LAW OF BANKRUPTCY
II. INSOLVENCY
1. Absolute Insolvency
Overall liabilities exceed total assets.
2. Practical Insolvency
Inability to pay debts as they fall due, or failure to pay debts in ordinary course of business.
3. Apparent Insolvency
Statutory definition introduced by Bankruptcy (Scotland) Act 1985, s.7 - Aapparent insolvency@ replaces earlier concept of Anotour bankruptcy@
s.7 sets out the circumstances in which a debtor will be regarded as apparently insolvent.
Apparent Insolvency (cont)
(a) His estate is sequestrated or he is declared bankrupt in England, Wales or Northern Ireland, or
(b) He has given written notice to creditors that he has ceased to pay debts in the ordinary course of business, or
(c) Any of the following circumstances occur:
(i) He grants a trust deed for creditors.
(ii) He is served with a charge for payment of a debt and the days of the charge expire without payment being made.
(iii) His moveable property is poinded or seized in pursuance of a summary warrant for payment of rates or taxes, and he fails to pay the sum due within 14 days.
(iv) A decree of adjudication is granted over any part of his estate.
(v) His effects are sold under a sequestration for rent.
(d) A creditor owed a debt of >
III. PETITIONS FOR SEQUESTRATION
1. Living Debtor
Any of the following can bring a petition for sequestration of a living debtor:
(a) Qualified Creditor
A creditor can bring a petition if:
(i) Debtor is apparently insolvent and became so in the four months prior to presentation of the petition, and
(ii) The creditor is owed a qualifying debt(s) - not less than
(b) Debtor
A debtor can petition for his own sequestration.
(i) Without Concurring Creditor
- total amount of dents not less than
- debtor not sequestrated in past five years, and
- apparent insolvency or trust deed granted which has not become protected.
(ii) With Concurring Creditor
- creditor or creditors must be qualified.
- no conditions as to prior sequestration or apparent insolvency.
- creditor or creditors must sign petition and an oath.
(c) Trustee Under a Trust Deed
A trustee under a trust deed can petition if:
- debtor has not complied with terms of trust deed, or
- debtor had not complied with trustee
- trustee believes sequestration is in best interests of the creditors.
2. Deceased Debtor
A petition to sequestrate the estate of a deceased debtor may be brought by:
- qualified creditor or creditors, or
- trustee under a trust deed, or
- executor of deceased debtor
3. Trusts
1985 Act resolved uncertainty as to whether a trust could be sequestrated. Petition can be brought by:
- majority of trustees with concurrence of qualified creditor, or
- qualified creditor alone if trustees are apparently insolvent.
4. Partnerships
Petition can be brought for sequestration of firm alone, or firm combined with some or all the partners. Petition is brought by either:
- partnership with concurrence of qualified creditor,
- qualified creditor alone where partnership is apparently insolvent.
IV. AWARD OF SEQUESTRATION
1. Grant of Award
(a) Debtor
=s PetitionSequestration must be awarded forthwith if there are valid grounds and debtor has lodged statement of assets and liabilities.
(b) Creditor
=s PetitionCourt must grant warrant to cite the debtor to appear before the court on date stated in warrant. (must be not less than 6 days or more than 14 days after date of citation).
Debtor can then appear to show why sequestration should not be awarded. Can be sequestrated in his absence if creditor able to show apparent insolvency and that warrant properly served.
(c) Form of Award
The award sequestrates estate presently belonging to debtor and that acquired prior to discharge.
Award states that debtor
=s estate now belongs to his creditors.Interim trustee will usually be appointed at this time.
2. Date of Sequestration
Bankruptcy (Scotland) Act 1985, s.12(4)
Date of sequestration is:
Debtor
=s petition - date on which court makes award of sequestration.Creditor
=s petition - date on which court grants warrant to cite debtor.3. Recording of Sequestration
Copy of first court order is recorded in Register of Inhibitions and Adjudications - this inhibits dealings with debtor
=s heritable property.Inhibition takes effect from date of sequestration and lasts three years.
