on the permanent trustee by that subsection would only arise if the pursuers had unduly delayed in proceeding with the sale, and we are not persuaded that there was any such undue delay on the part of the pursuers.

Counsel also maintained that the sheriff had failed to take into account the prejudice suffered by the defender as a result of not being automatically discharged. He contended that the clear policy of the legislation was to fix a period after which, irrespective of action on his part, a debtor would normally be given a discharge. If the pursuer was not allowed the benefit of the automatic discharge provided for by Parliament, he would still remain under the disabilities of being a bankrupt. Thus, for example, he would still be under restrictions on obtaining credit, and would be disabled from holding office as a director of a company.

Having read the sheriff's note, we are not persuaded that the sheriff has left such matters out of account. He applied his mind to the question of whether it was appropriate to grant the application. It was represented to the sheriff that since 18th January 1992, the defender had entered into contracts, opened new bank accounts and taken other steps upon the view that he was free from such disabilities. In these circumstances, we are satisfied that the sheriff must have been fully aware that if deferment were granted the defender would remain under the disabilities which apply to any bankrupt, and we are not persuaded that there was any failure on the part of the sheriff to take these matters into account.

Under reference to G. v. G. [1985] 1 WLR 647 counsel for the defender also contended that what the sheriff required to do was to carry out a balancing exercise, and he maintained that the sheriff had failed to carry out such a balancing exercise because he had had regard to one issue only, namely, the fact that the issue relating to the security subjects had not been resolved, and that he had given insufficient weight to the various matters to which we have already referred. Having studied the sheriff's note we are not persuaded that these criticisms are sound. Admittedly the sheriff has not listed all the factors to which he attached weight, but the sheriff does make clear which factors influenced him. He clearly took the view that the defender had not co-operated with the permanent trustee and indeed had obstructed realisation of the heritable property; he also had regard to the fact that if the defender was discharged at the present time there was a risk that the pursuers might be prejudiced. The sheriff's attention was drawn to the terms of sec. 55 (1) of the Act of 1985 which is in the following terms:

"55.—(1) Subject to subsection (2) below, on the debtor's discharge under section 54 of this Act, the debtor shall be discharged within the United Kingdom of all debts and obligations contracted by him, or for which he was liable, at the date of sequestration."

The sheriff noted that it was at least arguable that if the defender were to be discharged before the issues relating to the heritable subjects had been determined, the result might be that he was discharged of debts for which the heritable security was granted, and that the defender might be in a position to maintain that his debts having been discharged, the heritable security fell and he had no obligation at all to the pursuers. In this connection counsel for the pursuers referred to an article by Professor McBryde on "The Discharge of a Debtor and Securities", 1991 S.L.T. (News) 195.

In our opinion the sheriff was fully entitled to regard the foregoing matters as material. As already explained we are satisfied that he clearly was aware of the disabilities from which the defender would suffer so long as he remained bankrupt, and it is obvious that the sheriff must have had regard to that.

In all the circumstances there is no basis upon which this court could hold that the sheriff had erred in reaching his decision. He is not shown to have failed to take account of any material considerations, nor could this court hold that his decision was plainly wrong. We are accordingly satisfied that this court would not be entitled to interfere with his decision. We would only add that even if we had thought that there was any validity in the criticisms made, and that the issue was accordingly at large for this court, we would have arrived at the same decision as the sheriff for the same reasons that he has given. In these circumstances, we shall refuse the appeal and affirm the interlocutor of the sheriff of 30th January 1992.