Insolvency - personal & corporate

Insolvency relates to the situation where a party (either a company or an individual) has insufficient assets to meet their debts and liabilities, i.e. they are bankrupt and their assets are administered by a trustee for the benefit of the creditors.

There are a number of factors which, in terms of the general law of bankruptcy, indicate insolvency. These include the inability of the debtor to meet his outstanding debts and also the situation whereby the debtor’s liabilities exceed his assets. Section 7 of the Bankruptcy (Scotland) Act 1985 also lists a number of events that will indicate the ‘apparent insolvency’ of a person. Most common of these is the failure to comply within 30 days with a demand for payment of a debt for more than £1,500 or such sum as may be prescribed.

There is a range of different regimes that are applied to regulate the financial affairs of a party with a view to either enable them to continue operating without being wound-up or proceed to winding-up with the assets being administered for the creditors.

For individuals, partnerships and trustees the processes are:

Sequestration, where the trustee will administer the assets to cover the entitlement of the creditors; and
Voluntary Trust Deed which may be a Protected Trust Deed (PTD), where the debtor enters into an agreement to repay creditors resulting in the debt being written of at the end of the period of the agreement; procedurally this operates in a similar way to sequestration.

For companies and Limited Liability Partnerships the processes are:

Administration is intended to result in the company being rescued and continue trading as the original entity;
Liquidation winds up the company's affairs;
Receivership is undertaken to repay a creditor under a floating charge; and
CVA (variously known as Company, Corporate or Creditors Voluntary Agreement) is essentially an arrangement in which a company has formally agreed terms with its creditors for the settlement of its debts. It may be used as an alternative to administration/liquidation. However, CVAs may also be used where the company is in administration (proposed by the administrator) or in liquidation (proposed by the liquidator).

Table of Contents

5.1 Sequestration

Sequestration is a process that is invoked, either by the debtor or one of his creditors, whereby the estate of the debtor is taken over and subsequently distributed among the creditors according to their various entitlements. For sequestration to arise the debtor must be bankrupt or, as is it is more commonly termed nowadays, insolvent.

Sequestration is governed by the Bankruptcy (Scotland) Act 1985 (the "1985 Act"), as amended and extended by the Bankruptcy (Scotland) Act 1993, the Bankruptcy and Diligence etc. (Scotland) Act 2007 (the "2007 Act) and the Home Owner and Debtor Protection (Scotland) Act 2010 (the "2010 Act").

The bankruptcy provisions of the 2007 Act came into effect on 01 April 2008 however the changes introduced by this Act are not retrospective and only affect those sequestrations which arise after 1 April 2008. Sequestrations made before this date will follow the existing procedure as set out under the Bankruptcy (Scotland) Act 1985. This means that registration officers will have to be alert to the date that sequestration is awarded as evidenced in the Act and Warrant or Determination Awarding Sequestration recorded in the Register of Inhibitions.

The main changes introduced by the Bankruptcy and Diligence etc. (Scotland) Act 2007 are –

Debtors will be discharged from bankruptcy after one year (instead of three years for pre 1 April 2008 sequestrations), however the trustee in sequestration may apply to have the debtor's discharge deferred - see section 5.5.2; (Note: the inhibitory effect of a sequestration awarded under the 2007 Act continues to be 3 years or such longer period if the trustee records a memorandum continuing the inhibitory effect of the sequestration - see section 5.5.1);
Debtors will now apply to the Accountant in Bankruptcy (AiB) instead of the Sheriff Court for their own bankruptcy. The Act and Warrant will be replaced by a Determination Awarding Sequestration awarded by AiB;
a trustee in sequestration is precluded from registering title to any heritable property of a debtor for 28 days after the award of sequestration is itself registered. This is in order to allow time for a third party who has purchased property in good faith from a debtor to complete title by registration.
A debtor’s family home will re-vest in the debtor if their Trustee does not begin action to sell it within three years of the award of sequestration (the date they become bankrupt);
The debt threshold for bankruptcy will increase to £3000 for sequestration commenced by creditors but will remain £1500 for sequestrations commenced by debtors.
From the date of sequestration onwards there is simply a trustee in sequestration and not an interim trustee. Note: there is no term of ‘the permanent trustee’ rather reference is always to the ‘trustee’.
More than one sequestration can now run concurrently, since it is possible for a debtor to acquire new property and incur new debts after his automatic discharge in terms of section 54 of the 1985 Act. This can occur while the inhibitory effect of a prior sequestration is still in force. In such cases the original trustee can continue to administer the estate vested in him by the virtue of the original sequestration notwithstanding the fact that a new trustee is appointed in relation to the debtor's newly acquired assets.

Note: these changes only apply where the sequestration occurs on or after 1 April 2008

In addition the 2010 Act made further amendments to the 1985 Act to introduce the following changes:

New rules are made which include debtors being granted a certificate for sequestration by an authorised person confirming they are insolvent so debtors can use this certificate to apply to the AiB for their own bankruptcy
These new rules also repeal the previous routes whereby the debtor could apply for their own bankruptcy on the basis of creditor concurrence and where a trust deed has been refused protected status
The definition of trust deeds is amended so it can exclude assets such as the family home
Section 40 of the 1985 Act for the family home will now apply for trust deeds as well as bankruptcies

In terms of these new statutory provisions the effect is that debtors will be able to apply to the AIB for their own bankruptcy if they meet the following conditions:

they were habitually resident or had an established place of business in Scotland in the 1 year period preceding the date of their application – see section 9(1A) of the1985 Act,
they owe debts totalling at least £1,500 – see section 5(2B)(a) of the 1985 Act (please note this figure of £1,500 can be reviewed)
no award of bankruptcy has been made against them in the previous 5 years – see section 5(2B)(b) of the 1985 Act, and

either they are “apparently insolvent” as defined in section 7 of the 1985 Act and they meet the low income low asset conditions in section 5A of the 1985 Act, or they have a certificate for sequestration (see above)

5.1.2 Who may be sequestrated?

Section 5(1) of the 1985 Act provides that "the estate of a debtor may be sequestrated in accordance with this Act". In general terms this includes, living debtors, deceased debtors, trusts, partnerships and bodies corporate and unincorporated however it excludes companies registered under Companies Acts or an entity in respect of which an enactment provides that sequestration is incompetent.

Any application that involves a sequestration that is not against the estate of a living debtor should be referred to a senior caseworker. In terms of the amended section 5(2)(a)of the1985 Act the executor of a deceased debtor cannot apply to the AiB for voluntary sequestration and instead has to apply to the court for an award of sequestration. The senior caseworker will seek further guidance from Legal Services.

5.2 What triggers a sequestration?

There are two routes to sequestration. Either the creditor can initiate proceedings or the debtor himself can choose to do so. Nowadays the numbers of each are broadly similar, reflecting the fact that for many debtors sequestration is not always unwelcome. This is because sequestration limits the debtor’s liability for his outstanding debts and points to a time in the future when the debtor will be able to start again with a clean slate.

5.3 Procedure

Prior to 1 April 2008 and the introduction of the Bankruptcy and Diligence etc (Scotland) Act 2007 sequestration involved petitioning the court. This remains the case for creditor led sequestration but where the debtor voluntarily seeks to enter into sequestration the procedure is now dealt with by the AiB and not the courts. In both cases a notice is registered in the ROI and has the effect of an inhibition (s14(2) of the 1985 Act). It should be noted that the effective date is the date of award of sequestration, not the date of recording the notice in the ROI, and that the inhibitory effect lasts for 3 years.