4. Refusal to Grant Award
Court will refuse to award sequestration if:
(a) There are no valid grounds for the award, or
(b) Debtor pays what he owes to petitioning creditor, or comes to an arrangement with him, or gives adequate security for the debt (and also the debt which made him apparently insolvent, if different).
National Westminster Bank v Elrick & Co (Case 1)
5. Appeal Against Refusal
Petitioning creditor or any concurring creditor in debtor
=s petition can appeal within 14 days of refusal.Debtor has no right of appeal.
6. Recall of Sequestration
(a) Procedure
Petition for recall must be brought in the Court of Session, usually within 10 weeks of grant of the award of sequestration. Time limits do not apply where grounds for petition for recall are:
(i) Debtor has paid debts or given sufficient security for them, or
(ii) Majority of creditors are outwith Scotland, or
(iii) Other awards of sequestration or bankruptcy have been granted.
Copies of petition must be sent to the debtor, any petitioner, any trustee in the sequestration and the accountant in bankruptcy.
Answers to the petition must be lodged within 14 days. Notice of petition must be published in the Edinburgh Gazette.
(b) Grounds for Recall of Sequestration
Court can allow recall on any grounds if satisfied that, in the circumstances, it is appropriate to recall the award.
(c) Effect of Recall
Generally restores everyone to their original position, except:
- if petition interrupted period of prescription, prescription remains interrupted.
- any transactions by the interim or permanent trustee remain valid.
- fees and expenses of trustee must be paid.
V. ADMINISTRATION OF BANKRUPTCY
1. Accountant in Bankruptcy
Appointed by Secretary of State.
Responsibilities set out by Bankruptcy (Scotland) Act 1993
(a) Statutory Functions
(i) Maintaining Register of Insolvencies - public register containing details of all sequestrated estates and protected trust deeds.
(ii) Preparing annual statistical report - presented to Secretary of State.
(b) Supervisory Functions
(i) Supervision of trustees and commissioners throughout sequestration process.
(ii) Auditing accounts of interim trustees and determining fees.
(iii) Filling role of commissioners where no commissioners are appointed.
(iv) Auditing accounts during administration of trust deeds for creditors.
Accountant in Bankruptcy (cont)
(c) Regulatory Functions
(i) Reporting to court any trustee or commissioner who fails to carry out duties.
(ii) Reporting any offences committed with regard to the sequestration.
(d) Trustee Functions
Introduced by 1993 Act - Accountant in Bankruptcy has the role of acting as trustee for any sequestration where no trustee is elected or where no trustee is willing to act unless public funds were made available to pay him.
2. Interim Trustee
Interim trustee must be appointed in every sequestration - must be qualified insolvency practitioner resident in Scotland.
Role is:
- to preserve debtor
- to examine circumstances of debtor
=s insolvency.- to establish debtor
=s assets and liabilities.- to advertise award of sequestration in Edinburgh Gazette.
- to call statutory meeting of creditors.
3. Statutory Meeting of Creditors
(a) Requirement for Statutory Meeting
- if trustee is an insolvency practitioner, meeting must be called within 60 days of award of sequestration. Creditors must be given 7 days notice of meeting.
- if trustee is Accountant in Bankruptcy, he has discretion whether to call meeting or not. If he chooses not to, creditors have seven days to request meeting. Accountant must call meeting if 25% of creditors request it.
(b) Procedure
- creditors submit claims on estate at or before meeting.
- interim trustee first accepts or rejects claims.
- meeting then considers assets and liabilities of debtor.
- trustee informs meeting whether any dividend likely to be paid on debts.
- permanent trustee is elected.
4. Permanent Trustee
- if permanent trustee is elected at statutory meeting, this is reported to sheriff who will issue an act and warrant.
- if permanent trustee is not elected at statutory meeting, sheriff will automatically appoint interim trustee to be permanent trustee.
- permanent trustee has role of realising debtor
- trustee must keep records and submit accounts of dealings for each accounting period (every six months).
5. Commissioners
Commissioners are a group of persons elected by creditors to supervise and advise permanent trustee. A commissioner must be a creditor or an agent of a creditor.
It is not obligatory for there to be commissioners. The maximum number is five.
