Scottish Court of Session Decisions

[1] This is a petition by the Advocate General for Scotland, on behalf of the Commissioners of Customs & Excise, seeking the sequestration of the respondent, Abdelhaq Zaoui, trading as Fisherman's Arms at premises in Scalloway, Shetland.

[2] On 26 October 1999, the petitioner obtained decree against the respondent for payment of £121,511, in respect of unpaid Value Added Tax. A charge for payment was served on 22 November 1999, and the days of charge expired without payment. The respondent thus became apparently insolvent, and the petitioner, as creditor, presented the present petition for sequestration.

[3] Section 12(2) of the Bankruptcy (Scotland) Act 1985 provides that where a petition for sequestration of a debtor's estate is presented by a creditor, the court to which the petition is presented shall grant warrant to cite the debtor to appear before it on such date as shall be specified in the warrant, being a date not less than 6 nor more than 14 days after the date of citation, "to show cause why sequestration should not be awarded". In accordance with the terms of that subsection, on 31 January 2000, the Sheriff granted warrant to cite the respondent, and appointed him, if so advised, to appear at the Sheriff Court at Lerwick on 7 March 2000, to show cause why sequestration should not be awarded. Before I turn to the proceedings of 7 March, and the subsequent history of matters, it is convenient to set out the relevant provisions of subsections (3) and (3A) of section 12 of the 1985 Act, as amended by the Bankruptcy (Scotland) Act 1993, section 4.

[4] Section 12(3) provides that where, on a petition for sequestration presented by a creditor, the court is satisfied of a number of matters set out as heads (a) to (e), "it shall, subject to subsection (3A) below, award sequestration forthwith." It is not suggested that the court was not, or could not be, satisfied as to any of heads (a) to (e), and the court was accordingly required by statute to "award sequestration forthwith", subject only to the provisions of subsection (3A) of section 12.

[5] Section 12(3A) provides as follows:

There is no suggestion that cause was shown why sequestration could not competently be awarded, and head (a) of subsection (3A) is therefore not in point. And in relation to head (b) of section 12(3A), there is no question of the debtor having forthwith paid or satisfied, or having produced written evidence of the payment or satisfaction of, the debts referred to at heads (i) and (ii). The issue between the parties relates to the question of "sufficient security", and whether in the circumstances the provisions of subsection (3A)(b) provided a basis for the court not awarding sequestration forthwith, in terms of subsection (3).

[6] On 7 March 2000, when the respondent appeared at the Sheriff Court "to show cause why sequestration should not be awarded", it appears from the Sheriff's Note that the respondent on 3 March had "placed proposals for sufficient security before the petitioner's principal agents". The offer had been rejected "as a matter of policy", but the court was informed that it still stood, and that the respondent was in a position to deliver such a standard security over his heritage which would amply provide sufficient security in terms of section 12(3A)(b). It is clear that there was no pre-existing security: what was on offer was an entirely new security. The security which was offered was a standard security over two public houses, a hotel and if necessary the respondent's home. It was said that the Bank of Scotland had security over all the heritage, and the Shetland Development Trust held securities over the three commercial properties. A statement was produced, prepared by the respondent's accountant, showing various figures which are set out in the Sheriff's Note. These showed a figure of more than £320,000 equity, available to the respondent and permitting him to grant a sufficient security in favour of the petitioners, covering their whole debt of £120,000. Various other valuations, balances and projections produced by the accountant were provided to the court. And the Sheriff narrates that the respondent's solicitor said that applying these projections it should be possible for the respondent to pay off all his arrears and his current indebtedness to the petitioner's "probably within three months, possibly within six months but certainly within nine." A signed standard security was present in court and available instanter for acceptance or scrutiny.

[7] I shall return to the legal issues. What happened procedurally was that on 7 March the Sheriff found it necessary to continue the hearing "to a Diet of Proof" and assigned 10 March as a diet therefor. On 10 March, various documents were placed before the Sheriff, although no oral evidence was apparently led, and submissions were made on behalf of both parties. The Sheriff made avizandum, and on 5 April he issued an interlocutor allowing Answers to be lodged within six weeks, with a further fortnight for adjustments, fixing a procedural hearing for 13 April in order to fix a subsequent date for Proof. On 13 April he assigned a diet for Proof for 27 June 2000. However, the petitioner appealed, with leave, against the interlocutor of 5 April, to the Sheriff Principal. After various procedure, the Sheriff Principal, by interlocutor of 28 June 2000, refused the appeal, and adhered to the Sheriff's interlocutor of 5 April, remitting the cause to the Sheriff "to proceed as accords".