5.3.1 Petition by creditor or trustee under a trust deed

If the petition comes from a creditor, then the court will grant an interlocutor (an order of the court), instructing the debtor to appear before the court on a date between 6 and 14 days from the interlocutor. It is important to realise that, at this stage, the court has not taken a final decision on whether the sequestration will proceed – because they want to take into account the debtor’s views – and there is no appointment of a trustee in sequestration. However, to prevent the debtor from disposing of his assets during this period, the law provides that the sequestration takes effect on the date on which the court grants the interlocutor.

In terms of section 14(1) of the 1985 Act the clerk of the court shall forthwith after the date of sequestration send a certified copy of the relevant court order to the Keeper for recording in the Register of Inhibitions. Where the petition for sequestration has been raised by a creditor the court order will grant warrant to cite the debtor. The date of the warrant to cite the debtor is taken to be the date of sequestration.
The entry in the ROI will be along the following lines:

- 012345 9 January 2002
- Certified Copy Interlocutor (Sequestration), granting warrant to cite Bob Short, 1 Bank Street, Pennywell. Date of warrant 5 Jan. 2002. Per John Smith, Registers of Scotland.

As noted, the effective date for the sequestration is the date on which the court issued the interlocutor (in this example 5 January), not the date on which the certified copy of the interlocutor is recorded in the ROI (9 January). The date of recording in the ROI will generally be some 2 to 3 days after the date of sequestration, although longer delays can occur.

Occasionally the court grants more than one warrant to cite the same debtor. This often arises where the original interlocutor contains some informality such as an erroneous designation. The 1993 Act resolves any doubt about which court order represents the date of sequestration by providing that sequestration runs from the date of the first warrant to cite. This situation should not be confused with the position where a debtor is once again sequestrated after receiving his automatic discharge in terms of s54 of the said Act, which might occur whilst the 3 year inhibitory period of the previous sequestration is still running. See section 5.1.

There is a requirement to clear the register if the award of sequestration is refused, recalled or discharged; however, where sequestration is awarded there is no requirement to register a further document, following the warrant to cite, in the ROI. Accordingly, in any situation where a warrant to cite is registered in the ROI, and there is no subsequent deed counteracting this, the Keeper considers that sequestration has been awarded. If the agent on being advised that the Keeper will be excluding indemnity puts forward an argument that the sequestration did not proceed, the matter should be referred through the usual channels.

5.3.2 Petition by debtor

Post 1 April 2008 procedure (governed by the 2007 Act as amended by the 2010 Act)

Under the 2007 Act and 2010 Act a debtor will apply to the AiB for their own sequestration. Section 14(1) of the 2007 Act extends section 1A of the 1985 Act to add determining debtor applications for sequestration to the other functions of the AiB. The AiB will generally be able to award sequestration forthwith. If so, a determination awarding sequestration will be granted, and, as per section 14(1A) of the 1985 Act, the AiB must send a certified copy thereof for recording in the ROI. The entry in the ROI will be in the following terms:

- 012345 20 April 2008
- Certified Copy Determination awarding sequestration of estate of John Smith, Flat 1/2, 68 Queen Street, Edinburgh. Date of Award 17 Apr 2008. Per Janet Ross, Registers of Scotland.

The effective date for the sequestration is the date on which the AiB issues the determination awarding sequestration (17 April 2008) not the date on which the determination is recorded (20 April).

Pre 1 April 2008 procedure (governed by the 1985 Act)

Prior to 1 April 2008 the debtor had to petition the court for sequestration. Where the debtor petitioned for his own sequestration the court would generally be able to award the sequestration forthwith. An interlocutor awarding sequestration would be granted, and as per section 14(1) of the 1985 Act, the clerk of court was required to send a certified copy thereof for recording in the ROI. The entry in the ROI will be in terms similar to the following:

- 012345 9 January 2002
- Certified Copy Interlocutor, awarding Sequestration of estate of Bob Short, 1 Bank Street, Pennywell. Date of award 5 Jan. 2002.Per John Smith, Registers of Scotland.

Once again, the point to be stressed is that the effective date for the sequestration is the date on which the court issues the award of sequestration (5 January), not the date on which the copy interlocutor is recorded (9 January).

5.3.3 Trust Deeds

A trust deed for creditors is defined in section 5(4A) of the 1985 Act as follows:-

"In this Act "trust deed" means

(a) a voluntary trust deed granted by or on behalf of the debtor whereby his estate (other than such of his estate as would not under section 33(1) of this Act, vest in the permanent trustee if his estate were sequestrated) is conveyed to the trustee for the benefit of his creditors generally, and

(b) any other trust deed which would fall within paragraph (a) but for —

(i) the exclusion from the estate conveyed to the trustee of the whole or part of the debtor's dwellinghouse, where a secured creditor holds a security over it; and

(ii) the fact that the debtor's estate is not conveyed to the trustee for the benefit of creditors generally because the secured creditor has, at the debtor's request, agreed before the trust deed is granted not to claim under the trust deed for any of the debt in respect of which the security is held."

A trust deed for creditors is by its nature a voluntary act and can itself be considered to be a fraudulent preference or a gratuitous alienation, see 5.4.6. The trust deed conveys irrevocably the assets of the granter of the trust – but only assets capable of voluntary transfer may be effectively transferred no matter what is said in the trust deed. Some of the debtor’s rights may not be assignable. Trustees may be bound by a deed, which is valid against the debtor, because the trustee cannot acquire a higher right than the debtor. This means that there must be a discharge of any outstanding inhibitions or these are disclosed on the Title Sheet.

The trustee becomes vested in the property when the trust deed is delivered but this deed does not transfer rights of ownership to the trustee. The trustee can apply to register title in their name or can use the trust deed as a link in title and the Keeper does not require a deduction of title clause except where there is a First Registration, however if the necessary documents are submitted the Keeper's practice is not to return a DIR just to have a deduction of title inserted.

There is no automatic requirement to put a Notice in the Register of Inhibitions and Adjudications. Schedule 5 2(1) of the 1985 Act provides that the trustee "may" record such notice in the ROI. If a Notice is recorded it has the effect of Letters of Inhibition. If no Notice is recorded it is possible that the debtor could give a good title to heritage to a purchaser who had no knowledge of the trust deed, however if the Keeper becomes aware that an unrecorded Notice exists the matter should be referred to a senior caseworker who will seek further advice from Legal Services.

A trust deed does not have to comply with the requirements of the 1985 Act to give the trustee the right to deal with the truster's assets. The trust deed itself must always be examined to ascertain the particulars terms on which it has been granted and to ensure the heritable property is not excluded (this is only possible for trust deeds granted since 15 Nov. 2010). Trust deeds frequently provide for all assets acquired by the debtor during the period the trust deed is in force to vest in the trustee in the same manner as they would in a sequestration.

Since granting a trust deed is a voluntary act and therefore is a dealing in terms of the Matrimonial Homes (Family Protection) (Scotland) Act 1981, evidence that there are no occupancy rights in terms of the Matrimonial Homes Act is therefore required at the time of transfer to the trustee but not at the time of sale by the trustee (see section 5.4.10).

