Scottish Sheriff Court Decisions

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Cite as: [2003] ScotSC 53, 2004 SCLR 319

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SHERIFFDOM OF TAYSIDE CENTRAL AND FIFE
A298/01

JUDGMENT OF SHERIFF PRINCIPAL

R A DUNLOP QC

in the cause

D D McGRUTHER, as Permanent Trustee on the Sequestrated estate of M J S WALTON

Pursuer and Respondent

against

MRS PATRICIA WALTON

Defender and Appellant

__________________

Act: Ms O'Brien, QC instructed by Jardines, Solicitors, Edinburgh

Alt: Mr Cowie, Advocate, instructed by Biggart Baillie, Solicitors, Glasgow

PERTH, 31 October 2003. The Sheriff Principal, having resumed consideration of the cause, refuses the appeal and adheres to the sheriff's interlocutor of 24 January 2003 complained of; finds the defender and appellant liable to the pursuer and respondent in the expenses of the appeal; allows an account thereof to be given in and remits the same when lodged to the auditor of court to tax and report.

NOTE:

[1] In this action the pursuer is the permanent trustee on the sequestrated estate of M J S Walton ("the bankrupt"). The date of sequestration was 10 March 2001. The action was brought against the bankrupt's wife seeking declarator that a gift of shares made by the bankrupt to the defender on 12 May 2000 was a gratuitous alienation in terms of Section 34 of the Bankruptcy (Scotland) Act 1985. The pursuer also sought restoration of the shares to the bankrupt estate failing which payment of their value.

[2] Section 34 of the Bankruptcy (Scotland) Act 1985 (hereinafter referred to as "the 1985 Act") entitles the permanent trustee to challenge a gratuitous alienation if made not earlier than five years before the date of sequestration. There was no dispute that the provisions of section 34(1), (2) and (3) were satisfied and that the gift of shares by the bankrupt to his wife on 12 May 2000 was liable to be caught by the provisions of section 34 unless the defender established the defence set out in section 34(4)(a). Section 34(4)(a) provides as follows:

"On a challenge being brought under subsection (1) above, the court shall grant decree of reduction or for such restoration of property to the debtor's estate or other redress as may be appropriate, but the court shall not grant such a decree if the person seeking to uphold the alienation establishes -

that immediately, or at any other time, after the alienation the debtor's assets were greater than his liabilities; ..."

[3] Following a proof, the sheriff was satisfied that the defence set out in section 34(4)(a) had not been made out and by his interlocutor of 24 January 2003 he found and declared that the gift of shares made on 12 May 2000 by Michael Walton to the defender was a gratuitous alienation and found the defender liable to the pursuer for the payment of a sum of money representing their value. It is against that interlocutor that the defender now appeals.

[4] The whole focus of the appeal was the meaning of section 34(4)(a) and in particular the meaning of "assets". The specific issue that arose was whether a number of pension policies comprised part of the bankrupt's "assets" immediately after the alienation of the shares. Although this subsection provides that a defender may establish that at any other time after the alienation the debtor's assets were greater than his liabilities, counsel for the appellant made it clear that the defender only sought to establish that that was the position immediately after the alienation and the evidence had been directed solely to show the position at 12 May 2000.

[5] In terms of finding in fact 25 the sheriff found it established that on 12 May 2000 the total fund value of the pension policies was £523,879 and the total transfer value about £507,000. He also found that, as the bankrupt was 55 years of age, he would have been able to elect to realise part of the benefits of these policies and in particular would have been able to realise 25% of the latter figure - approximately £126,000. He also found as a fact however that the bankrupt had not in fact elected to do so. He took the view that the value of the pension policies did not fall within the meaning of "assets" in the context of section 34(4)(a), since they were not available to meet the bankrupt's liabilities.

[6] In its essentials the position of the appellant is that the full fund value of the policies should have been included in the balance sheet of the defender's assets and liabilities as at 12 May 2000 and had the sheriff done so he would have found as a fact that the bankrupt's assets were greater than his liabilities. The competing position adopted by the respondent was to leave the pensions out of account in their entirety. In the course of the appeal there was a discussion about whether there was an intermediate position which treated the figure of £126,000 differently. Whether that approach is valid or not however, it was accepted by counsel for the appellant that it was necessary for success in the appeal for her to show that the entire fund value should have been included as an asset, since the inclusion of only 25% would not have been sufficient to produce a surplus of assets over liabilities.

