Scottish Sheriff Court Decisions

SHERIFFDOM AT LOTHIAN AND BORDERS AT EDINBURGH

 

Case Ref: SQ176/10

 

JUDGEMENT   of   SHERIFF WILLIAM HOLLIGAN   in the cause   THE ACCOUNTANT IN BANKRUPTCY, 1 Pennyburn Road, Kilwinning, Ayrshire. previously Permanent Trustee on the sequestrated estates of Graeme John Grant, 65 Redhall Crescent, Edinburgh, EH14 2HD conform to Award in her favour on 29th April 2008 Pursuer   against   Graeme John Grant, residing at 65 Redhall Crescent, Edinburgh, EH14 2HD   Defender _________________

 

Act: Lloyd, Harper Macleod

 

27^th October 2010

 

The Sheriff having resumed consideration of the cause grants leave to the pursuer to lodge a minute of amendment within 14 days of the date hereof.

 

[1] This is a summary application in which the pursuer ("the AIB") seeks an order pursuant to section 29(6) of the Bankruptcy (Scotland) Act 1985 ("the 1985 Act") that the office of trustee has become vacant and for certain other orders. The action is undefended but an issue of competency has arisen. I put the matter out for a hearing and had the benefit of being addressed by Mr Lloyd on behalf of the AIB.

 

[2] The defender was sequestrated on his own application to the AIB on 29^th April 2008. The AIB was the trustee in sequestration. Both the pursuer and the defender have been discharged respectively. It has now come to light that there are assets by way of a claim that the defender had against a third party. The pursuer was unaware of this claim. There are monies available. The problem is that, having been discharged, there is no trustee in office to deal with this matter.

 

[3] The issue is not a new one and is well set out in paragraphs 8-75 to 8-76 of McBryde on Bankruptcy (2^nd edition) ("McBryde"):-

"Discharge of both debtor and trustee does not end the sequestration (unless there is a discharge on composition). In general if new assets emerge after the discharge of a trustee and these are assets which would be vested in a trustee for the benefit of the creditors there may be the appointment of a new trustee... There is uncertainty about the correct procedure for the appointment of a new trustee. It may be that the procedure should commence with an application under section 29(6) to the sheriff. If this is wrong there may be an application to the nobile officium. When the 1913 Act was in force it was decided that a nobile officium petition was the appropriate remedy if both trustee and bankrupt were discharged."

 

[4] The authorities referred to in McBryde are all of some age. Many of them predate the Bankruptcy (Scotland) Act 1913 ("the 1913 Act") let alone the 1985 Act. In my opinion, there are three issues which require to be addressed in this matter:-

1. Whether the sequestration can be revived?

2. If yes, whether it is competent to do so pursuant to section 29(6) of the 1985 Act?

3. If no to 2, whether the matter can be dealt with pursuant to section 63(1)(b) of the 1985 Act?

 

 

Revival of the sequestration

 

[5] The passage I have quoted from McBryde (the revival of the sequestration and the discharge of the debtor in trustee does not end the sequestration (unless there is a composition)) refers to various authorities (Whyte v Murray (1888) 16 R 95; Geddes v Quistorp (1889) 17 R 278; Buchanan v McCulloch (1865) 4 Macph 135). In relation to the revival of the sequestration, Whyte refers to another related case namely Northern Heritable Securities Investment Co Ltd v Whyte (1888) 16 R 100; (1891) 18 R (HL) 37. Northern Heritable Securities involved a petition to the nobile officium in the case of a sequestration where both the debtor and the trustee had been discharged. The Lord President had no difficulty in granting the petition and referred to the procedure having been followed in "a great many similar cases" beginning with that of Thompson Petitioner (1863) 2 Macph 325. The matter was appealed to the House of Lords. Given that the reasoning in that case is critical to resolution of this issue I quote from the speech of Lord Watson at page 39:-