There is no specified limit for discharge as there is in sequestration and the debtor has to obtain a discharge from the trustee on behalf of the creditors who have acceded to the deed and there can be uncertainty as to when the debtor can re-acquire assets. On the final distribution of the debtor's estate however Schedule 5 2(2) of the 1985 Act provides that the trustee "shall" record a notice in the register of inhibitions and adjudications recalling any notice recorded under sub-paragraph 2(1). The trustee may also obtain his/her own discharge from the creditors.

A trust deed can therefore be adapted according to individual circumstances but if the trustee wants to make the trust deed protected it must comply with Schedule 5 of the 1985 Act.

5.3.4 Protected Trust Deeds

A protected trust deed, once in place, has the benefit of being binding on all creditors and provides protection against any other action of sequestration by a creditor; from a registration perspective the considerations are generally the same as for a trust deed, provided there are no indicators that any of the points in the following paragraphs have not been complied with. To achieve the protected status the trustee must

- At time of delivery of deed to him publish a notice in prescribed form in the Edinburgh Gazette, being the official newspaper of record and which includes insolvency data, public and legal notices. It is monitored by firms that administer creditor black-lists;
- Not later than 7 days after publication of the Gazette notice the trustee must send a copy of the notice, the trust deed and other prescribed information to each known creditor.

The prescribed information relates to the debtor's assets, liabilities, income, expenditure and what will be available to the trustee for the benefit of the creditors.

The trust deed becomes protected if

- within 5 weeks from publication of the Gazette notice the trustee has not received notification that either a majority in terms of number of creditors or not less that a third in value (of the debt) of the creditors that they do not wish to accede to the trust deed, and
- immediately after the expiry of the 5 week period the trustee sends a copy of the trust deed and statutory certificate to the AiB for registration in the register of insolvencies. The trust deed becomes protected from the date on which the AIB records it in the register of insolvencies.

By way of example, creditor A is owed £60k, B is owed £35k, C is owed £20k and D and E are both owed £7.5k giving a total debt of £120k. Objection by any combination of 3 creditors will prevent the trust deed becoming protected; alternatively an objection by A alone would prevent acceptance of the trust deed, as would an objection by B and any other creditor. A combination of C, D and E would not reach a third of the value of the debt but would be a majority of creditors and accordingly prevent proceeding to a protected trust deed. On the basis the trust deed is not accepted it will be open to each creditor to petition for sequestration; consequently, although unusual it is not impossible for more than one trustee to be appointed.

In theory a non-acceding creditor (inhibitor) cannot reduce a protected trust deed and therefore it is not necessary that any inhibitions against the bankrupt be discharged. In practice it is prudent for any outstanding inhibition to be discharged; if any are still outstanding the application should be referred to a senior caseworker.

5.4 Effect of sequestration

Whether a trustee is appointed following on a creditor's trust deed, a debtor's trust deed or a protected trust deed the implications of the sequestration on the debtor's estate are the same.

5.4.1 Inhibitory effect of ROI entry

The 3 year inhibitory effect of the ROI entry awarding sequestration applies to sequestrations awarded both before and after 1 April 2008. The 2007 Act does not alter the inhibitory period notwithstanding the bankruptcy period is reduced to 1 year for sequestration awarded on or after 1 April 2008.

The recording of the relevant order, i.e. the certified copy interlocutor granting warrant to cite or the certified copy interlocutor awarding sequestration or the determination awarding sequestration (as the case may be), has the effect of an inhibition for a period of 3 years dating from the date of sequestration (the date of the award/order rather than the recording date) and means that the property becomes litigious and the Trustee can seek reduction of any deed granted by the bankrupt if he attempts to transact with the property during that time. Since the date of sequestration is the date of the order/award and not the date of recording in the ROI, litigiosity is retrospective, albeit usually only to the extent of 2 or 3 days.. Should an application contain a disposition by the debtor/bankrupt, indemnity should be excluded as regards that particular transaction unless the submitting agent can offer a satisfactory explanation, supported by the appropriate documentary evidence, as to why the trustee in sequestration is not granting, or consenting to, the deed. The only satisfactory explanation will be that the sequestration is at an end. In that event, appropriate documentary evidence should be submitted to the Keeper (see Termination of sequestration ).

5.4.2 Appointment of trustee in sequestration

Pre 1 April 2008

Where sequestration is awarded by the court an interim trustee is appointed to take immediate control of the debtor’s estate. Thereafter, following on a meeting of creditors, a permanent trustee is appointed in his or her place and is awarded an Act and Warrant by the court, which confirms the trustee's appointment and forms their authority to act.

1 April 2008 and subsequent

Where the sequestration is awarded by the AiB, section 14(2) of the 2007 Act inserts new subsections (1A) to (1C) into section 2 of the 1985 Act giving the AiB power to appoint a trustee in sequestration to the debtor's estate or deeming the AiB to be the trustee if no-one else is appointed. A debtor can appeal the AiB's refusal to award sequestration to the Sheriff Court in terms of section 15(3A) of the 1985 Act, inserted by paragraph 13 of schedule 1 to the 2007 Act. Appointment of the trustee by the AiB will be evidenced by Determination awarded by the AiB and not an Act and Warrant.

In cases where the court makes the award of sequestration the trustee in sequestration is now appointed at that time (though in rare cases an interim trustee may be appointed prior to the award of sequestration) and there is no requirement to apply for an Act and Warrant.

If an interim trustee was appointed the subsequent appointment of the permanent trustee will be evidenced by the award of Act and Warrant by the court.

The necessary evidence of appointment must be submitted and examined.

5.4.3 Effect of Court appointment of trustee in sequestration

Pre 1 April 2008 position (i.e. sequestrations governed solely by 1985 Act) - the Act and warrant

Although the debtor/bankrupt will remain the recorded or registered proprietor of the property, the trustee becomes personally vest (i.e. as trustee) in the property as the debtor/bankrupt’s successor, by means of the Act and Warrant issued by the court on confirmation of the trustee’s appointment or election. This enables the trustee to complete title to the heritage in his own name (as trustee), using the Act and Warrant as a link in title. When the debtor/bankrupt's title is already registered and the trustee wishes to make up title, the trustee should submit the Act and Warrant accompanied by an application Form 2 completed in the trustee's name. Alternatively, rather than complete title the trustee can convey the property using the Act and Warrant as the link in title. In any transaction involving a trustee in sequestration, legal settlers should ensure they have sight of the Act and Warrant. An Act and Warrant containing any obvious errors, defects or peculiarities should be referred to a senior caseworker and, if need be, to Legal Services.

Where the Act and Warrant appoints the Accountant in Bankruptcy as the trustee, any disposition they grant will be signed by the current holder of that post. The following have held that post (chronologically) since its inception:

- George Leslie Kerr (December 2004 – July 2006)
- Steven Woodhouse (July 2006 – May 2007)
- Gillian Thompson (May 2007 — October 2009)
- Rosemary Winter-Scott (from 1 October 2009)

If the deed has been granted and executed by one of these individuals as the trustee there is no reason to requisition evidence of their authority to sign, however the Act and Warrant vesting title in the trustee must still be submitted. Registration Officers should note that, in terms of section 1(2) of the 1995 Act, the Depute Accountant in Bankruptcy, who is appointed by Scottish Ministers, may carry out the functions of the Accountant in Bankruptcy whenever the Accountant is unable to do so. This will include the execution of deeds on behalf of the Accountant where the Accountant was appointed as trustee. The current Depute Accountant in Bankruptcy is John Cook and his predecessor was Marion McCormack. Further guidance should be sought if there is any variation to this (e.g. another insolvency practitioner acting as trustee).