Submissions for appellant

[7] Counsel for the appellant in large measure repeated the submissions advanced before the sheriff. She drew attention to the absence of any definition of "asset" in the 1985 Act. She referred to an excerpt from Hansard (1985 Volume 83 - 22 July 1985) which dealt with the Government's position in relation to what is now section 34 when the bill was passing through Parliament. It was clear from that excerpt that the position of the Solicitor-General at that time was that section 34 was dealing with the same concept of "absolute insolvency" as that concept had been developed under the pre- 1985 law. Counsel adopted that position.

[8] By way of comparison she referred to the Insolvency Act 1986, in which the equivalent provision under English law referred to "property", which was defined in very broad terms in section 436. She also referred to the Stair Encyclopaedia Volume 18 paragraph 13 which treated pension rights as heritable incorporeal property and submitted that prima facie something that is "property" can properly be described as an asset. Her contention was that, at the simplest level, if a pension is heritable incorporeal property it is an asset and prima facie falls within section 34(4)(a) of the 1985 Act unless restricted by the terms of that section.

[9] She then went on to examine what the law was before 1985 and referred to Bell's Commentaries Volume 2 at pages 171, 180 and 181. She drew particular attention to Part III entitled "Question of solvency" and to the statement that, "wherever the debtor is insolvent at the time of the challenge, there is a legal presumption of insolvency also at the date of the deed granted without value to a conjunct or confident person and that by contrast, the deed will be completely supported by a proof that the granter was solvent at the time of making it."

[10] Detailed attention was then given to the immediately following passage, which is in these terms:

"1. It has been held sufficient if the debtor has at the time of the deed a visible estate, although ex eventu he should prove insolvent. The subsequent depression of the funds, or the fall of markets for land or goods, will therefore afford a good answer on the question of insolvency, where, on a fair reckoning of the estate as at the date of the deed, the debtor was solvent.

2. No rights which are merely in spe (as expectations of succession) can be taken into account in reckoning solvency or insolvency, however immediate the succession may seem to be, and although ex eventu the debtor has actually succeeded, unless by such succession the debtor has been restored to solvency. But although, perhaps, strictly following out the principle, the same rule should hold as to rights actually vested, but of which the continuance depends on a contingency, this does not appear to be the opinion of the court; and a liferent interest, the interest of an heir of entail in possession, etc. are allowed to be reckoned in computing solvency."

[11] There is further elaboration of the latter statement in note 2, which is in these terms:

"There is a distinction between those rights when considered relatively to the question whether the debtor is solvent, and when they are to be viewed as claims to be made on a bankrupt estate. As rights to be enforced, liferents, annuities, etc. may be valued, and a claim for that value entered; but in reckoning the funds of a debtor in a question of solvency, nothing ought properly to be taken in computo which is not liable to the demands and diligence of the creditors, or which is not actually brought into a shape tangible by them; for a debtor seems not entitled to exhaust by donations his actual property, and leave the contingent to answer his debts. If the possibility of sale at market is to be the test, then the survivance of an annuity, or even the immediate expectancy of a succession, may be sold, or by insurance made valuable. This sort of argument was not listened to in Lord Elibank's case."

[12] Counsel acknowledged that the reference to Lord Elibank's case appears to be a reference to the case of Selkrig v Murray mentioned in note 1 on the same page, but as Sheriff Principal Reid pointed out in Taylor v Russo 1977 SLT (Sh. Ct.) 60 the reference is apparently erroneous. Sheriff Principal Reid had been unable to discover the decision to which reference was being made and accordingly there was no assistance to be derived from it other than the learned author's account of it.

[13] In this case counsel for the appellant submitted that, in the main body of the text, Bell has reported the view of the court with which he plainly did not agree, the contrary argument being set out in the note. She submitted that a pension was analogous to a liferent and the claims of an heir of entail and that the court's view, as narrated by Bell, should be followed. This supported the view that, while one discounts from "the visible estate" rights which have not vested, nevertheless one should take into account rights which have vested albeit on a contingency.