[8] The question of what security may suffice to prevent the award of sequestration "forthwith" has been considered in a number of cases. The Sheriff in his Note refers to Royal Bank of Scotland plc v. Forbes 1988 S.L.T. 73, National Westminster Bank plc v. Ellrick & Company 1991 S.L.T. 709 and Bank of Scotland v. Mackay 1991 S.L.T. 163. The Sheriff Principal refers also to Drybrough & Company Limited v. Brown 1989 S.C.L.R. 279 (Sh. Ct.) and Clydesdale Bank plc v. Grantly Developments, now reported at 2000 S.C.L.R. 771.

[9] Of these cases, the first four arose before (and constitute an element in the background of) the amendments to section 12 introduced by the 1993 Act. The new subsections (3) and (3A) replaced the original subsection (3). While the overall structure is altered, and the essential provisions are expressed in somewhat different terms, the essence of the provisions remains the same, with only one alteration which I think requires comment. Provided that the court is satisfied as to certain prerequisites, the general provision is that it shall award sequestration forthwith. Both before and after amendment, there are two exceptions to that general requirement, which are set out as heads (a) and (b) of the original section 3, and of the new section (3A). Head (a) relating to competency is unaltered. Head (b) is altered by expanding the expression "gives sufficient security" to the expression "gives or shows that there is sufficient security". The introduction of the words "or shows that there is" means that it is now clear that regard may be had to pre-existing securities, and not merely to "new" securities given by the debtor when called upon to show cause why sequestration should not be awarded. In the four cases mentioned (all in the Outer House or Sheriff Court) differences of opinion had emerged as to whether the word "gives" was sufficient to enable a debtor to rely upon pre-existing securities. The 1993 amendment makes it clear that he can now do so; and it is (perhaps fortunately) correspondingly unnecessary to resolve the differences of opinion which existed in relation to the unamended provision. In any event, in the present case, no issue arises as to pre-existing securities. Since what is offered is a "new" security, the problem is one which arose in relation to the original subsection (3), and has not been removed by the 1993 amendments.

[10] That problem may be summarised thus. The general requirement is that the court award sequestration "forthwith". Yet there is an exception to that requirement, and sequestration is not to be awarded, if the debtor "gives or shows that there is sufficient security" for the payment of certain specified debts. It will be a question of fact whether that exception applies. (Even ignoring any more difficult or complex questions, what is the amount of the relevant debts, and how, and at what figure, is one to put a value upon the security, in deciding whether it is sufficient security for the payment of those debts?) Having regard to the fact that these are summary proceedings, and to the use of the word "forthwith" at the end of subsection (3), and again in subsection (3A)(b), when and how is the court to resolve such issues of fact? The position of the respondent, upheld by the Sheriff and the Sheriff Principal, is that this may take some time, and that proof may be required. The position of the petitioner and appellant is that such an answer is unsound in principle, and inconsistent with the word "forthwith": only if the sufficiency of the security is acknowledged, or established forthwith to the satisfaction of the court, will it be competent for the court not to award sequestration immediately. Against this obviously over-simplified indication of the issue between the parties, I turn to their more detailed submissions.

[11] On behalf of the petitioner and appellant, counsel moved us to allow the appeal, recall the interlocutors of the Sheriff Principal and the Sheriff, and remit the matter to the Sheriff, to sequestrate the respondent. Counsel noted that in section 29 of the Bankruptcy (Scotland) Act 1913, the court was required to award sequestration if the appearing debtor did not "instantly pay the debt or debts in respect of which he was made bankrupt, or produce written evidence of the same being paid or satisfied". (He was likewise required to pay or satisfy, or produce evidence in relation to debts due to appearing and concurring creditors). There was no express provision for security as an alternative to payment or satisfaction. It was only by section 12 of the 1985 Act that this express alternative was introduced. In the 1914 edition of Goudy, Law of Bankruptcy at pages 137 to 138, the view was expressed that "it is thought that either consignation or caution would be held to be equivalent to satisfaction in the sense of the Act of 1913. If this view be sound, it would follow that where the debt of the petitioning creditor is disputed, and the debtor consigns or gives security for the whole amount of it, along with interest and the expenses of the application, and no other creditor appears in the process, the court will dismiss the petition". Since these views depended upon a construction of the word "satisfaction" and since only consignation and caution were mentioned as examples of such "satisfaction", it was submitted that the only forms of security contemplated by Goudy were of a kind which could immediately be identified as sufficient to meet the debts in question and immediately available to bring about payment, once any dispute as to the debt was resolved. It was further to be noted that consignation of funds, or appropriate caution, could be "given" by a debtor without any acceptance or other participation by the creditor: there was no indication that Goudy contemplated forms of security where the nature or value of the security might require to be negotiated with the creditor, and accepted by him. Goudy's views had been followed: there were subsequent cases in which consignation had resulted in dismissal: Laird v. Scott 1914 1 S.L.T. 368 and McCumiskey Brothers v. MacLaine 1922 S.L.T. 104.