Commissioners act for free and have no right even to claim expenses from the debtor
=s estate.6. Summary Administration Procedure
Many bankruptcies involve comparatively small amounts of money (both assets and liabilities). Sequestration is unlikely to result in payment to unsecured creditors.
Summary administration is intended to keep costs down.
Procedure:
- interim trustee applies to court for certificate of summary administration (COSA).
Court must grant certificate if:
- debtor
- debtor
=s unsecured debts do not exceed ,20,000.If COSA is granted, permanent trustee
=s duties are modified - he only has to carry out those which will be of financial benefit to the estate and in the interests of creditors.VI. VESTING OF THE ESTATE
The permanent trustee becomes owner of the debtor
=s property.1. Estate at the Date of Sequestration
(a) Heritable Property
Act and warrant gives trustee title to debtor
=s heritable property in Scotland - but title must be completed by registration in Register of Sasines or Land Register.Trustee can deal with heritable property even if there is a prior inhibition on the property.
Where debtor has heritage on which sale has been concluded prior to sequestration, but where disposition has not been signed and delivered, trustee can choose whether to carry on the deal or not.
Where the disposition has been signed, but not recorded at the date of sequestration, there may be a race to the register - trustee will still have title if he can register title before the buyer does.
Sharp v Thomson (Case 2)
(b) Moveable Estate
Moveable estate vests in the permanent trustee as if he had taken possession or delivery of it.
Special rules exist in relation to some kinds of moveable property:
(i) Insurance Policies and Certain Incorporeal Moveables
- An insurance policy will vest in the trustee as if he had intimated its assignation to him.
- Certain incorporeal moveables, such as shares, patents and trade marks, require some form of registration to complete title.
(ii) Pensions
- if debtor receives or is entitled to receive a pension as a result of his employment, this is treated as income which does not vest in the trustee.
- rights to any pension provisions the debtor has made on his own behalf do vest in the trustee.
(iii) Non-vested Contingent Interests
e.g. bequest in a will to the survivor of the debtor and another.
Non-vested contingent interests vest in the trustee at the date of sequestration. Trustee is entitled to any benefit which may arise from the interest even if it remains contingent until after debtor has been discharged.
Vesting (cont)
(c) Legal Actions
Trustee acquires any rights of debtor to bring a legal action for breach of contract, or for patrimonial loss due to any delict he has suffered.
Claims for solatium for personal injury, or for defamation are personal to the debtor and trustee cannot bring an action, but if debtor brings an action, damages will vest in the trustee.
(d) Scope of Trustee
=s RightsDebtor
=s property vests in trustee - but trustee acquires no better rights than the debtor had.Trustee takes the estate tantum et tale - only to the extent that it belonged to the debtor.
Heritable Reversionary Co Ltd v Millar (Case 3)
2. Vesting of Property Acquired After Sequestration
Debtor has duty to inform trustee of any assets he acquires after the date of sequestration - failure to do so is a criminal offence.
(a) Acquirenda
Property acquired by the debtor after sequestration but before discharge. It vests in permanent trustee if it would have vested in the trustee had it been part of debtor
=s estate on date of sequestration.(b) Future Income
Income received by the debtor after the date of his sequestration does not vest in the trustee, but remains the property of the debtor.
The trustee has a duty to try to gain a contribution from income where the debtor has an income.
The amount may be informally agreed between the debtor and the trustee - or the amount can be fixed by court order from the sheriff court.
3. Exclusion from Vesting
Certain property is exempted from vesting by s.33 of the 1985 Act:
(i) Trust Property
Property held by the debtor in trust for a third party will not vest in the trustee.
(ii) Property Exempted from Poinding
Property which is exempt from poinding for the protection of the debtor and his family does not vest in the trustee. The Debtors (Scotland) Act 1987 lists the property exempt from poinding. It includes:
- clothing reasonably required.
- tools or equipment for trade or business up to
- medical equipment reasonably required.
- educational materials up to
,500.- toys and articles required for care of child in debtor
=s family.- basic household articles which are in a dwelling house and reasonably required for the household - e.g. beds and bedding, chairs, tables and equipment for the preparation and serving of food.
