Tag Archives: sequestration

Re-opening sequestration for whose benefit?

Re-opening sequestration for whose benefit?

In a recent note, issued by Glasgow Sheriff Court, Sheriff Deutsch, has refused an application to re-open a sequestration, which he found failed to provide sufficient evidence that re-opening the sequestration would benefit anyone, but the professionals involved.

The application to re-open the sequestration, after the trustee and the debtor were discharged, was to allow the trustee to be re-appointed in order that he could take possession of funds that had become available from a mis-sold payment protection insurance claim.

As these funds related to a claim that would have vested with the trustee during the sequestration, if it had been known about, s63 (1) (b)  of the Bankruptcy (Scotland) Act 1985, allow a trustee to apply to the court to re-open a sequestration in order that the funds be ingathered and distributed to the creditors of the sequestration.

In this case, the problem was there were none, or at least any who had submitted a claim.

Exercising his discretion, the sheriff could see insufficient benefits that would arise from the re-opening of the case, other than for the professionals involved, and declined to do so.

Of the £2,817.91 available to the trustee, it was shown approximately only 16% of this would be available to be distributed to the creditors, none of whom had made a claim in the previous sequestration, and £2,344.38 would be consumed by the fees and outlays of the trustee and his legal advisers.

Consignation of Funds

Interestingly, the solictors acting for the trustee, suggested to the sheriff that if the sequestration was not re-opened, the funds would have to be consigned to the Accountant in Bankruptcy (AiB). This is a process that allows for funds to be deposited with the AiB at the end of a sequestration, where funds have been allocated to a creditor, but not uplifted or cashed, or which have been allocated to a claim by a creditor that has been set aside.

In the sequestration in this case, however, no claims were received by creditors, so it is not simply a case they had not been uplifted of cashed. The only apparent grounds for consigning the funds, therefore, would be the creditor had failed to make a claim and provided reasonable reasons for failing to submit one, under section 52 (8) of the 1985 Act.  However, it would appear no reasonable reasons were provided by those creditors that failed to submit claims.

As the Trustee is no longer in office, and the court clearly decided to not allow the case to be re-opened, it must be wondered what capacity they would have to take any funds, even to just consign them to the AiB.  Equally,  it must also be wondered what would be the statutory basis for the AiB  accepting the funds. No claims were made in the sequestration and apparently creditors did not provide reasons for failing to submit claims.

Multiple Poinding

Sheriff Deutsch, however, suggested there may be other routes, even informal  ones available for dealing with the funds. One option he suggested, was an action of multiple-poinding. Multiple poinding is an action that can be raised when there are multiple competing claims that need to be dealt with. However, in this case, there are no claims, presuming the trustee himself has no fees and outlays outstanding from the original sequestration.

Offer of Composition

Another informal route that could be used is to make an offer of composition to the creditors in full and final settlement of the debts. There are, however, also problems with this. First, the trustee has no official capacity to do this and until the funds are released to the debtor, they lack any means of implementing it.  It would also require creditors to submit claims and, there may still be problems agreeing the claims submitted.

Personal Bar

Possibly a better way of dealing with a case like this, is where no claims have been received, or reasons for failing to submit a claim have been made prior to the trustee being discharged, is to take a view that the creditors have personally barred themselves from making a claim in the future. This would allow the funds to be reverted back to the debtor.  It cannot be argued they didn’t have sufficient time to make a claim or at least submit a reason for why they had not.

This would appear more sensible. Its one thing re-opening sequestrations where creditors have made claims which are unsatisfied, or have submitted reasons why no claim has been submitted prior to a trustee receiving their discharge; its another thing to re-open a case where no claims are known about and no fees are owed to the trustee in the original seqeustration.

It also has to be questioned on what basis someone else’s property is being consigned to a government agency to be held in trust for creditors, who have made no claim or failed to provide any reason for failing to make a claim. It would appear fairer to assume all debts have been paid and the funds should be reverted back to the debtor.

 

Gratuitous alienation did not breach human rights law

Gratuitous alienation did not breach human rights law

Lord Armstrong has held in a decision dated the 11th May 2017, that the provisions contained in s34 of the Bankruptcy (Scotland) Act 1985, relating to gratuitous alienations, were ECHR compliant.

The Background

Miss Farrell had married Mr Walker in November 2007 and they were subsequently divorced in August 2010. Mr Walker was sequestrated in April 2009. The Accountant in Bankruptcy was appointed the trustee in his sequestration.

Prior to the sequestration, Mr Walker was the sole owner of a property at 1A Beechwood Avenue, Rutherglen, but in December 2007 the property was sold for £435,000. After the mortgage on the property and the costs of sale were deducted, this left Mr Walker with £178,723.82.