[14] Counsel for the appellant resisted the notion that only those assets which were liquid should be computed amongst the assets available to meet the demands of creditors. The question is whether the debtor was in possession of assets which were realisable at the time of the bankruptcy. In Taylor v Russo the Sheriff Principal had been prepared to look at future payments and if that approach is correct there is no reason in principle to exclude the right to future payments from a pension fund. Counsel also drew attention to the fact that pensions are assets in the context of a divorce and that it would be anomalous if a pension was included as an asset for that purpose but discounted for the purposes of bankruptcy. Finally reference was made to Words and Phrases Legally Defined 3^rd Edition Volume 1 at page 125 and in particular to an excerpt from Page v International Trust Agency and Industrial Trust Limited 1893 62 LJ CH 160 at 612, 613 as follows:

"My opinion in this particular case goes on the word "assets". ... What is the meaning of the word? We generally use it in reference to a winding up or bankruptcy. That is its first meaning - that which is available for payment of debts on taking proper accounts in the liquidation ... But the word has a second sense equally good and familiar and I find the remarks I make justified by reference to the Century Dictionary where the second meaning is put forward quite as on a par with the first. Even such a well established Corporation as the Bank of England publishes a statement of its assets and liabilities, the assets including everything that is available to meet the liabilities. All property ... set together against the liabilities is assets and in that sense uncalled capital assets."

[15] Counsel for the appellant submitted that the proper approach to section 34(4)(a) was a balance sheet approach and that this excerpt provided a meaning of "asset" that was entirely consistent with that approach. In that event the sheriff had been wrong to exclude the pension policies from his calculations.

Submissions for respondent

[16] In responding to the appeal counsel for the pursuer and respondent submitted that, in the context of solvency, the word "asset" had to be read as referable to the obtaining of liquid funds to meet the claims of creditors when they fell due. Whatever view one took of the 25% of fund value, the remaining 75% of that value could not have been obtained by the bankrupt to meet the claims of his creditors. To speak of a pension policy as an asset was liable to be misleading unless one examined the nature of the rights derived from that policy. Although there had been no evidence about the terms of the policies in question it was generally understood that they gave the holder contingent rights to purchase an annuity and to take a certain percentage of the fund as a capital sum. Referring to the excerpt from Bell, he submitted that this put the nature of the bankrupt's right into the category of a right in spe.

[17] He submitted further that nobody can get possession of a pension fund other than to the extent of 25% of the fund value. Pension funds were in effect trusts and the pension administrators were in a position akin to trustees. They only had a duty to account once an election had been made by the bankrupt to take the 25% capital sum. Had such an election been made that sum would have been arrestable, but until then it was not available to the diligence of creditors. He adopted the argument advanced by Bell (Commentaries Vol 2 page 181 note 2) that "in reckoning the funds of a defender in a question of solvency, nothing ought properly to be taken in computo which is not liable to the demands and diligence of the creditors, or which is not actually brought into a shape tangible by them; ..." On that basis the sheriff had been correct to exclude the pension policies from consideration in their entirety. On any view however he submitted that no more than 25% of the fund value could be taken into account and that was insufficient to achieve solvency at the relevant date.

Additional submissions

[18] In the course of the appeal hearing I raised with counsel the question whether the provisions of the Welfare Reform and Pensions Act 1999 (hereinafter referred to as "the 1999 Act) had any bearing on the issues that fell to be decided in the appeal. This was not a matter that had been considered in advance of the appeal but counsel were able to make submissions about it after considering the position over lunch.

[19] Section 11(1) of the 1999 Act provides that "Where a bankruptcy order is made against a person on a petition presented after the coming into force of this section, any rights of his under an approved pension arrangement are excluded from his estate."

[20] This section came into force on 29 May 2000 (Welfare Reform and Pensions Act 1999 (Commencement no.7) Order 2000/1382) and both counsel agreed that all pensions in this case fell within the definition of "an approved pension arrangement." The effect of this provision is to take such pension arrangements out of the hands of the trustee in bankruptcy in any sequestration after 29 May 2000. The position of counsel for the respondent was that accordingly the 1999 Act was irrelevant to the issues that arose for determination in this appeal.

[21] By contrast, counsel for the appellant submitted that the need to enact these provisions supported her primary argument that under the pre-existing position pension arrangements such as these were caught as assets and fell into the bankruptcy. She drew attention to the note in the Annotated Statutes which showed that section 11 had been enacted because of the decision In re Landau (A Bankrupt) 1997 3 WLR 225. This affirmed the right of a trustee in an English bankruptcy, appointed under the provisions of the Insolvency Act 1986, to receive all sums payable under a pension policy. She submitted that if pension policies did not fall within the definition of "assets" there would have been no need to extend the application of the 1999 Act to Scotland.