4. Protection of Third Parties
If debtor deals with his estate once it has vested in the permanent trustee, the transaction will be of no effect.
There is limited protection for a third party who dealt with debtor after the sequestration, if certain conditions are fulfilled:
(i) The third party did not know and had no reason to believe that the debtor had been sequestrated, and
(ii) The permanent trustee had abandoned the property involved in the transaction to the debtor, or had consented to the transaction.
or
The dealing was the performance of an obligation undertaken before the date of sequestration, or involved the purchase of goods from the debtor for which value was given, or was a banking transaction in the ordinary course of banking business.
Minhas
VII. SEQUESTRATION AND DILIGENCE
1. What is Diligence?
Legal process by which creditor tries to enforce payment of a debt. The main forms are:
(a) Poinding
Attachment of property in the possession of the debtor by a sheriff
=s officer - followed by a warrant sale.(b) Arrestment
Attachment of the debtor
=s property in the hands of a third party (e.g. the debtor=s bank).Attachment does not give creditor title to attached assets - this requires further action of furthcoming.
(c) Inhibition
Inhibition prevents dealings with debtor
=s heritable property, but gives creditor no right to possess it.(d) Landlord
Landlord has a hypothec (security) for up to one years rent arrears over all moveables brought onto the premises by the tenant. Hypothec is enforced by action of sequestration for rent.
2. The Effect of Sequestration on Diligence
(a) Diligence After Sequestration
A creditor cannot carry out diligence against any income which vests in the debtor after sequestration.
(b) Cutting Down of Diligence
Diligence executed prior to sequestration may still not be effective to give the creditor a preference.
- no arrestment or poinding will be effective if executed within the 60 days prior to the date of sequestration.
- no inhibition will be effective if recorded within the 60 days prior to the date of sequestration.
- arrestments served outside 60 day period are effective, but if action of furthcoming is not brought prior to date of sequestration, arrested funds can be taken by trustee - subject to obligation to pay arresting creditor
- where property has been poinded outside the 60 day period, but no warrant sale has been held by date of sequestration, the poinded property vests in the trustee, subject to obligation to pay poinding creditor.
Cutting Down of Diligence (cont)
- inhibitions recorded prior to 60 day period do not prevent trustee disposing of property. Inhibiting creditor is entitled to be paid from proceeds of sale prior to any unsecured creditor whose debt arose after inhibition was recorded.
(Landlord
=s hypothec for rent is not affected by sequestration.)(c) Equalisation of Diligence by Apparent Insolvency
All creditors who have executed arrestment or poinding within the 60 days before the debtor became apparently insolvent or within the four months after will rank equally - none has a preference over the other.
If debtor is also sequestrated during the four months after he becomes apparently insolvent, the trustee, whose act and warrant operates as arrestment, poinding, etc on behalf of all the creditors, also ranks equally - so diligence is of no effect.
VIII. CHALLENGEABLE TRANSACTIONS
1. Gratuitous Alienations
Assets given away, or sold for inadequate consideration.
(a) Challenge Under Bankruptcy (Scotland) Act
Can be challenged by creditor or trustee if made within 2 years prior to sequestration (5 years if made in favour of associate of debtor).
Transaction cannot be challenged if:
- adequate consideration was given, or
- debtor was solvent at time alienation made, or any time after it, or
- alienation was reasonable conventional gift or donation to charity.
Alienated property must be restored to estate and person who had benefit of alienation will be postponed creditor in sequestration.
Short
=s Trustee v Chung (Case 5)(b) Challenge at Common Law
Requirements:
- alienation entirely gratuitous.
- debtor was absolutely insolvent and remained so until transaction was challenged.
- alienation prejudiced other creditors.
If shown, time limits imposed by statute do not apply.
2. Unfair Preferences
Transaction which has effect of favouring one creditor at the expense of another.
(a) Challenges under Bankruptcy (Scotland) Act
Preference can be challenged if given within the 6 months prior to the date of sequestration.
Exceptions:
- transactions in the ordinary course of business.
Anderson
- payments in cash for debts due (unless transaction was collusive).