Mr Walker then transferred this sum to Miss Farrell. Miss Farrell then purchased a new property using these funds and funds from the sale of her own home for £866,000. The purchase was funded by

  1. The funds transferred to her by Mr Walker as a gift;
  2. £313,000 from the sale of her own property; and
  3. A mortgage of £380,000.

The Pursuer’s Case

The trustee in sequestration sought to challenge the transfer of the funds from Mr Walker to Miss Farrell as a gratuitous alienation under s34 of the Bankruptcy (Scotland) Act 1985 and raised an action for payment of money.

Arguments for the Defender

Miss Farrell did not dispute that the transfer of funds from Mr Walker was a gratuitous alienation. She instead claimed that the statutory defences available in s34(4) did not take into consideration the circumstances of the alienation, or the reasonability or proportionality of making the order on her personal or financial circumstances. She claimed in this regard s34(4) was incompatible with her rights under Articles, 6,8, 14 and Article 1 of the First Protocol of the European Convention of Human Rights.

Article 6 – The Right to a Fair Trial

The court held that Miss Farrell’s complaint that her right to a fair trial was denied was misconceived. Miss Farrell’s complaint was about the fact that s34(4) did not allow her a stateable defence, not that the process itself was unfair.

Article 8 – Right to Respect for Family life and Home

Miss Farrell argued that the effect of the order sought by the pursuer would be that she would have to sell her home and this would constitute an interference in her family life and that of her children. This argument, the court held, was also misconceived. The action was one for payment of money, not for the sale of her home, although if successful it may have resulted in Miss Farrell being sequestrated and her trustee looking to sell her home. However, in that event, Miss Farrell would have access to the defences allowed under s113(2) of the Bankruptcy (Scotland) Act 2016 (formerly S40 of the Bankruptcy (Scotland) Act 1985).

Article 14 – Protection Against Discrimination

The defender also argued s34(4) discriminated against her in that it allowed gratuitous alienations, made for the benefit of associates, to be challenged where they occurred within five years of the date of sequestration, rather than for two, where the beneficiary was not an associate. The court dismissed this argument as although Miss Farrell had argued her family had been discriminated against, she failed to specify the basis of the discrimination under any grounds prohibited by Article 14.

In addition, under the circumstances of the cases, the gratuitous alienation had taken place within two years of the debtor’s sequestration, so would have been challengeable even if Miss Farrell had not been an associate.

Article 1, First Protection – Peaceful Enjoyment of Property

Finally, Miss Farrell argued that the order sought would interfere with her peaceful enjoyment of her property, namely her home. Again the court dismissed this argument, as the order sought was for payment of money, not for the sale of the debtor’s home.

The court also held that aims of S34 of the Bankruptcy (Scotland) Act 1985 were legitimate and did strike the correct balance between the interests of the debtor’s creditors and Miss Farrell. It held they were reasonably proportionate to that aim.

Unjustified Enrichment

Interestingly, the Court also held that Miss Farrell would not be able to claim unjustified enrichment or be able to make a claim in the sequestration, if the order sought was granted and payment made, as the transfer of funds were a gift and unjustified enrichment could not be claimed.

The full case can be read here.

Opinion column: Alan McIntosh

Opinion column: Alan McIntosh

First pubished in The Journal of the Law Society of Scotland.

The proposal to extend the contribution period in bankruptcy from 36 to 48 months is unsupported, and arguments contradict ministerial statements relating to protected trust deeds

In money advice and personal insolvency, it is accepted as a truism that the longer people pay into any debt repayment plan, the likelihood of them defaulting increases. However, this is not universally accepted. The Minister for Energy, Enterprise & Tourism, Fergus Ewing, believes debtors can pay for longer and have not been paying long enough for the last 28 years, since the Bankruptcy (Scotland) Act 1985 was introduced.

In support of this belief, he has cited evidence from the Scottish Debt Arrangement Scheme, where the average payment period is six and a half years: if these debtors can pay that long, he believes others can too. He has also made the point that only 3% of all DAS cases are revoked each quarter. Obviously a success, until you realise that some in the insolvency industry who have researched this are equating it to 13.4% per annum and, with the average lifetime of a debt payment programme being six and a half years, are suggesting the attrition rates for DAS could eventually be more than 50% for average length programmes. Not so successful, and not so supportive of the argument that paying for longer is suitable for all debtors.

