Scottish Sheriff Court Decisions

SHERIFFDOM OF LOTHIAN AND BORDERS AT EDINBURGH

 

Case No: SQ442/08

 

 

NOTE

 

by

 

SHERIFF WILLIAM HOLLIGAN,

in the Note

 

for directions by

 

 

DONALD IAIN McNAUGHT, Capital House, 2^nd Floor, Festival Square, Edinburgh, EH3 9SU, Trustee on the sequestrated estates of Gary Brown, formerly having a place of business and residing at East Hermiston Farm, Currie, Edinburgh, EH14 4AJ and now residing at 12 School Lane, Bothwell, Glasgow, G73 8RE.

 

 

 

Edinburgh October 2009

 

The Sheriff, having resumed consideration of the Note, makes the following directions: That it is an appropriate act of administration for the trustee to seek payment of sums received from the debtor on or after 15 October 2008; directs that the expenses of this Note shall be expenses in the sequestration.

 

[1] This Note is brought pursuant to s.3(6) of the Bankruptcy (Scotland) Act 1985 ("the 1985 Act") in which Mr Donald McNaught ("the trustee") on the sequestrated estates of Gary Brown ("the debtor") seeks directions from the court.

 

[2] Background

Before turning to the legal issues raised by this application it is necessary to set out some of the factual background.

 

[3] The chronology of events is of particular importance. Sequestration was awarded at the instance of a petitioning creditor. Warrant to cite the debtor was granted on 10th October 2008. The writ was then served and sequestration awarded by the court on 19th November 2008. Shortly afterwards, the trustee received the interlocutor appointing him as a trustee. The trustee visited the debtor's premises and issued the usual intimations in the Edinburgh Gazette. It appears that, at that stage, the debtor hoped to secure recall of the sequestration and consulted with professional advisers in order to do so. On or about 3rd or 4th December 2008 the trustee froze the debtor's bank account. Having regard to the business of the debtor, the trustee obtained the assistance of a quantity surveyor to assist him in examining the books and records of the debtor. On 5th December 2008 the trustee wrote to the debtor's employees notifying them of the sequestration. The trustee confirmed that trading would continue whilst the debtor's position was examined more closely. At that time it appeared that the debtor's business might be able to trade profitably. Recall of the sequestration was also still being discussed. However, the trustee did instruct the employees of the staff, in short, not to engage in transactions without the sanction of the trustee or his representatives. The trustee received a list of creditors to whom notification of the trustee's appointment was given on 9th December 2008. Some trading did take place under the supervision of the trustee or his representative. Trading ceased altogether at or about the end of January 2009.

 

[4] Problems have arisen because of events which took place between 15th October 2008 (the date of the warrant to cite) and a date at or about 4th December 2008, the date the bank account was frozen. It appears that the debtor continued to intromit with the estate after 15th October 2008. He continued to order goods and supplies and he also made and received payments between these dates. The matter is slightly more complicated because some of the transactions were undertaken by employees acting contrary to the trustee's instructions and some of the invoices postdate 4th December 2008 but refer to work carried out prior to that date. The trustee has appended to his Note a schedule (appendix 2) detailing the debts incurred and paid from the debtor's bank account after 15th October 2008. They amount to £309,427.44. I have counted no fewer than 36 named creditors in the appendix. The trustee has received claims by creditors in the sequestration all as set out in a further schedule (appendix 3). Some of these claims arise out of debts incurred prior to 15th October 2008 and others to debts incurred after 15th October 2008.

 

[5] The Legal Framework

Before I turn to the details of the legal framework I need to make clear that I do so in order to help in the understanding of this Note, a copy of which I understand may be given to some or all relevant creditors. It is not intended that reference to the legislation should be taken as a determination of the final rights and liabilities of any party.

 

[6] The starting point is s.31(1) of the 1985 Act which provides:-

 

"Subject to s.33 of this Act... the whole estate of the debtor shall, by virtue of the trustee's appointment, vest in the trustee as at the date of sequestration for the benefit of the creditors".

 

The words "date of sequestration" are crucial. Pursuant to s.12(4)(b)(i) the date of sequestration is the date of the warrant to cite which in this case is 15th October 2008. In other words, although sequestration was not awarded until 19th November 2008, once granted, the effect of the award is to vest the estate of the debtor in the trustee as at the date of the warrant to cite. s.32(8) provides:-

 

"Subject to subsection(9) below, any dealing of or with the debtor relating to his estate vested in the trustee under this section or s.31 of this Act shall be of no effect in a question with a trustee".