Whatmough
=s Trustee v British Linen Bank (Case 7)- transactions in which both parties undertake fresh obligations (unless transaction was collusive).
Montgomery v Gallagher (Case 8)
- situations in which the debtor grants a mandate for arrested funds to be handed over to the arresting creditor.
Unfair Preferences (cont)
(b) Challenges at Common Law
Requirements:
- preference caused prejudice to other creditors.
- debtor was absolutely insolvent when preference given and remained so until preference was challenged.
- debtor knew he was insolvent.
- debtor
Exceptions are essentially the same as the statutory exceptions.
3. Recall of Capital Sum on Divorce
Family Law (Scotland) Act 1985 allows the court to make an order for payment of a capital sum or transfer of property on divorce. The order can be recalled if:
- debtor was absolutely insolvent when order made or he was rendered absolutely insolvent by the order, and
- debtor was sequestrated within 5 years after the order was made.
Former spouse will then have to repay money or return property.
4. Extortionate Credit Transactions
Trustee can challenge any credit transaction entered into by debtor in the three years prior to sequestration if he can show that transaction was extortionate.
A
extortionate@ = terms which require grossly exorbitant payments, or otherwise contrary to principles of fair dealing.IX. MANAGEMENT OF BANKRUPT
=S ESTATE1. Possession and Realisation of Estate
Trustee has duty to take possession of and value the debtor
=s estate.He has wide powers in relation to the estate, but must comply with directions from commissioners, creditors or the court.
The trustee must avoid any conflict of interest.
There are special rules for:
(a) Debtor
=s Family HomeDefined by 1985 Act as a property in which the debtor had a right or legal interest on the day preceding the date of sequestration and which at that time was occupied by:
(i) the debtor and his/her spouse, or
(ii) the debtor
(iii) the debtor and a child of the family.
The trustee cannot sell the family home without the
Arelevant consent@ - consent of the spouse or former spouse in (i) or (ii) above, or consent of the debtor in (iii)If trustee cannot get the consent, he must get the consent of the court, which will look at the circumstances of the case. The court may give consent subject to conditions, or postpone consent for up to 12 months.
(b) The Matrimonial Home
Matrimonial Homes (Family Protection) (Scotland) Act 1981 gave protection to the rights of a spouse to occupy the matrimonial home where the other spouse had sole title or tenancy rights.
If there is a petition for sequestration of an estate which includes a matrimonial home, the non-entitled spouse can petition for recall of the award of sequestration.
The court can recall the award if it believes the petition was brought purely for the purpose of defeating occupancy rights.
2. Examination of the Debtor
Trustees have a duty to gather information about the debtor
=s financial state. The Act provides formal means to enable this:(a) Private Examination
Permanent or interim trustee can request the debtor or any other person with relevant information to appear before him to give information.
If this is not complied with, trustee can apply for order from the sheriff compelling appearance before sheriff for the examination.
(b) Public Examination
Examination in open court.
Permanent trustee can apply to sheriff for order for public examination. Application must usually be made not less than eight weeks before the end of the first accounting period.
Trustee must ask for an order if requested to by:
- the Accountant in Bankruptcy, or
- the Commissioners, or
- 25% in value of the creditors.
Order must be published in Edinburgh Gazette and copies sent to all the creditors.
3. Claims from Creditors
(a) Submission of Claims at Statutory Meeting
- creditors must submit claims at or before statutory meeting in order to be able to vote at the meeting.
- claim must be set out on the statutory form and be accompanied by documentary evidence of the debt.
- it is a criminal offence to knowingly submit a false claim.
(b) Submission of Claims after Statutory Meeting
- creditors who did not claim at statutory meeting can claim later in order to vote at later meetings or to get payments to account.
- form of claims is the same as those submitted at the meeting.
In either case, if a creditor
=s claim is rejected by the trustee, he can appeal to the sheriff.4. Offers of Composition
A
Composition@ = an arrangement under which creditors agree to accept less than full amount due to them.Offer must be enough to cover:
- all costs of administering the sequestration.
- full payment to the preferential creditors.