[12] The Scottish Law Commission's Report on Bankruptcy (Scot. Law Com. No. 68) lay behind the 1985 Act, and incorporated a draft Bill which, on this matter, was identical with the eventual statutory provisions of section 12(3). There was, perhaps surprisingly, no express mention of the introduction into the statute of express reference to security. It was, however, expressly stated at para. 7.16 of the Report that the Commission proposed no departure in principle from the provisions of section 29 of the 1913 Act, which they quoted. And the reason for their adopting that position was to be found in the preceding sentences of the paragraph:

Counsel submitted that the Law Commission Report was consistent with the passage in Goudy, and that in construing both the original terms of section 12(3) of the 1985 Act and their 1993 replacements, one should abide by the historic approach and principles, and reject any construction which increased the risk that issues of fact would be contested, with consequential delay and expense.

[13] Turning to the terms of section 12, counsel submitted that there was in fact no need, or indeed scope, for any such construction. The word "security" was of course itself a wide one. It was not suggested that it was limited to consignation and caution, in itself. And where a pre-existing security was relied upon it might well be a standard security, already accepted by the creditor and affording him security for payment of his debt, even if there were issues as to its sufficiency for such payment. Even in regard to a pre-existing security, such issues as to sufficiency (whether as a matter of simple value, or in wider terms) must be capable of being resolved "forthwith". The Sheriff had seen the word "forthwith", where it occurs in section (3A)(b), as relating to the requirements of payment or satisfaction, but not to the words "gives or shows that there is sufficient security". But that could not be right. One was concerned with a time when, in terms of section 12(2), the debtor had to "show cause why sequestration should not be awarded". It was then that the court was in general required to award sequestration forthwith. And since the opening words of subsection (3A)(b) were "The debtor forthwith..." there was no reason for regarding the word "forthwith" as relating only to the earlier items in the list of alternative acts which followed. And there was no rational basis upon which a debtor who was paying his debt should be required to do so forthwith, whereas he could put matters off by giving security at some later date. There might already have been payment or satisfaction. Or there might already be sufficient security. If such matters could be demonstrated forthwith, sequestration might be averted. In the absence of such prior facts, any payment or satisfaction, or sufficient security, must be effected forthwith.

[14] Counsel for the petitioner acknowledged that where one was concerned with a pre-existing security, it might be one which could not be realised forthwith. But at least the creditor had that security, and the ranking which it would carry. And it was submitted that as Lord Nimmo Smith had said in Clydesdale Bank plc v. Grantly Developments at page 777G, even such a pre-existing security should only be regarded as sufficient if capable of realisation forthwith, resulting in payment of the whole debt without undue delay. The existence of such a standard security did not entitle a debtor to have further time before the security was realised. In the absence of any pre-existing security, it had to be borne in mind that a significant lapse of time would have occurred, and in this case had occurred, since the debt was originally due and unpaid. Against that background of failure to pay, the word "forthwith" was entirely understandable: this was meant to be the end of the road. Counsel referred to the pre-1993 cases, and the differing observations in those cases as to what scope, if any, there might be for factual enquiry if pre-existing securities could be relied upon. But he submitted that the doubts and difficulties which could arise even in relation to known and existing securities, confirmed the need for any "new" security to be truly "given" and not merely offered. Only consignation and caution appeared to be possibilities. Any other form of "offered" security would raise questions as to when it would be effective or might be capable of realisation, and at what value, with associated questions as to whether the creditor could reasonably be expected to accept it. That was not the sort of procedure envisaged by the Act. It was not for a court to wonder whether an offered security would eventually turn out to be effective or sufficient, or to give further time for the proposed security actually to be created and recorded. The creditor was entitled to his award of sequestration against the debtor unless the debtor could avert that by immediate action of one of the described kinds. Further or future actions were not in point. Even if there was any scope for factual enquiry, there was no scope for future ascertainment of facts as a basis for future creation of a security.