 

As I understand it, subsection (8) refers to the trustee on the basis that if sequestration is, for any reason, not awarded then any transaction between the debtor and a third party will remain unaffected. It is only if sequestration is awarded that subsection (8) comes into play and in that event "any dealing" is of no effect in a question with the trustee. In her submission, Mrs Grant referred me to Cooks Trustee 1985 SLT 33 in which, read short, Lord Kincraig commented that the effect of the bankruptcy legislation is to prevent the debtor from disposing of his property after it has become vested in the trustee.

 

[7] However, s.32(9) does exempt certain transactions from the ambit of s.32(8). The statutory provisions are lengthy and complex. However, for the reasons I have given earlier it is appropriate to set some of them out:-

 

"Subsection (8) above shall not apply if the person seeking to uphold the dealing establishes -

 

(a)   that the trustee -

(i)                 has abandoned to the debtor the property to which the dealing relates;

(ii)               has expressly or impliedly authorised the dealing; or

(iii)             is otherwise personally barred from challenging the dealing; or

 

(b)   that the dealing is

(i)                 the performance of an obligation undertaken before the date of sequestration by a person obliged to the debtor in the obligation;

(ii)               the purchase from the debtor of goods for which the purchaser has given value to the debtor or is willing to give value to the trustee; or

(iii)             a banking transaction in the ordinary course of business between a banker and the debtor; or

(iv)              one which satisfies the conditions mentioned in subsection (9ZA) below,

and that the person dealing with the debtor was, at the time of the dealing incurred, unaware of the sequestration and had at that time no reason to believe that the debtor's estate had been sequestrated or was the subject of sequestration proceedings".

 

I will not set out the terms of the s.32(9ZA) that they refer to a particular class of transaction.

 

[8] Paragraph 1 (1) to schedule 1 of the 1985 Act provides that the amount in respect of which a creditor should be entitled to claim shall be the accumulated sum of principal and any interest which is due on the debt as at the date of sequestration. Again, the crucial date is 15 October 2008.

 

[9] There is yet a further complication in this matter and that relates to set off. The trustee's position is that the law as to set off is as set out in the case of Mulvey v The Secretary of State for Social Security 1997 SC (HL) 105 at 107 in which Lord Jauncey quoted with approval the passage from Goudy on Bankruptcy (4^th edition) at pages 554-5:-

 

"The concourse of debit and credit must have existed antecedent to the date of bankruptcy. Thus, against the debt which becomes due to the trustee on a bankrupt estate after the date of bankruptcy, it is not competent to plead compensation in respect of a claim against the bankrupt which existed prior to that date. The rule is based on sound principles of equity and expediency - one of the main considerations being to prevent persons indebted to the estate purchasing up claims at a low figure and then pleading set off to the serious detriment of the general body of creditors".

 

[10] The Difficulties

I am told that the trustee is faced with a number of problems. Some creditors do not understand why, having supplied goods to the debtor, they have not been paid the sums which they claim are due to them. Other creditors are aggrieved that they may be asked to return monies paid to them after 15 October 2008 and thereafter be left to lodge a claim in the sequestration, only part of which may be accepted, and even that is subject to what funds the trustee has to pay claims which he does accept. The trustee has been threatened with litigation, some of which may be directed personally at him. The monies involved in the sequestration are, in total at least, substantial. The trustee is anxious to make progress but he does not want to engage in a large number of court actions which may only serve to dissipate the funds under his control even further. He therefore seeks directions from the court.

 

[11] At this point, I return to the legislation I referred to above. In the paradigm sequestration, the assets and liabilities of the debtor vest in the trustee as at the date of sequestration which, as I have said, is not the date of the award but the date of the warrant to cite. The structure of the legislation is that all the assets of the debtor vest in the trustee as at that date and that the debtor should no longer deal with them wherever they are. Debts owed to creditors fall to be calculated as at the same date. What appears to have happened here is that the debtor has continued to deal with the estate which had already vested in the trustee and he, or others on his behalf, also continued to transact with other parties after the date of sequestration, incurring liabilities which may not, on the face of it, be liabilities in the sequestration. I say "may not" because the proviso to s.32(8) leaves open the possibility of creditors defending their position provided they can satisfy the requirements of s.32(9). Furthermore, where there are monies due pre and post sequestration, the rules as to set off establish limits as to what debts can be treated in this way and, in general terms, do not permit pre sequestration and post sequestration matters to be offset against each other.

 

[12] Directions

An obvious point to consider is the extent of my power to give directions and whether I ought to do so. S.3(6) of the 1985 Act provides as follows:-

"The trustee may apply to the sheriff for directions in relation to any particular matter arising in the sequestration".