- at least 25p in the
Permanent trustee reports on offer to the Commissioners or Accountant in Bankruptcy - if they recommend it, notice is put in Edinburgh Gazette and each creditor is notified personally.
Creditors have 14 days to return firm accepting the offer. If acceptances are returned by a majority in number and at least two-thirds in value, it is regarded as accepted.
Trustee then reports to sheriff, who will order approval or rejection. His decision can be appealed by the debtor or any creditor within 14 days.
Approval of offer means debtor will be discharged from sequestration.
5. Distribution of Estate
(a) Order of Distribution
Debts are paid in the following order (similar to a company liquidation):
(i) Expenses and fees of interim trustee.
(ii) Expenses and fees of permanent trustee.
(iii) If debtor was a deceased debtor - reasonable funeral expenses and any expenses of executor prior to sequestration of the estate.
(iv) Expenses of any creditor in bringing or concurring with the petition for sequestration.
(v) Preferential debts.
(vi) Ordinary unsecured debts.
(vii) Interest (payable on preferential debts first).
(viii) Postponed debts, i.e.
- loan made to debtor in consideration of a share of business profits.
- loan made to debtor by his/her spouse.
- creditors right to any money paid on transaction which was successfully challenged.
(ix) Balance, if any, to debtor or his successors.
(b) Dividends
If funds of estate allow, trustee can make partial payments to creditors at the end of each accounting period.
Where funds available would result in very small payment, trustee can seek permission to postpone payment until end of next accounting period.
If trustee believes payment of dividend should be made earlier, he can seek permission to shorten the accounting period.
Unclaimed dividends must be deposited in a bank or other approved institution.
X. DISCHARGE OF SEQUESTRATION
1. Discharge of Debtor
(a) Prior to 1985 Act
No automatic discharge for debtor.
(b) Automatic Discharge
Debtor is discharged automatically at the end of three years form date of sequestration.
He can request certificate of discharge from the Accountant in Bankruptcy.
(c) Deferment of Discharge
Trustee of creditor can apply to sheriff for discharge to be deferred for up to two years.
Application must be brought more than three months prior to date of automatic discharge.
Application must be notified to debtor - he must lodge a declaration that he has made full disclosure of assets and claims. If no declaration is lodged, court will defer discharge without a court hearing - otherwise there will be a court hearing to determine the action.
(d) Effect of Discharge
Debtor will no longer be liable for any pre-sequestration debts.
Exceptions:
- secured creditor still has right to repossess property.
- the following debts are not discharged:
- liability to pay a fine to the Crown.
- liability for fraud.
- obligation to pay maintenance to a spouse or child.
Debtor can then acquire new estate which will not vest in the permanent trustee.
2. Discharge of Permanent Trustee
(a) Procedure
Final audited accounts are put before Accountant in Bankruptcy. Trustee can then ask for certificate of discharge.
Notice of application for discharge must be sent to debtor and all creditors - they have 14 days to object to discharge of trustee.
(b) Effect of Discharge
Trustee has not further liability to debtor or creditors for his actions in the sequestration, unless fraud can be shown.
XI. TRUST DEEDS FOR CREDITORS
1. Voluntary Trust Deeds
Trust deed must be voluntarily granted by debtor. It puts debtor
=s estate into hands of trustees to be administered for benefit of creditors.Trust deed does not require consent of creditors, but it will be almost impossible to administer if they don
=t.
2. Protected Trust Deeds
(a) Requirements for a Protected Trust Deed
- deed must convey all of debtor
- granting of the deed must be published in the Edinburgh Gazette.
- within one week, trustee must invite the views of all the creditors.
- if majority in number or one-third in value of creditors object to deed, it cannot become protected.
- if required majority does not object, deed is registered with Accountant in Bankruptcy.
(b) Effect of Protection
- creditors who objected cannot execute diligence to recover their debts.
- trustee has right to challenge gratuitous alienations and unfair preferences.
- creditor can still petition for sequestration of debtor, but must do this within six weeks of publication of notice in the Gazette.
(c) End of Protected Trust Deed
Trustee sends statement of distribution to Accountant in Bankruptcy, along with discharge from creditors, if he has been given one.