1 April 2008 and subsequent (i.e. sequestrations governed by 1985 Act as amended by the 2007 Act)

The trustee is appointed and vested in the debtor's estate on the award of sequestration and there is no longer a requirement for an Act and Warrant. The effect of the award of sequestration appointing the trustee is the same as the Act and Warrant with one significant exception:

Section 17 of the 2007 Act adds sections 31(1A) and (1B) to the 1985 Act which state that a trustee in sequestration is precluded from registering title to heritable property of a debtor for 28 days after the award of sequestration is itself registered. This is in order to allow time for a third party who has purchased property in good faith from a debtor to complete title by registration. See also the specific provisions relating to transactions involving the debtor within 7 days of the date of sequestration (see section 5.7.1).

New section 31(8)(a) of the 1985 Act does however provide that heritable property which a debtor has sold or otherwise transferred remains part of the debtor's estate which is given over to the trustee in sequestration if the person to whom it was sold has not completed title by registration. As such it would be open to the trustee to make up title to such property after the 28 day period mentioned in the previous paragraph. If an application is being cancelled for any reason it is not for the Keeper to consider whether the property might fall within the estate that a trustee could be entitled to make up title to prior to its re-submission.

5.4.3.1 Effect of AiB's Determination awarding sequestration

Although the debtor/bankrupt will remain the recorded or registered proprietor of the property, the trustee becomes personally vest (i.e. as trustee) in the property as the debtor/bankrupt’s successor, by means of the determination awarding sequestration confirming the trustee’s appointment or election. This enables the trustee to complete title to the heritage in his own name (as trustee), using the determination awarding sequestration as a link in title.

However, as noted above section 17 of the 2007 Act adds sections 31(1A) and (1B) to the 1985 Act (a trustee in sequestration is precluded from registering title to heritable property of a debtor for 28 days after the award of sequestration is itself registered). This is in order to allow time for a third party who has purchased property in good faith from a debtor to complete title by registration. See also the specific provisions relating to transactions involving the debtor within 7 days of the date of sequestration (see section 5.7.1).

Section 31(8)(a) of the 1985 Act does however provide that heritable property which a debtor has sold or otherwise transferred remains part of the debtor's estate which is given over to the trustee in sequestration if the person to whom it was sold has not completed title by registration. As such it would be open to the trustee to make up title to such property after the 28 day period mentioned in the previous paragraph. If an application is being cancelled for any reason it is not for the Keeper to consider whether the property might fall within the estate that a trustee could be entitled to make up title to prior to its re-submission.

As noted above with Court appointed sequestrations, the trustee cannot register title within 28 days and any transactions entered into by the debtor within seven days of the sequestration are not struck at.

When the debtor/bankrupt's title is already registered and the trustee wishes to make up title, the trustee should submit a certified copy or extract of the determination awarding sequestration accompanied by an application Form 2 completed in the trustee's name. Alternatively, rather than complete title the trustee can convey the property using the determination awarding sequestration as the link in title. In any transaction involving a trustee in sequestration, registration officers should ensure they have sight of the determination awarding sequestration. A determination awarding sequestration containing any obvious errors, defects or peculiarities should be referred to a senior caseworker and, if need be, to the Legal Services.

5.4.4 Completion of Trustees Title

5.4.4.1 Position for sequestrations on and after 1 April 2008 (i.e. sequestrations governed by 1985 Act as amended by the 2007 Act)

If an application is made to register the interest of the trustee in sequestration, by virtue of a judicial appointment of the trustee (e.g. the Court Decree or Deliverance awarding sequestration and appointing the trustee) or by virtue of a Determination Awarding Sequestration, the B Section should be amended by retaining existing entries and adding a further entry for the Trustee(s), including the date of registration. (The same procedure should be followed where a trustee under a trust deed for creditors registers a title as trustee.) The original entry(ies) should not be amended to remove the bankrupt party. This allows any destination to remain in force where the title is in name of the bankrupt and other parties and in addition alerts purchasers from the Trustee in Sequestration that the property may be a "family home" in terms of section 40 of the 1985 Act and whether title was in joint names or solely in name of the bankrupt - see paragraph 5.4.10.

A certified true copy or extract of the award of sequestration appointing the trustee, or determination awarding sequestration must be submitted. The entry added for the trustee should make clear that they are proprietor in their capacity as trustee of the debtor, e.g.

Entry No.	Proprietor	Date of Registration	Consideration
1.	A B and C D, spouses, (designation), equally between them and the survivor of them	19 Sep. 2010	£100,000
	MHA note		Entry
	CPA note		30 Aug 2010
		Date of Registration
2.	E F (designation) as Trustee on sequestrated estate of said AB	10 Jun. 2011

	Note: The consideration and date of entry fields in entry 2 are intentionally blank

In addition, registration staff must ensure that the terms of Section 17 of the 2007 Act have been complied with and check that the application for registration on behalf of the trustee in sequestration has been submitted after the 28 day period commencing on the date on which the certified copy of the warrant to cite or the determination awarding sequestration is recorded in the ROI.

If the application for registration of the Trustees title has been submitted within the 28 day period the submitting agent should be contacted and advised that the application appears to contravene section 31(1A) and (1B) of the Bankruptcy (Scotland) Act 1985 and offered the opportunity to have the application withdrawn and re-presented. If the agent declines that opportunity indemnity should be excluded. The following style of note should be entered in the B section of the title sheet following on from the entry indicating that the property is vest in the trustee:

Note: Indemnity is excluded in terms of section 12(2) of the Land Registration (Scotland) Act 1979 in respect of any loss arising from any title stemming from the said Trustee being declared or found not to be competent by virtue of the provisions of section 31(1A) and (1B) of the Bankruptcy (Scotland) Act 1985.

In the event of the property subsequently being sold by the Trustee then the exclusion of indemnity should be amended to the following style:

Note: Indemnity is excluded in terms of section 12(2) of the Land Registration (Scotland) Act 1979 in respect of any loss arising from the title of the above proprietor stemming from Disposition by Trustee on sequestrated estate of AB to CD, registered dd mmm yyyy being declared or found not to be competent by virtue of the provisions of section 31(1A) and (1B) of the Bankruptcy (Scotland) Act 1985.

Referrals should be made as necessary to a Senior Caseworker, and as appropriate to Legal Services, if, in the circumstances, it is unclear whether the documentation evidencing the trustee’s appointment is in order, or how to enter the trustee’s title in the proprietorship section.

5.4.4.2 Pre 1 April 2008 position (i.e. sequestrations governed solely by 1985 Act)

If an application is made to register the interest of the trustee in sequestration by virtue of an Act and Warrant, the B Section should be amended by retaining existing entries and adding a further entry for the Trustee(s), including the date of registration. The original entry(ies) should not be amended to remove the bankrupt party. This allows any destination to remain in force where the title is in name of the bankrupt and other parties and in addition alerts purchasers from the Trustee in Sequestration that the property may be a "family home" in terms of section 40 of the 1985 Act and whether title was in joint names or solely in name of the bankrupt - see paragraph 5.4.10. and previous paragraph for style.

The Act and Warrant must be submitted.

Referrals should be made as necessary to a Senior Caseworker, and as appropriate to Legal Services, if, in the circumstances, it is unclear how to enter the trustee in the proprietorship section.