The minister also believes that bankrupts can pay for longer, despite evidence heard by the Energy, Enterprise & Tourism (EET) Committee during stage 1 of the Bankruptcy and Debt Advice (Scotland) Bill. Organisations such as Money Advice Scotland, Citizens Advice Scotland, the Law Society of Scotland, Stepchange, Lloyds Banking Group and the Consumer Finance Association all opposed the change, fearing it could result in increased defaults, hardship and disputes between debtors and trustees.

Part of the problem with the Government’s proposal is that many feel it is completely left field and was never consulted on. The minister has said it was consulted on, and supported by respondents. He cites question 10:41A, where respondents were asked whether they would support an extension of the payment period in one particular type of bankruptcy product. Only 27 supported retaining the three-year period, while 32 supported a rise to five years.

This ignores, however, that the original consultation had proposals for five different bankruptcy products, and, in relation to another product, question 10:47A, in identical terms to question 10:41A, produced 33 responses for keeping the three-year period and only 28 wanting it extended.

What has been overlooked, however, in relation to both questions is that more than half of the 129 respondents ignored both questions, and many indicated they did not feel any additional products were required. Eventually, the proposal to have five different products was shelved.

The minister has argued that the extension is necessary as payment periods must be harmonised with those for protected trust deeds which, since 27 November 2013, now last a minimum of four years. Without harmonisation, it is said, debtors may opt to use bankruptcy as an easier option for dealing with their debts.

However, on 11 October 2013, while giving evidence to the EET Committee on the Protected Trust Deed (Scotland) Regulations 2013, which extended the minimum payment period to four years, the minister dismissed concerns that introducing such changes ahead of the bill being commenced would result in debtors using bankruptcy as an easier way to deal with debts.

He pointed to the rest of the UK, where individual voluntary arrangements, which normally last five years, remain popular despite bankruptcy only having a three-year payment period. Debtors, he argued, did not take the easiest remedy for dealing with their debts and wanted to pay back what they could.

In my view, the real problem here is that the Scottish Government’s proposals to extend bankruptcy payment periods have not been thought through, and are not supported by research. They are not supported by the vast majority of civic Scotland, who make up the key stakeholders and, bizarrely, for once the debt charities and the trade body of payday lenders are all singing from the same hymn sheet.

The four-year period appears to be completely arbitrary, and the arguments in favour of it are weak. They have also been inconsistent, with the minister arguing one minute that harmonisation is not necessary and the next that it is vital.

The Institute of Chartered Accountants in Scotland has called for more research before stage 2 of the bill to explore what, if any, net benefits there would be for creditors. I would support that, but suggest such research should also extend to consider how debtors will be affected.

The Scottish Government may be launching a new Financial Health Service, but it is no National Health Service, and it is not even clear whether it has a Hippocratic Oath of doing no harm.

Scottish Gov To Introduce UKs Longest Bankruptcy

Scottish Gov To Introduce UKs Longest Bankruptcy

As the Scottish Government host on Monday, the 24th Annual General Meeting of the International Association of Insolvency Regulators, their surroundings will be far from those where most bankrupts spend their time.

The conference itself will be hosted in the Edinburgh’s plush George Hotel and be opened by Scottish Government Minister, Fergus Ewing.

Later there will be a drink’s reception in the Great Hall of Edinburgh Castle and a formal conference dinner on the Royal Yacht Britannia.

The event is expected to be attended by insolvency regulators from 24 countries, including the Republic of Ireland which, like Scotland, is currently modernising its own bankruptcy laws.

Unlike Scotland, however, whereas the Irish are liberalising their laws to reduce the time someone will be bankrupt from 12 years to 3 years, Scotland, under Minister Fergus Ewing is introducing new legislation, which will may see Scots remaining bankrupt for longer than anyone else in UK.

Currently under existing legislation, bankrupts throughout the UK are only bankrupt for 1 year, then they receive a discharge from their bankruptcy.

Where debtors can afford to pay something towards their bankruptcy, however, they have to pay for three years.

New proposals being made by the Scottish Government, however, will see this change.

First, they are proposing removing the automatic discharge of debtors from their bankruptcy after one year and leaving it to the discretion of their trustees to decide when they should be discharged.

Second, they are changing the law so bankrupts don’t just pay for three years, but for four years, one year longer than anywhere else in the United Kingdom.

Many insolvency practitioners have already indicated that if it is left to their discretion when a debtor is discharged, then they will likely only discharge debtors when all payments to the bankruptcy have been paid, meaning for most Scots, bankruptcy will last four years.

The poor are being trapped in a cycle of debt

Last year over 40% of all Scottish bankrupts were low income, low asset bankrupts (LILA), which mean they were either entirely dependent on means tested benefits or living on less than the 40 times the national minimum wage and didn't own their own home.