[15] So far as the present case was concerned, counsel for the petitioner submitted that the creditor was not merely being left with no security at or after 7 March 2000. The proposed or offered security was insufficient on any view. It would be a third ranking security. There were complex issues as to valuation of heritable property. The sequestration date was January, and later debts would apparently not be covered. Even if the speculative assertions as to when the debtor might be able to pay his debts were sound, there was no incentive for him to make payments to account. Unless and until a trustee was appointed, the creditor would not even be able to oblige the debtor to carry on trading: there could be a sudden drop in the value of any security subjects. Any call-up of the security would be likely in any event to induce sequestration at the hands of some other creditor. And the whole concept of a new standard security being created, only to be called up immediately if the creditor were to obtain payment, was absurd. Sequestration was the method by which the law protected a creditor in such circumstances. He was entitled to leave court, on 7 March 2000, with an award of sequestration against the debtor, unless the debtor had given him his money or a sure equivalent.

[16] On behalf of the respondent, counsel asked us to refuse the appeal, and adhere to the interlocutor of the Sheriff Principal. In relation to the 1993 amendments to the 1985 Act, he submitted that there was a slight change of emphasis: "unless" in the original subsection (3) was less strong than "shall not be awarded...if" in subsection (3A). But counsel accepted that the 1993 amendments did not appear to be intended to make any change in principle. The added words "or shows that there is" represented an escape route which had previously been at least in doubt. And while it was easy to see why the legislature had thought it appropriate to add these words, it was accepted that they did not alter the original principle, that there should be objective and readily ascertainable criteria for an award of sequestration. It was accepted that sequestration should normally be obtained without the risk of issues of fact being contested. The pre-1993 decisions in which it had been held that pre-existing securities could provide an escape route, even before the amendment, nonetheless illustrated the caution with which the court would consider any suggestion that factual enquiry was necessary. But it was submitted that before or after the 1993 amendments, when a new standard security was tendered by a debtor, with information, valuations and projections which showed that it was of sufficient value to meet the relevant debts, further factual enquiry would in general be unnecessary or quite straightforward. These particular prior cases demonstrated that the criteria for an award of sequestration were indeed "readily ascertainable", but that they might sometimes, if not "normally", involve a need for issues of fact to be resolved.

[17] Counsel's primary position was that a debtor who tenders a signed standard security at the bar is indeed giving security at that time. The petitioner's argument that acceptance would be necessary was unjust in principle, since there was no reason for allowing a creditor to reject sufficient security. The issue which might require enquiry was as to the sufficiency of any security thus tendered and "given". But where the information before the court indicated that the security was of a value far in excess of the debt, as here, the sufficiency of the given security would not normally require such investigation. It might be that a creditor could put the debtor to proof of such sufficiency; but it could not be that the creditor could simply refuse the security, if it was plainly ample and easily realisable. It was for the court, not the creditor, to decide for the purposes of the statute whether sufficient security was being given. For its purposes, in a summary matter, the court would normally be able to decide this issue on information before it at the time. But it remained a matter for the sheriff. If in a particular case, as here, a sheriff considered that further enquiry was needed, an appeal court should not interfere with that discretion. Subsection (3A) was binding on a Sheriff: he could not legally award sequestration if the debtor gave sufficient security for payment of the relevant debts. An appeal court should only interfere if it could be said that there was no basis for any reasonable Sheriff to hold that the defender was giving sufficient security.

[18] It was submitted that the Ellrick and Forbes cases showed how in certain cases it would be clear that enquiry was inappropriate, while in others it might have to be contemplated and even allowed. Some problems which might arise with old pre-existing securities would not arise where, as here, the offered security was a fresh one. And it was accepted that in a case like Grantly Developments, where the security subjects were evidently incomplete buildings, it would be understandable to hold that the requirements for this type of escape route had not been met. But on its facts, this case was a stronger one than Forbes. It could not be said that the Sheriff was not entitled to take the view which he did, as to the need for enquiry. It was clear that the debtor had gone to considerable lengths to produce security, and satisfy the Sheriff as to a wide range of material matters. What had been said as to the time-scale within which the debtor might pay the debts, if there was no sequestration, was a general indication as to how the respondent might "trade himself out" of debt. With sufficient security, the creditor might wish to allow that to happen, rather than realise his security. But it was accepted that that would remain a matter for the creditor. It was in the nature of sufficient security that a creditor might wish to hold it, rather than realise it immediately. The fact that it could not perhaps be realised immediately was not critical. Nor was the existence of preferred creditors of any real significance, provided that the security subjects were of sufficient value to leave an ample balance after those prior creditors were satisfied. In so far as these matters of fact might not be regarded as plain at the time, the Sheriff was entitled to look into them by Proof.