5.4.5 Acquisitions by debtor prior to discharge

Not only does all property which belongs to the debtor at the time of sequestration vest in the trustee, but in addition any property acquired by the bankrupt after the date of sequestration and prior to the date of discharge vests automatically in the trustee in sequestration. Such property is called acquirenda. As in the case of heritage which vested automatically in the trustee at the time of sequestration, the trustee has the option of completing title, using the Act and Warrant, court decree or determination awarding sequestration in his favour as a link in title.

Of course, the Keeper's policy on searching the ROI (see Section 6(1)(c) of the 1979 Act-disclosure of adverse ROI entries) only against the granters of deeds, means that a registration officer should not search the ROI against an applicant/purchaser, unless they are also processing a deed granted by the purchaser, typically a standard security. It will therefore be possible that the purchaser in a transaction resulting in registration is sequestrated but this information will not come to light during the registration process.

The debtor's title to the property is not made voidable by the existence of the sequestration; instead the property vests in the trustee in sequestration automatically. The sequestration is not adverse to the interest, and the Keeper therefore does not require to carry out a search in the ROI against grantees of deeds to ensure they are not sequestrated. The trustee remains in the position of an unregistered proprietor of the subjects and may still apply for registration using, as appropriate, the Act and Warrant, court decree or the determination awarding sequestration as a link in title.

However, if the debtor then attempts to deal with the property, without the involvement or consent of the trustee, for example by granting a standard security, such deeds may be rendered voidable by the existence of the sequestration and the sequestration will be adverse. Further information on the action to be taken in that event can be found in Debtor's Transactions Prior to Discharge.

5.4.6 Gratuitous alienations and unfair preferences

Equally importantly, the trustee may be able to get back certain properties which the debtor had already disposed of before the sequestration became effective. If the debtor has given away property (or conveyed it for less than the full market value) then the trustee may be able to reduce the conveyance on the basis that it is a gratuitous alienation and bring that property back into the sequestrated estate. The provision for this is found in section 34 of the 1985 Act. It sets the time limits during which the transaction occurred (up to five years before sequestration for conveyances to associates of the debtor, and up to two years for other parties), and it also provides certain exceptions such as birthday presents. Similarly, under section 36 of the 1985 Act, any transaction entered into by the debtor within 6 months of the sequestration which creates a preference for one creditor (e.g. granting a standard security) to the prejudice of the general body of creditors can be challenged.

This obviously raises a major issue: Any transfer for less than full value might become challengeable if the granter is sequestrated at any time during the subsequent five years and any standard security within 6 months of sequestration could also be struck at. However, the Keeper will not exclude indemnity from a title on the grounds that a deed could at some later stage be challenged as a gratuitous alienation or unfair preference, unless he is alerted in the application for registration to the insolvency or possible insolvency of the party granting the deed.

Should a deed be granted and subsequently reduced on grounds it was a gratuitous alienation or unfair preference, protection is afforded to the Keeper under Section 12(3)(b) of the Land Registration (Scotland) Act 1979 which provides that no indemnity is payable. However where there is any information within an application indicating the potential insolvency of a party the application should be referred to a senior caseworker. The inclusion of an affidavit by a party declaring that at the time of granting a deed they were solvent is not itself an indication of potential insolvency.

5.4.7 Realisation of bankrupt’s estate

Section 39 of the 1985 Act inter alia provides for the realisation of the bankrupt’s estate. This includes the sale by the trustee in the sequestration of the bankrupt’s heritable estate (including the sale of any part over which a heritable security is held by the creditor or creditors whose rights are preferable to those of the permanent trustee). The terms of the section provide that the trustee should comply with certain rules, etc. However, section 39(7) provides that the validity of the title of any purchaser shall not be challengeable on the grounds that there has been a failure to comply with a requirement of section 39. Therefore, in a sale governed by section 39 the settler does not have to check that the trustee has acted in accordance with the provisions of section 39. Note that this relates to the right of the trustee to sell the subjects but does not result in the automatic discharge of any prior standard security.

In terms of section 17 of the 2007 Act, it is not competent for any person deriving title from the trustee to complete title before the expiry of the 28 day period commencing on the date on which the certified copy of the warrant to cite or the determination awarding sequestration is recorded in the ROI. If the acquirer’s application was received during the 28-day period, the submitting agent should be contacted and advised that the application appears to contravene section 31(1A) and (1B) of the Bankruptcy (Scotland) Act 1985. If the agent declines that opportunity indemnity should be excluded. The following style of note should be entered in the B section of the title sheet:

Note: Indemnity is excluded in terms of section 12(2) of the Land Registration (Scotland) Act 1979 in respect of any loss arising from the title of the above proprietor stemming from Disposition by Trustee on sequestrated estate of AB to CD, registered dd mmm yyyy being declared or found not to be competent by virtue of the provisions of section 31(1A) and (1B) of the Bankruptcy (Scotland) Act 1985.

Referrals should be made as necessary to a Senior Caseworker, and as appropriate to Legal Services, if, in the circumstances, it is unclear whether the documentation evidencing the trustee’s appointment is in order, or how to enter the trustee’s title in the proprietorship section.

5.4.7.1 Transactions within 7 days of the date of sequestration

The 2007 Act introduced a caveat for those sequestrations occurring on or after 1 April 2008. Sections 17(2)(b) and (c) of the 2007 Act add a new section 32(9ZA) to the 1985 Act which states that where a person deals with a debtor after the date of sequestration the dealing is not void if it relates to incorporeal or heritable property, was done in good faith for an adequate value and the deed was delivered during the period of 7 days after the sequestration is awarded. This takes into account the period when a sequestration has been granted but does not appear in any register, a time when the grantee could not reasonably know of the sequestration. The Act explains that the dealing can constitute ‘the creation, transfer, variation or extinguishing of a real right in heritable property’. If a registration officer encounters this situation as a result of a ROI search disclosing the existence of the sequestration, evidence should be sought from the submitting agent that the provisions of section 32(9ZA) have been met. The best evidence in this situation is a letter from the trustee in sequestration acknowledging that he or she is content that the application for registration is in respect of a transaction that falls within the ambit of section 32(9ZA) of the Bankruptcy (Scotland) Act 1985. If lesser evidence is forthcoming the application should be referred to a Senior Caseworker for consideration.

If no evidence is forthcoming details of the sequestration should be entered on the title sheet and indemnity should be excluded as per 5.7.3 and 5.7.4

While section 17 creates a preference for acquirers who take delivery of a deed during the 7-day period, in order to benefit from that preference they must of course register their deed. If the acquirer fails to register within the 28-day period [Section 5.4.4.2] then it is possible that registration of a title by the trustee (or an acquirer from the trustee) may remove that preference. Any scenario where the interaction of the 7-day and 28-day periods is at issue should be referred to Legal Services.

5.4.8 Effect of sequestration on prior Inhibitions against the debtor

An inhibition against a debtor registered prior to the date of his sequestration ceases to be effective as an inhibition upon that date. The trustee in sequestration can therefore sell free of any prior inhibition against the debtor, and the purchaser’s title will not disclose prior inhibitions as adverse entries. Equally, the trustee’s own title (if registered) or the debtor’s registered title should not disclose prior inhibitions.