Decision

[22] I think it is important firstly to be clear about the nature and scope of the provisions of the 1999 Act and their relevance, if any, to the issues in the appeal. The first thing to notice is that the provisions of section 11 of the 1999 Act apply to a bankruptcy order made "on a petition presented after the coming into force of this section." In this case the "bankruptcy order" was made on 22 March 2001 and the date of sequestration in terms of section 12(4)(b) of the 1985 Act was 10 March 2001, both dates being later than the date on which section 11 of the 1999 Act came into force, namely 29 May 2000. Accordingly any rights of the bankrupt under the pension policies in question were excluded from the sequestrated estate and, contrary to the submission of counsel for the appellant, the sheriff's finding in fact 26 is accurate in this respect.

[23] In the second place, section 11 relates to any "rights" of the bankrupt under an approved pension arrangement. Those rights will depend on the precise nature of the arrangement and may involve a bundle of different rights, some of which may have vested and others of which may not. I can see the force of the argument that the need to enact this section in Scotland suggests that under the pre-existing law such rights would have vested in the trustee in bankruptcy and the provisions of sections 31(5) and 31(8)(b) of the 1985 Act may have some relevance in this regard. Assuming the validity of that argument, it is nevertheless important to emphasise the distinction between, on the one hand, the rights under the pension arrangement and, on the other, the pension arrangement itself or the fund value to which it relates. Accordingly, if these provisions have any bearing on the question of what is encompassed within the meaning of the word "asset", it is the rights of the bankrupt in the arrangements in question that are relevant and what it is necessary to discover is the nature and value of those rights, the trustee in bankruptcy having no greater right in relation to the pension arrangement than that possessed by the bankrupt himself. I do not think there is any inconsistency between this approach and that taken in relation to matrimonial property, which is defined by reference to the "rights or interests" in any benefits under a pension arrangement (Family Law (Scotland) Act 1985 s.10(4) & (5)).

[24] Turning now to the particular statutory provisions at the centre of this appeal, in my opinion section 34(4)(a) of the 1985 Act is concerned with the question of absolute insolvency and in this respect it did not innovate upon the position pre 1985 that a gratuitous alienation of assets would not be liable to be set aside if at the time of making it the grantor was solvent. It should be noted that section 73(2) of the 1985 Act equates "absolute insolvency" with a reference to circumstances in which a debtor's liabilities are greater than his assets, although it is curious that, so far as counsel's researches were concerned, the term "absolute insolvency" does not appear to have been used elsewhere in the Act.

[25] In Goudy on Bankruptcy 4^th Edition at page 17 one finds that insolvency in the absolute sense "consists in the debts exceeding the assets on a complete estimate of the debtor's property at a particular date." Under reference to Bell's Commentaries Vol 2 page 153, Goudy narrates that "in a question between creditors, there must be evidence of insolvency in the sense of absolute deficiency of the debtor's assets at a particular date. This is the test of insolvency in actions by creditors to set aside deeds on the ground of fraud at common law or under the Act 1621 Chapter 18. The usual mode of proof is by examination of the debtor's books, accounts etc. and striking a fair value at the time in question." (page 18).

[26] Against this background it seems to me that counsel for the appellant was well founded in submitting that a balance sheet approach was the correct one. It is equally clear however that, when Goudy refers to an "absolute deficiency" of assets at a particular date, what he has in mind is an assessment of what assets, if realised, are available to meet the liabilities at that date, solvency in the absolute sense only being demonstrated if there are sufficient assets available to meet the liabilities. This would also consist with the second meaning of "asset" referred to in Page v International Trust Agency and Industrial Trust Limited, upon which counsel for the appellant relied. Whether there is an absolute deficiency in this sense is essentially a question of fact. I have already referred to the sheriff's finding in fact 25, to which might be added finding in fact 26 and finding in fact and law 1, both of which emphasise that any proceeds from the pension policies were not available for the payment of the bankrupt's debts either between 12 May 2000 and the date of sequestration or in the sequestration itself.

[27] In my view counsel for the respondent was well founded in his submission that it is misleading to speak of a pension policy as an asset without some examination of the nature of the rights derived from that policy. Those rights will depend on the precise nature of the pension arrangement and, as I have already pointed out, may involve a bundle of different rights some of which may have vested and others of which have not. No attempt was made in the appeal to examine the details of any of the pension arrangements in question and, so far as the printed evidence is concerned, there does not appear to be any support for a view contrary to that expressed by the sheriff in the findings in fact to which I have referred. The fact is that at no time between 12 May 2000 and the date of sequestration was the bankrupt able to get possession of the pension funds in question, other than to the extent of 25% of the fund value, and in relation to the latter sum he had chosen not to request payment of it. It is a matter of speculation whether the bankrupt had any vested rights in the funds, but it seems clear at least that any rights were contingent, so far as the 25% proportion was concerned, on the bankrupt exercising an election to call for payment of that sum and, so far as concerns the remainder of the fund, on his survival to the pension date. Accordingly, at least to the extent of 75%, the pension fund was in no practical sense available to meet the liabilities of the bankrupt at any stage between 12 May 2000 and the date of sequestration.