[19] I am not persuaded that the submissions for the respondent are sound, nor that the decisions of the Sheriff and Sheriff Principal can stand. The Sheriff did not consider that the word "forthwith" in subsection (3A)(b) governed the phrase "or gives or shows that there is sufficient security...". I am unable to agree. For the reasons advanced by counsel for the petitioner, I consider it plain that the word "forthwith" governs all the succeeding verbs at head (b), and not merely those closest to it. The Sheriff's further statement that he saw no reason why the sufficiency of the security had to be considered there and then depends, as he acknowledges, upon the view that the phrase was not governed by the word "forthwith". On that basis, he reaches conclusions as to the subjunctive mood of the verbs in the phrase, and concludes that the sufficiency of the security might be established at a future time. Differing as I do from the Sheriff on the fundamental premise, I am not persuaded that there is scope for future ascertainment of sufficiency in this way. The sufficiency of any newly given security like the sufficiency of any pre-existing security, must in my opinion be shown "forthwith". We are not here concerned with pre-existing securities, as I was in the case of Forbes. But I think that what I said in that case suggests too wide a possibility of delay in ascertaining facts. I am now satisfied that the sufficiency of any security must be demonstrated to the satisfaction of the court "forthwith", whatever the scope of that word may be. I think it can be read as having somewhat more scope than the word "immediately", or such expressions as "here and now" or "there and then". But I cannot envisage it as covering more than a matter of days. I am in no doubt that the submissions advanced on behalf of the petitioner, in relation to the history of the legislation, and the principles involved, are sound, and that once a debtor appears before the court "to show cause why sequestration should not be awarded" the statute requires him to do so at that hearing, although perhaps with some brief deferment or continuation.

[20] More fundamentally, and apart from issues of quantification, I am satisfied that the offering of security is not the giving of security. The issue is not merely one of acceptance: consigning or giving caution can be effected without acceptance. But a standard security does not become a security on being tendered, and while counsel for the respondent insisted that it was "potentially a security", that merely confirms that no security actually exists until further steps have been taken and the deed recorded. If a standard security were tendered and accepted, and perhaps even if it were tendered and the creditor wished some brief time to consider acceptance it may be that within the scope of the word "forthwith" recording might be achieved. I should wish to reserve my opinion upon that matter, and generally it appears to me that the scope of the word may depend upon the circumstances and what remains to be done. But in a case such as the present, where quite a number of matters are the subject of assertions by the debtor, and where there are inevitable uncertainties as to the course which events would take if sequestration were to be refused, I can see no basis upon which it could be regarded as unreasonable for the creditor to regard the offer of security as unacceptable. Equally, while it is not entirely clear to me what the proposed Proof would cover, it appears that during the whole period up to and including Proof, and any further time that it might take the Sheriff to reach conclusions of fact, there would be no security in existence, and it would be wholly uncertain (as a matter dependent upon Proof) whether the Sheriff would ever be satisfied that there was sufficient security. In my opinion, that bears no relationship to what is envisaged by the statute, and cannot, upon any basis, meet the requirement of sufficient security being given forthwith.

[21] I have not found it necessary to deal specifically with the matters discussed by the Sheriff Principal: in essence, I have reflected these in what I have said as to the Sheriff's grounds for his decision, or the propositions advanced on behalf of the respondent. In the whole circumstances I am satisfied that the requirements of section 12(3A)(b) are not met, and that the Sheriff was obliged to award sequestration in terms of section 12(3). In these circumstances, I would recall the Sheriff's interlocutor of 5 April 2000, and the subsequent interlocutors by the Sheriff and the Sheriff Principal. I would remit the matter to the Sheriff, with a direction to award sequestration.

[1] I agree entirely with the Opinion of your Lordship in the chair, subject only to one minor qualification noted below. I agree in particular that the scope of the word "forthwith" in subsection (3A)(b) of the amended section 12 of the Bankruptcy (Scotland) Act 1985 plainly governs all the succeeding verbs in head (b) and not merely those closest to it, with the result that required sufficiency of security must be shown by way of demonstration to the satisfaction of the court "forthwith". I agree with what your Lordship says with regard to the meaning of the word "forthwith" in this context and in particular as to reservations of opinion on that matter, subject only to additional reservation as to whether there could be very exceptional circumstances where "forthwith" exceeded "a matter of days".

[1] I have read the Opinion of your Lordship in the chair in this appeal. For the reasons given therein I would also allow the appeal, recall the relevant interlocutors and remit to the Sheriff, with a direction to award sequestration. There is nothing further I can usefully add.