There are two reasons why acts by the trustee in sequestration are not affected by prior inhibitions against the debtor. In the first place, actings by the trustee are not voluntary acts by the debtor. In the second place, section 31(2) of the Bankruptcy (Scotland) Act 1985 provides that the exercise by the permanent trustee of any power conferred on him by that Act in respect of any heritable estate vested in him shall not be challengeable on the ground of any prior inhibition. (Inhibiting creditors whose inhibitions have been registered more than 60 days before sequestration are compensated by having a preferential ranking on the debtor’s estate).

Note, however, that if the debtor has taken a title which is subject to an inhibition against a previous proprietor, that inhibition will remain effective, on the principle that the trustee in sequestration can acquire no better title than the debtor has.

5.4.9 Sequestration and Prior Standard securities

Section 39(4) deals with heritable securities. That subsection has two important provisions. The first is that the trustee must get the heritable creditor’s consent to a sale unless the trustee is able to discharge the security. The second is that either the trustee or the heritable creditor may exercise their power of sale, but they must intimate to each other that they intend to do so. This precludes the other party from transacting with that property. In practical settling terms, no action need be taken by the legal settler to ensure the provisions of section 39(4) have been complied with. As regards sales by the trustee in sequestration, the terms of section 39(7) can be relied upon however any prior standard security requires to be discharged, either by an ordinary discharge or the creditor consenting within the disposition granted by the trustee. As for sales by heritable creditors, provided the question on the application form has been answered in the affirmative no further assurance need be requisitioned. If it is answered in the negative, the Keeper will require an assurance that the heritable creditor intimated to the permanent trustee that he intended to commence power of sale procedures and that such intimation was made prior to any contrary intimation by the said permanent trustee.

5.4.10 Disposal of bankrupt’s family home

As a sale by a trustee in sequestration is not a voluntary dealing by the debtor, the provisions of section 6 of the Matrimonial Homes (Family Protection) (Scotland) Act 1981 and section 106 of the Civil Partnership Act 2004 (as amended by the Family Law (Scotland) Act 2006) do not apply. No Matrimonial Homes Act/Civil Partnership Act evidence is therefore necessary as regards any property, or share in property, conveyed by a trustee in sequestration.

However, section 40 of the 1985 Act provides protection for the debtor’s family, as it prevents the trustee in sequestration from selling the debtor’s ‘family home’ without either a ‘relevant consent’ or the authority of the court. Accordingly, when presented with a sale or disposal by a trustee in sequestration, legal settlers will first need to establish whether or not the property falls within the definition of ‘family home’. That definition is found in subsection 4(a). The definition is much wider than the definition of ‘matrimonial home’ in either the Matrimonial Homes Act or Civil Partnership Act. For sequestration, a ‘family home’ is any property lived in by the debtor with his spouse or civil partner or by a present or former spouse or civil partner without the debtor, or by the debtor without a spouse or civil partner but with a ‘child of the family'. The term ‘child of the family’ has a similarly wide definition in that it can include children who are not even related to the debtor.

Where the agent has failed to provide any Section 40 evidence, the agent should be contacted and advised that the Keeper will require to examine the relevant consent or court authority under Section 40, or evidence that the property is not the family home. A letter from the agents or the trustee in sequestration confirming that the subjects are not a family home in terms of Section 40 will suffice.

If it is established that the property falls within the definition of family home, the Keeper will require to examine the relevant consent. This is defined in subsection 4(c). The following rules should be applied in determining who grants the consent-

- If there is a spouse or civil partner or former spouse or civil partner of the debtor living in the house – with or without the debtor – the consent of the spouse or civil partner is required.
- If the debtor lives there without a spouse or civil partner but with a child, then the consent of the debtor is required.
- If the ‘relevant consent’ cannot be obtained, the trustee has to get the authority of the court for the sale.
- Section 40 does not contain a protective provision similar to section 39(7). As such the Keeper must examine evidence in terms of section 40 and in the absence of such evidence the application should be cancelled.

Section 11 of the 2010 Act amends section 40 of the 1985 Act so that it applies to trust deeds as well as bankruptcies. This requires trustees under trust deeds to seek the relevant consent or the permission of the court as above in the same way as a trustee in bankruptcy. Again the Keeper must examine the evidence in terms of section 40 failing which the application should be cancelled. The appointed day for the commencement of section 11 was 15 November 2010 and no special transitional provisions apply to this section. This means that section 40 will apply to any sale by a trustee under a trust deed on or after 15 November 2010. The date the trust deed was entered into is not a relevant consideration for the purposes of section 40. It is possible there may be some cases where the property was sold by the trustee prior to 15 November 2010 but registration of the disposition was on or after 15 November 2010. Any such cases where the agent suggests section 40 does not apply as the property was sold prior to the section coming into force should be referred to a senior caseworker who will seek further guidance from legal services.

Section 19(2) of the 2007 Act adds section 39A to the 1985 Act which states that if the trustee takes no action in relation to the debtor’s family home within 3 years of sequestration being awarded, the property ceases to form part of the sequestrated estate and reverts to the debtor without conveyance of any kind. If however the trustee discovers the debtor’s interest in the property at a later date the three year period will run from the date the trustee becomes aware of the property. Accordingly registration staff, when presented with an application for registration on behalf of a trustee who is seeking to make up title to a debtor’s property after the expiry of the 3 year period must requisition evidence from the trustee that the property is not the debtor’s family home. A sworn statement by the trustee to that effect will be sufficient, or confirmation that one of the exceptions in section 39A applies.

5.4.11 Debtor owns a pro indiviso share

The trustee becomes vest in property owned by the bankrupt and property acquired by the bankrupt prior to expiry of the sequestration. If the debtor owned a half pro indiviso share in property, then the trustee’s right extends only to said half share. As it is unlikely to be realistic for the trustee to sell a half share, the trustee will have to request the proprietor of the remaining pro indiviso share to co-operate in a joint sale. If the other party declines to co-operate, the trustee will have to raise a court action of division and sale.

5.5 Continuing sequestration

5.5.1 Renewal of sequestration

By section 14(4), the trustee in sequestration may, if he has not been discharged, before the end of the 3 year inhibitory period, send a memorandum for renewal to the Keeper for recording in the ROI. Such recording renews the inhibitory effect for a further 3 years. It is possible for the trustee to continue to renew the sequestration at, or before, the expiry of each subsequent 3 year period. Although infrequent, it is therefore possible that a sequestration which commenced initially in, for example, 2002 to be still ongoing as a result of memoranda of renewals being recorded in 2005, 2008 and then 2011. This provision applies no matter what date the sequestration commenced.

Renewal continues the effect of the sequestration as an inhibition and citation in an adjudication in terms of section 14(2) of the 1985 Act regarding property which has already vested in the trustee and prevents a family home from re-vesting in the debtor in terms of section 39(A).

It is important to realise that recording a memorandum of renewal does not prevent the debtor's automatic discharge in terms of section 54 of the 1985 Act, therefore the existence of a certificate of discharge of the debtor in terms of said section does not mean that a memorandum can be ignored. However the memorandum does not prevent the debtor from acquiring new property which will (i) be free of the inhibitory effect of the original sequestration and (ii) not vest in the trustee since by virtue of sections 32(6) and 32(10) of the 1985 Act it is only property acquired after the date of sequestration and before the debtor's discharge becomes effective which vests in the trustee.

Any application involving a memorandum of renewal must be referred to a senior caseworker.