"The provisions of the Bankruptcy Act of 1856 strip the bankrupt of the whole property of every description which is vested in him at the date of the sequestration and also of all property that may come to him during the subsistence of the sequestration prior to his own discharge. According to my view of the statute, he can only get back the property which has been taken from him absolutely and irredeemably by the force of the statute in one of three ways - either, first by his discharge upon payment of a composition to his creditors; secondly by receiving a part of it as a surplus after satisfying their claims to the extent of twenty shillings in the pound; or, in the third place, by a transaction with the trustee and creditors of the bankrupt's estate... Now, as to the period when a sequestration comes to an end the... argument... rested mainly upon this: that the sequestration in this case had absolutely come to a close in terms of the statute, and accordingly that the exercise of their praetorial power by the First Division of the Court of Session was in reality legislation; that they had revived a process which by the statute was at an end. I am quite unable to take that view of the provisions of the Act. I think the final close of the sequestration contemplated by the statute was the discharge of the trustee after the final distribution - after the whole of the funds vested in him by force of the statute had been applied to their proper purpose, namely payment of the debts ranked in the sequestration. When I speak of final distribution, I mean distribution of what were in fact the last funds available for that purpose... Now in this case there was no doubt a discharge of the trustee upon the footing that the available funds had been distributed. That was the footing upon which the discharge of the trustee proceeded, so far as I can see. But it proves to have been in face of the fact that there were funds extant at that date which were available, and might have been available by the trustee for division among the creditors. Now it appears to me that a discharge of a trustee upon that footing before final distribution, either in ignorance or inadvertence, cannot possibly alter the provisions of the Act and that by force of the Act the sequestration notwithstanding subsists for behoof of the creditors. When a trustee has been discharged upon that footing erroneously, I do not doubt (indeed I think it is implied in the statute...) that the court has power to furnish the machinery necessary for working the sequestration to its close - necessary, for getting in the whole assets available for payment of the creditors and distributing those assets among them, and I have only to add that, in my opinion, the parties who made this application to the court below were quite right in appealing to the nobile officium of the Inner House because I do not find in the statute any precise delegation of the authority required for such a purpose either to the Lord Ordinary on the Bills or to the sheriff".

 

The case of Thompson to which the Lord President referred involved an application to the nobile officium to appoint a new trustee in circumstances where the former trustee had been discharged but the debtor himself was not. The petition was presented because the bankruptcy statute then in force (the Bankruptcy (Scotland) Act 1856 - "the 1856 Act") and in particular, section 74 thereof, only dealt with circumstances in which the trustee had been removed, had resigned or had died. It did not deal with discharge. It was held that this was a casus improvisus. The order pronounced was to appoint a meeting of creditors to appoint a new trustee. The case of Buchanan v McCulloch concerned the issue as to whether a debtor in a sequestration had the right to vote, such a right depending upon the ownership of property. In the course of his opinion Lord Ormidale said (at page 136):-

"It is said that the [debtor] has since been discharged; but he was discharged without composition, and the result was that he was not reinvested. The 140^th section of the Bankruptcy Act [1856] which provides for reinvestiture, is expressly limited to discharge and payment of a composition. The 146^th section which regulates cases of discharge without composition, contrasts with the 140^th, and does not contain any provision that the bankrupt shall be reinvested. On the contrary, the sequestration may go on for many years after the discharge. But it is said that the trustee here was also discharged and that necessarily put an end to the sequestration. I cannot accede to that view. A trustee may be discharged for various reasons, or he may die, or may resign and yet the sequestration goes on. We must therefore hold that the sequestration still exists and that whatever belonged to the husband through his wife has passed to his creditors."

I was also referred to a passage in McBryde at page 413 which refers to the effect of a discharge of a debtor. The learned author quotes from the opinion of Lord Justice Clerk Hope in Henderson v Bulley (1849) 11 D 1470 at 1473 to the effect that a sequestration is not at an end.