The words themselves are couched in expansive terms. The only substantial qualification is that there must be a matter "arising in the sequestration". There appears to be no reported authority dealing with the interpretation of this subsection. The subsection was introduced by paragraph 1 of schedule 1 to the Bankruptcy (Scotland) Act 1993 ("the 1993 Act"). I note that s.3(7), which relates to the rights of persons other than the trustee to make application to the sheriff, was introduced at the same time. In writing a commentary to the 1993 Act in the Current Law Statutes, Professor McBryde commented that the intention was to provide a way of obtaining a court decision in a way which may be easier and cheaper than the alternative. The alternatives he referred to are, for example a Special Case for the Opinion of the Court of Session or an action of declarator. However, Professor McBryde goes on to refer to a number of cases relating to similar procedures for trustees under trust deeds (Andrew's Trustees v Maddeford 1935 SC 857; Peel's Trustees v Drummond 1936 SC 786; Henderson's Trustees v Henderson 1938 SC 461 and Grant's Trustees v Hunter 1938 SC 501). The learned author goes on to say that the Court of Session was not inclined to favour such procedure where there are complex issues, particularly where another form of action is more appropriate. The comments of Professor McBryde are to similar effect in his book on Bankruptcy (2^nd edition paragraph 8 -38).

 

[13] In the context of insolvency, the procedure seeking a petition for directions is not novel. S.112 of the Insolvency Act 1986 contains a broad provision entitling certain parties to seek directions from the court in those classes of winding up procedures governed by the section. The court may give directions to a liquidator if its determination would be "just and beneficial". There is also the authority of Liquidator of Upper Clyde Shipbuilders Ltd 1975 SLT 39 also referred to by Professor McBryde.

 

[14] As Mrs Grant pointed out in her submission, in three out of the four trust cases referred to by Professor McBryde, the court did actually give the directions sought. For my own part, I do not find the trust cases to be of particular assistance here. In my opinion, s.3(6) requires to be read in the context of the 1985 Act as a whole. To some extent the right to seek directions from the court is the counterpart to being an officer of court. There may be many and varied circumstances in which a trustee may require directions from the court in the discharge of the functions imposed upon him by the 1985 Act. Subject to the following observations, I would not be inclined to qualify or limit the expansive words contained within s.3(6). One possible limitation is as follows. The 1985 Act contains within it specific provisions dealing with certain categories of dispute. For example s.31(6) allows a person who claims that the estate claimed by the trustee should not vest in the trustee to make an application to the sheriff to determine that such an estate should be excluded from the estate held by the trustee. S.49(6) sets out a procedure for a dissatisfied creditor to object to the acceptance or rejection of any claim. I find it difficult to envisage circumstances in which a petition for directions would be appropriate in cases where the 1985 Act already prescribes a statutory procedure for resolving such issues. Mrs Grant was careful to say that, in the present Note, the trustee did not seek to obtain an order which will determine the rights and liabilities of the parties in the sequestration. In my opinion, she was correct to do so. I do not say that there are no circumstances in which, with the consent of all interested parties, the petition for directions could not do so, but on any view it would not be appropriate here.

 

[15] Returning to the current Note I am inclined to give directions. It is clear that the issues raised by the trustee relate to matters arising in the sequestration. As originally drafted, the Note sought directions which relate to payments made by the debtor on or after the date of sequestration; the treatment of creditors claims; and set off. I was reluctant to make all the directions sought because it seemed to me that the directions might be taken as a final determination by the court of the matters raised in the Note. The trustee specifically did not seek an order for service of this Note on the basis that service might only serve to bring about the very state of affairs which he is keen to avoid. The consequences are that it would not be appropriate for me to make, or be thought to make, any order finally determining the rights and liabilities of any party. However, what I can do is to give directions as to how the trustee ought to deal with the position he finds himself in. The directions sought are a consequence of the 1985 Act.

 

[16] The 1985 Act is a code which sets out in technical detail just how assets and liabilities fall to be dealt with by the trustee. As an officer of court the trustee is bound and obliged to act in accordance with the code however unwelcome to interested parties that may be. I have set out in my Note the legal issues confronted by the trustee and certain consequences flowing therefrom. Subject to the proviso of s.3(8), the trustee has an obligation to recover monies due to the estate. The trustee is clearly under pressure from certain quarters to admit certain classes of claims and not to pursue recovery of others. I have set out at some length the general legal position and the way in which, in general terms, the trustee is required to deal with the payments made by or to the estate. I am told that, subject to the direction of the court, the trustee proposes to write to each party listed in appendix 2 to request payment of sums received from the debtor on or after 15 October 2008; to invite each party to submit a further claim in the sequestration for sums which may become due as a result of payment being made to the trustee; the trustee will make reference to the rules for set off and also advise each party that if they are uncertain of the legal position that they should seek independent legal advice and that the trustee and/or his solicitor would be prepared to discuss matters. In my opinion, on the basis of the information before me, what the trustee proposes is an appropriate act of administration for the trustee to take and I shall make a direction accordingly. I shall also order that the expenses of this Note shall be expenses in the sequestration.