5.5.2 Deferment of discharge

The trustee in sequestration or any creditor may, not later than 9 months after the date of sequestration, apply for deferment of the debtor's automatic discharge. The deferment may be for a period not exceeding 2 years, and the court order awarding deferment must be submitted for recording in the register of inhibitions. The trustee or creditor can apply for a further deferment of the automatic discharge not later than 3 months prior to the end of an existing period of deferment. The consequence of deferment is the full effects of sequestration continue to apply.

Any application involving a deferment of discharge of a sequestration must be referred to a senior caseworker.

5.6 Termination of sequestration

There are a number of ways in which the effect of the sequestration can come to an end:

5.6.1 Expiry of 3 year period

Provided the trustee has not completed title, when presented with an application in which a bankrupt/former bankrupt is transacting with property which has vested in the trustee after the expiry of the 3 year inhibitory period (or such longer period as is applicable where the debtor's discharge has either been deferred (see 5.5.2 above) or where the trustee has recorded a memorandum of renewal (see 5.5.1 above)), legal settlers need not seek evidence of the permanent trustee's/trustees (or indeed the bankrupt's) discharge. Authority for this can be found in section 44(4)(c) of the Conveyancing (Scotland) Act 1924. It states:

'No deed, decree, instrument or writing, granted or expede by a person whose estates have been sequestrated under…the Bankruptcy (Scotland) Act 1985…relative to any land or lease or heritable security belonging to such person at the date of such sequestration or subsequently acquired by him shall be challengeable or denied effect on the ground of sequestration if such deed, decree, instrument or writing shall have been granted or expede, or shall come into operation at a date when the effect of recording….under subsection 1(a) of section 14 of the Bankruptcy (Scotland) Act 1985 the certified copy of an order shall have expired by virtue of subsection (3) of that section, unless the trustee shall before the recording of such deed….in the appropriate Register of Sasines ( and Land Register)…have completed his title to such land…'

In short, any transaction by the former bankrupt after the 3-year inhibitory period (or such longer period as is applicable where the debtor's discharge has either been deferred or where the trustee has recorded a memorandum of renewal) is free from challenge. Consequently, no evidence of the discharge of the permanent trustee/trustee or of the discharge of the debtor is required. It follows that indemnity should not be excluded in respect of any loss that the permanent trustee/trustee may incur through the inability to enforce his rights under the Act and Warrant, court decree or the Determination awarding sequestration. This contrasts with the very different situation during the 3 year period (or such longer period as is applicable where the debtor's discharge has either been deferred or where the trustee has recorded a memorandum of renewal) where the trustee in sequestration has power to reduce any dealing on the bankrupt's property that he does not consent to.

While for post 1 April 2008 sequestration the debtor is discharged after 1 year, the inhibitory effect continues for 3 years and accordingly the foregoing instructions remain relevant.

The trustee's power to reduce is based primarily on section 32(8) of the 1985 Act, which provides that:-

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

Subsection 9 provides a number of exceptions including that the trustee:-

(i) has abandoned to the debtor the property to which the dealing relates - in terms of section 32(9B) of the 1985 Act the notice of abandonment by the trustee must be recorded in the ROI;

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

(iii) is otherwise personally barred from challenging the dealing.

Unless one of the exceptions listed in the Act applies then the Trustee would have power to reduce any unauthorised dealing by the debtor. This power relates to any part of the debtor's estate vested in the trustee on a relevant date by virtue of the sequestration. For the purposes of such vesting section 32(10) provides that - "In this section “a relevant date” means a date after the date of sequestration and before the date on which the debtor’s discharge becomes effective."

In addition to the above, in terms of section 14(2) of the Act the recording in the Register of Inhibitions and Adjudications of a certified copy of the order of the sheriff granting warrant under section 12(2) of the Act shall have the effect as from the date of sequestration of an inhibition and of a citation in an adjudication of the debtor’s heritable estate. This effect lasts for a period of 3 years in terms of section 3 (b) of the Act and may be extended for a further 3 year period by the recording of a memorandum of renewal - see section 5.5.1. Any transaction by the debtor in breach of the inhibition would also be voidable at the instance of the trustee."

For the avoidance of doubt, it is still competent for the trustee in sequestration to transact with the bankrupt's property after the expiry of the 3-year inhibitory period. As explained above, the sequestration itself does not automatically terminate on the expiry of such a period. The trustee therefore remains vest in the property and is able to transact with it. In that event, the only evidence the Keeper requires to examine is the Act and Warrant, court decree or Determination awarding sequestration issued by the Court on confirmation of the trustee's appointment. The one caveat to this concerns post 1 April 2008 sequestrations and the debtor’s family home which will vest back to the debtor at the end of the 3 year period unless the trustee had previously taken steps to complete title to it or one of the other exceptions in section 39(A) of the 1985 Act apply.

Where title has been registered subject to an exclusion of indemnity in respect of the sequestration of a previous proprietor this cannot be removed until evidence is provided that the sequestration process has been concluded, or that the trustee confirms that they have no interest in the property and will not seek reduction of any deed.

For the avoidance of doubt: if the Trustee has registered/recorded title to the subjects, then any transaction during the three year period should be entered into by the Trustee. See 5.8.2 below for acceptable evidence for transactions by the debtor after 3 year period where trustee has recorded/registered title.

5.6.2.1 Discharge of the debtor

Although the discharge described at 5.6.1 above is automatic, the debtor is entitled to obtain a certificate of discharge from the AiB. It is open to the trustee in sequestration or any creditor to apply for a deferment of the debtor's discharge. If the debtor's discharge is deferred by the court, the clerk of the court must, as provided in section 54(7), send a certified copy of the order deferring discharge to the Keeper for recording in the ROI. Deferment can be for any period not exceeding 2 years. Such an order should not be confused with the registration of a memorandum of renewal in the ROI at the instance of a permanent trustee in sequestration who has not been discharged and who wishes to continue the inhibitory effect of the CCI; the memorandum of renewal does not prevent the debtor's automatic discharge.

5.6.2.2 Discharge of Trustee

Discharge of the debtor means that the debtor can once again acquire property without the same vesting in the trustee by virtue of the sequestration - see section 5.8.1. This does not actually end the sequestration. The inhibitory effect of the sequestration continues however in relation to property which has already vested in the trustee and the trustee continues to administer the sequestrated estate. Once this administration has been completed and the trustee has made a final distribution of the debtor's estate the trustee also obtains his own discharge from the AiB and only then will the sequestration be at an end. No entry will appear in the ROI to indicate that such a certificate has been granted to the trustee and the sequestration is at an end.

5.6.3 Effect of debtor's discharge

Section 55 provides that the discharge of the debtor discharges him of all debts and obligations contracted by him, or for which he was liable, at the date of sequestration (subject to certain limited exceptions). If, therefore, the debtor had granted a standard security prior to the date of sequestration, upon his discharge under section 55 he ceased to be personally liable to repay the debt. This gave rise to doubts about the position of secured creditors. In an amendment to section 55 of the 1985 Bankruptcy Act, it became clear that the discharge of the debtor in respect of any debt or obligation shall not affect any rights of a secured creditor to enforce his security for payment of the debt or performance of the obligation. This means that, although the debtor’s personal liability may have ceased upon the discharge, nevertheless the creditor still has a security which he can enforce e.g. by exercising a power of sale. Consequently any such security must continue to be disclosed in the debtor’s title sheet.

5.6.4 Recall

Section 17(8) of the 1985 Act provides that, where the court has recalled a sequestration, the clerk of the court must send a certified copy of the order recalling the sequestration to the Keeper for recording in the ROI. The effect of the recall is to restore the debtor to the position he would have been in if the sequestration had not been awarded. That said a recall will not invalidate any transaction by the trustee in sequestration entered into before the recall took effect.