 

[6] As is obvious, the case law to which I was, and have referred, is of some age. The conclusions reached in these cases depended upon the construction of the relevant statute then in force. There have been two bankruptcy statutes since these decisions were issued. The leading text book on the Bankruptcy (Scotland) Act 1913 interpreted the issue in the same way on this point. (See Goudy, Bankruptcy at page 388, although the authorities cited in support thereof are the cases of Henderson and Northern Heritable Securities referred to above.)

 

[7] The reasoning which I have referred to above was based upon the interpretation of the then bankruptcy statute, namely the 1856 Act. Applying the same reasoning to the 1985 Act, discharge of the debtor pursuant to section 55 of the 1985 Act (subject to section 55(2) and (3)) discharges the debtor of all "debts and obligations" contracted by him, or for which he was liable at the date of the sequestration. By contrast, paragraph 16(1) of schedule 4 provides that, on composition, the debtor (again subject to certain exceptions) is discharged of all debts for which he was liable at the date of the sequestration and that the debtor is also "reinvested in his estate existing as at the date of the order". The general rule as to the vesting of assets in the trustee also applies to similar effect as under the earlier legislation. I question whether, in any meaningful way, it can be said that a sequestration "continues" notwithstanding discharge of both the debtor and trustee. In my opinion, the issue at the heart of this matter is that there exists an asset which, had its existence been known at the material time, would have vested in the trustee for the behoof of creditors. Put another way, by virtue of the 1985 Act, such an asset is and remains property in the sequestration. Its later discovery does not alter that fact. Discharge of the trustee removes the administrative mechanism for securing the asset and its realisation. Discharge on composition defeats this reasoning because of reinvestiture, subject, perhaps, to any issues of concealment or fraud. It seems to me that the scheme of the 1985 Act, in effect, applies the reasoning of the older statutes and thus the case law on this point remains good law.

 

 

 

Is an application pursuant to section 29(6) competent?

 

 

[8] The passage in McBryde which I quoted above, whilst conceding there is some uncertainty, suggested that it might be possible to deal with the issue by way of an application pursuant to section 29(6). It is clear from Thompson that a petition to the nobile officium was required because the words of section 74 of the 1856 Act were held not capable of extending to the situation in which the trustee had been discharged from office. Mr Lloyd referred me to the case of Cockburn's Trustees 1941 SC 187. The issue in that case was whether a petition should be presented to the Inner House under the nobile officium or to a Lord Ordinary under section 71 of the 1913 Act (similar to section 29 of the 1985 Act) in circumstances where assets had been identified and both the debtor and trustee discharged. Reference was made to Whyte and the 1856 Act. It appears that there was some uncertainty as to whether the procedure by way of petition to the nobile officium, following the construction of the 1856 Act, remained appropriate pursuant to the 1913 Act. The report is very short and simply narrates that the judges of both the First and Second Division had consulted and reached the conclusion that section 71 of the 1913 Act did not apply and that a petition to the nobile officium remained the appropriate procedure.

 

[9] In my opinion, the important feature under both the 1856 and 1913 Acts was the relevant section dealing with, to use a neutral phrase, the absence of a trustee ( see the closing words of Lord Watson in Northern Heritable Securities Limited in the passage quoted above). The present writ is brought pursuant to section 29(6) of the 1985 Act. Section 29 is headed "Removal of trustee and trustee not acting". Sub-sections 29(1)-(5) deals with the removal of a trustee with which I am not concerned. Sub-sections 29(6) and (9) provide as follows:-

"(6)... where the sheriff is satisfied of any of the circumstances to which subsection (9) below applies he may, on the application of a commissioner, the debtor, a creditor or the Accountant in Bankruptcy, and after such intimation as the sheriff considers necessary -

(a)    declare the office of trustee to have become or to be vacant; and

(b)   make any necessary order to enable the sequestration to proceed or to safeguard the estate pending the election of a new trustee;

...