Previously these types of bankrupts in Scotland composed a larger number of those who went bankrupt, but applications by LILA debtors dropped by 60% last year after Fergus Ewing increased the cost of applying for bankruptcy from £100 to £200.

Since then many Citizen Advice Bureau and local authority money advisers have reported a sharp increase in the number of poor debtors unable to find solutions to their debts and who are now trapped in a cycle of debt.

Low Income, Low Asset Bankruptcies

The Scottish Government are now proposing a new procedure for Low Income, Low Asset debtors, but the procedure will be more restrictive than the current procedure and it is not expected as many debtors will be able to apply.

It will, however, allow those do meet the criteria to be discharged automatically after 6 months, but with the maximum amount of debt in such bankruptcy’s being restricted to £10,000 (average level of debt in LILA’s is £17,000), many low income debtors will be forced into the more formal, longer bankruptcy procedure.

The problem is the Scottish Government has not produced any evidence to suggest debtors in Scotland are able to pay for longer than anywhere else in the United Kingdom and no research has been undertaken to discover if this will increase hardship for bankrupt debtors and their families, although most money advice agencies are expecting it will. 

Even if the motivation is to raise more money for creditors, it is expected four year bankruptcies will also increase the costs of administering bankrupties and any increased returns will be minimal. 

Scotland’s Debt Landscape Possibly Changing

Scotland’s Debt Landscape Possibly Changing

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The recent statistics producced by the Accountant in Bankruptcy has shown that the Scottish debt landscape has begun to change.

The number of sequestrations (formal bankruptcies) in the first quarter of this year remained the same with the number for the previous quarter (3,139), but showed a 16 % decrease on the numbers from the same quarter last year.

A similar story can be told for protected trust deeds, with only 2,239 becoming protected in the first quarter, which although up 10 % on the previous quarter was down 13% on the same quarter for last year.

The real story, however, is the 495 debt payment programmes entered into under the Debt Arrangement Scheme, showing a 19% increase on the previous quarter and a 60% increase on the same quarter last year.

The Debt Arrangement Scheme is a statutory alternative to personal insolvency and allows debtor to repay their debts in full, whilst providing them with protection from their creditors. Importantly, it also avoids debtors having to realise assets and  allows interest and charges on debts to be frozen and eventually written off if the programme is succesfully completed.

Launched in October 2004, the scheme has had a troubled beginning with a poor uptake and problems with debtors unable to access it. This has largely been because access is exclusively through an approved money adviser and there has been a shortage of approved money advisers. This has now been partly solved with increased private sector involvement and it is now believe up to 10% of all applications may now be originating in the private sector. Concerns have, however, been raised in relation to private sector involvement with some private sector providers charging debtors up to £1,800 to access the scheme.

However, the increase in the number of the debt payment programmes may not just be a sign that debtors are keen to repay their debts, but that they have no other remedy available to them.

Those  who enter the Debt Arrangement Scheme have to have disposable income to make payments  and, therefore, it may be that increasing numbers of  white collar debtors may be using the Scheme where there has been a drop in the household income and they are unable to use personal insolvency as a remedy. This may be as in personal insolvency debtors are required to realise the value of  assets, such as homes and cars for the benefit of creditors. One of the advantages of the Debt Arrangement Scheme is that debtors do not normally have to realise their assets for the benefit of their creditors.

This creates a problem, however, for those debtors with assets, if they are unable to realise those assets (it may make them homeless or leave them unable to get back and forth to work), resulting in them having to enter repayment plans with their creditors that could take 10 years or more.

The Scottish Government will be introducing a new route into seqeustration also in October, which will allow debtors who cannot repay their debts as they fall due to apply for bankruptcy. This may result in an increase in the number of bankruptcies each year, but may equally result in a reduction in the number of protected trust deeds. In addition to this, the Government, as part of the new Act, will also be introducing new forms of protected trust deeds that will allow debtors to exclude their home from it, allowing them to keep it even though they are personally insolvent. This, however, is likely only to be  in cases where there are small amounts of equity in the home.

It is clear that Scotland’s debt remedy landscape  is now beginning to shift with one debt payment programme being entered into for every four protected trust deeds being signed. It could be tomorrows debtor landscape is one where there is more debt payment programmes and less personal insolvencies. It could also be with the decreasing number of personal insolvencies and increasing numbers of debt payment programmes, Scotland’s personal insolvency industry will now begin diversifying to offer the Debt Arrangement Scheme as one of the services they can offer.

Debt Arrangement Scheme

Accountant in Bankruptcy