[28] The passage from Bell's Commentaries Vol 2 p 181 sets out an interesting difference of opinion between the writer and the court, but the view of the court which was urged upon me does not appear to me to assist the argument advanced by counsel for the appellant. Bell records the view of the court that a liferent interest and the interest of an heir of entail in possession are allowed to be reckoned in computing solvency. Although the continuance of these rights depends on a contingency, nevertheless they are rights which have vested, are being enjoyed and may be valued. That distinguishes them from rights under a pension arrangement which may not have vested, are not being enjoyed and may never be enjoyed unless the contingency of survival to the pension date is satisfied. These strike me as being more akin to rights in spe, which according to Bell's treatise are not to be taken into account in reckoning solvency or insolvency.

[29] Even if I am wrong about that, and assuming that one is able to attach some present realisable value to contingent rights such as these, I cannot see how such a value could equate to the fund value and there was no attempt to attach any different value to the bankrupt's interest in the policies in question. So far as Taylor v Russo is concerned it seems that the Sheriff Principal was only willing to entertain the possibility that future payments could be reckoned in calculating solvency if they had a present value and were of a kind liable to the diligence of creditors and this distinguishes that case from the present.

[30] It follows from what I have said that in my view the sheriff was well founded in excluding the fund value of the pension policies, at least to the extent of 75% thereof, from the balance sheet of assets and liabilities and in that event it is accepted that the appeal cannot succeed. It is accordingly unnecessary to consider the position in relation to the 25% proportion of the fund value that the bankrupt could have elected to take on reaching age 55. I am inclined to think however that the sheriff's conclusion in relation to this matter is well founded. It was accepted by counsel for the appellant, rightly in my view, that the general purpose of section 34(4) of the 1985 Act is to provide a measure of protection to creditors, enabling the reduction of gratuitous alienations made to their disadvantage. It seems to me that, if a particular asset is beyond the reach of creditors, it would be contrary to that purpose to allow the value of such an asset to be reckoned in calculating solvency. It was not in dispute that the pension funds remained at all times outwith the reach of the diligence of the bankrupt's creditors and had the alienation of the shares occurred after the coming into force of section 11 of the 1999 Act it would have been clear that at no time could any value attaching to the pension arrangements have accrued to the benefit of creditors. In my view that would have been a clear case in which the purpose of section 34(4) would have been frustrated by the inclusion of any value attaching to the pension rights in the calculation of solvency.

[31] In fact however the timing of the alienation of the shares and the coming into force of section 11 of the 1999 Act means that, had a petition for sequestration been presented in the sixteen days separating these events, it is arguable that the trustee would have been entitled by virtue of the provisions of section 31(8)(b) of the 1985 Act to exercise the bankrupt's power of election to realise 25% of the fund value. In such circumstances it is at least arguable that that proportion of the fund value could properly be taken into account in calculating solvency. In the result however there was no petition for sequestration in this period and none of the bankrupt's rights under the pension arrangements vested in the trustee. At no point had the pension administrators in fact divested themselves of any sums to the bankrupt nor were they under any obligation to do so until such time as he elected to take any part of the 25% of the fund value that he could take on reaching the age of 55. In all these circumstances, had it been necessary to decide this issue, I would on balance have reached the view that the figure of £126,000 did not form part of the assets of the bankrupt in computing solvency at the date of the alienation of the shares.

[32] I shall accordingly refuse the appeal and adhere to the sheriff's interlocutor. Parties were broadly in agreement that the expenses of the appeal should follow success. Counsel for the appellant submitted however that, if I was refusing the appeal but nevertheless took the view that 25% of the fund value should have been included as an asset, there should be no expenses due to or by either party in respect of the appeal. I am not persuaded that that is an appropriate course of action. The argument with regard to the 25% was inextricably bound up with the general argument in the appeal, which was directed against an interlocutor to which I have adhered. The respondent has successfully resisted the appeal and in my view he should receive the expenses of the appeal.

I have no note of being asked to certify the appeal as suitable for the employment of counsel.