(9) The circumstances to which this subsection applies are that the trustee -

(a)    is unable to act (whether by, under or by virtue of a provision of this Act or from any other cause whatsoever other than death); or

(b)   has so conducted himself that he should no longer continue to act in the sequestration."

 

The power to declare the office of trustee vacant therefore arises only upon the application of circumstances set out in section 29(9). Mr Lloyd accepted that section 29(9)(b) does not apply. One is therefore left with section 29(9)(a). It does seem to me that, whatever "inability" may mean, its meaning does not extend to circumstances in which the trustee has been discharged. In my view, the same reasoning in relation to the similar provisions of the 1856 and 1913 Acts applies with equal force here. Sub-sections 29(6) and (9) deal with a wholly different issue from the present circumstance. It follows that, in my opinion, the court does not have the power to grant the application pursuant to section 29(6).

 

The application of section 63

 

[10] Mr Lloyd submitted that, if I were against him in relation to his submission pursuant to section 29(6), the court might, nonetheless, grant relief pursuant to section 63(1)(b). It is appropriate to quote section 63(1). The heading is "Power to cure defects in procedure":-

"(1) The sheriff may, on the application of any person having an interest -

(a)    if there has been a failure to comply with any requirement of this Act or any regulation made under it, make an order waiving any such failure and, so far as practicable, restoring any person prejudiced by the failure to the position he would have been in but for the failure;

(b)   if for any reason anything required or authorised to be done or in connection with, the sequestration process cannot be done, make such order as may be necessary to enable that thing to be done."

 

The background to the enactment of section 63 is clear and well covered by a number of authorities. In short, the 1913 Act was unforgiving in the strictness of its timetable and the absence of any flexibility in the application of the legislation. It was recognised that this gave rise to extensive resort to the nobile officium (see McBryde: Sequestration and the Nobile Officium 1978 SLT News 265). It is equally clear that there are limits to the application of section 63 (Royal Bank of Scotland plc v J & J Messenger 1991 SLT 492). No reported authority was cited to me in which section 63 has been used in circumstances such as the present. However, as is clear from the authorities I have referred to, problems such as the present were far from unknown. It might therefore be thought surprising for the 1985 Act to have made no provision for resolution of problems such as the present. In my opinion, section 63(1)(a) is not engaged here. Section 63(1)(b) deals with "something required or authorised to be done". I see no reason to read "required" as being something which must exclusively derive from the Act although one could say that, in the present case, the requirement for a new trustee arises because the Act provides that assets such as in the present case are assets of the sequestration. On any view it seems to me to be something "connected with" the sequestration process. What requires to be done is to appoint a trustee to ingather assets such as in the present case and distribute them. In my opinion, the appointment of a trustee in the present circumstances is something which requires to be done in the sequestration process and cannot be done. It cannot be done because there is no mechanism provided for in the Act to enable it to be done. Section 29 is not broad enough to encompass the present circumstances. Accordingly, I view section 63 as being wide enough to encompass the present application. Although I do not found upon it as such, I am fortified in my conclusion by paragraph 7.47 of the Scottish Law Commission Report referred to in McBryde and to which Mr Lloyd made reference (Scottish Law Commission Report on Bankruptcy and Related Aspects of Insolvency and Liquidation no. 68 at paragraph 7.41-7.47). Section 63 is modelled upon recommendations made by the Scottish Law Commission and it is clear from the passages to which I have referred, and in particular paragraph 7.47, that the Commission specifically had in mind a sequestration which had become dormant and which required to be revived. Mr Lloyd accepted that, if I were with him in relation to this chapter of his argument, the current crave does not reflect the provisions of section 63 and amendment will be necessary. I see no purpose to be served in dismissing the application only to have it revived. I shall accordingly grant leave to the AIB to lodge an appropriate minute of amendment within 14 days from the date of this interlocutor.