5.6.5 Composition

A new provision, although not yet in force, was introduced by the 2007 Act affecting those sequestrations that commence on or after 1 April 2008. Section 21 of the 2007 Act amends schedule 4 of the 1985 Act which governs the procedure for the making of an offer of composition by the debtor to the trustee in sequestration. The offer is made to the trustee and passed for approval to the AiB rather than to the court, those creditors who do not actively object and have been notified of the offer will be considered to have agreed to the offer of composition. If composition is approved the AiB shall grant a certificate of discharge of the debtor and also a certificate of discharge of the trustee. The AiB shall send a copy of the certificate discharging the debtor to the Keeper for recording in the ROI. Recording of the certificate is sufficient evidence that the sequestration is at an end. This provision has not yet been brought into effect by a commencement order and any application that indicates a discharge was subsequent to an approved offer of composition should be referred to a senior caseworker for further consideration.

5.7 Debtor’s Transactions Prior to Discharge/end of 3 year inhibitory period

Prima facie, any dealing by an undischarged bankrupt, whether in respect of the property which vested in the trustee at the date of sequestration, or property conveyed to the debtor during the period prior to discharge vesting in the trustee as acquirenda, without the participation or consent of the trustee in sequestration, is irregular. Whilst it should be an exceptionally rare occurrence, a deed by an undischarged bankrupt transacting (for example granting a standard security) with heritable property which has vested in the trustee, is potentially voidable.

Should an application for registration contain a disposition or a standard security by the debtor/bankrupt, and the trustee in sequestration has neither granted nor consented in gremio, the registration officer should seek an explanation from the submitting agent, supported by appropriate documentary evidence, as to why the trustee in sequestration is not granting, or consenting in, the deed.

If a satisfactory explanation and supporting evidence are not forthcoming, details of the sequestration should be entered on the title sheet and indemnity should be excluded as per paragraph 5.7.3 and 5.7.4.

There are two situations specific to sequestrations awarded on or after 1 April 2008 where the debtor can transact with property within the 3 year inhibitory period. These are set out below.

5.7.1 Transactions within 7 days of the date of sequestration

The 2007 Act introduced a caveat for those sequestrations occurring on or after 1 April 2008. Sections 17(2)(b) and (c) of the 2007 Act add a new section 32(9ZA) to the 1985 Act which states that where a person deals with a debtor after the date of sequestration the dealing is not void if it relates to incorporeal or heritable property, was done in good faith for an adequate value and was done during the period of 7 days after the sequestration is awarded. This takes into account the period when a sequestration has been granted but does not appear in any register, a time when the grantee could not reasonably know of the sequestration. The Act explains that the dealing can constitute ‘the creation, transfer, variation or extinguishing of a real right in heritable property’. If a registration officer encounters this situation as a result of a ROI search disclosing the existence of the sequestration evidence should be sought from the submitting agent that the provisions of section 32(9ZA) have been met. The best evidence in this situation is a letter from the trustee in sequestration acknowledging that he or she is content that the application for registration is in respect of a transaction that falls within the ambit of section 39(9ZA) of the Bankruptcy (Scotland) Act 1985. If lesser evidence is forthcoming the application should be referred to a Senior Caseworker for consideration.

If no evidence is forthcoming details of the sequestration should be entered on the title sheet and indemnity should be excluded as per 5.7.3 and 5.7.4.

5.7.2 Abandonment of the property by the trustee

New provisions were introduced by the 2007 Act to provide for the recording of a notice of abandonment by the trustee in the ROI where the trustee has abandoned to the debtor any heritable property. This provision does not apply to pre 1 April 2008 sequestrations. Section 19(1) of the 2007 Act adds sections 32(9A) and (9B) to the 1985 Act. Subsection (9A) provides that, when a trustee gives heritable property back to a debtor, written notification by the trustee is evidence that the debtor is now the owner of the property. Subsection (9B) provides that the trustee must register a notice of abandonment in the Register of Inhibitions. This ensures that anyone dealing with the debtor can see from a search of that register that the debtor is the owner. A search of that register would reveal the existence of the sequestration and without evidence of the notice of abandonment it would appear to a searcher that the property was still owned by the trustee for the creditors in the sequestration. The notice will take the following form

747474 02 Apr 2008
Notice of Abandonment dated 02 Apr 2008, of the sequestrated estate of JOHN SMITH, Flat 1/2, 68 Queen Street, Edinburgh in relation to Flat 1/2, 68 Queen Street, Edinburgh under Land Register Title No. MID1234. Date of award 01 Apr 2008. Per Janet Ross, Registers of Scotland

The notice of abandonment is sufficient evidence to allow the debtor to transact with the property narrated in said notice. When processing an application for registration where the property has been abandoned by the trustee, registration officers must satisfy themselves that the notice of abandonment relates to the property the debtor is transacting with. If this is not clear from the ROI minute confirmation should be sought from the submitting agent. Appropriate confirmation would be a letter from the trustee confirming that the property in question is covered by the notice of abandonment.

5.7.3 Style of entry and exclusion of indemnity notes in B section - disposition granted by undischarged bankrupt

In this case, the sequestration is adverse to the interest of the new proprietor; both details of the sequestration and an exclusion of indemnity are required in the B Section. This should be in similar terms to the following, the details of the CCI being taken from the ROI search.

Note: The title of the proprietor of the subjects in this Title follows upon a Disposition by X {design} (insert name of grantor/debtor) to Y (purchaser from debtor) registered (insert details of registration). By virtue of the Bankruptcy (Scotland) Act 1985, the estate of the said X has vested in the trustee in sequestration on the estate of the said X. The title of the said X was subject to the following entry in the Register of Inhibitions: (details of CCI or determination).

Note: Indemnity is excluded in terms of section 12(2) of the Land Registration (Scotland) Act 1979 in respect of any loss arising from the reduction of the said Disposition by said X to the said Y, following on the sequestration of the estate of said X.

Where the new proprietor has granted a standard security, an exclusion of indemnity is also required in the C Section, since the title of the registered proprietor is subject to possible reduction by the trustee in sequestration. That exclusion of indemnity must also be reflected in the Charge Certificate.

Note: Indemnity is excluded in terms of section 12(2) of the Land Registration (Scotland) Act 1979 in respect of any loss arising from the reduction of Disposition by X to the said Y, the estate of the said X having vested in their trustee in sequestration by virtue of the Bankruptcy (Scotland) Act 1985.

5.7.4 Style of adverse entry note - standard security granted by undischarged bankrupt

An entry is required in the B Section for the details of the sequestration, but no exclusion of indemnity is required in that section as the sequestration does not affect the validity of the title.

Note: In terms of the Bankruptcy (Scotland) Act 1985, the estate of the said X has vested in the trustee in sequestration of the said X. The title of the said X is subject to the following entry in the Register of Inhibitions: (details of CCI or determination)

An exclusion of indemnity should be entered in the C Section; although the sequestration does not affect the validity of the proprietor's (the debtor's) title, even though the property automatically vests in the trustee, it may result in the reduction of the standard security by the trustee.

Note: Indemnity is excluded in terms of section 12(2) of the Land Registration (Scotland) Act 1979 in respect of any loss resulting from a reduction of the above Standard Security, the estate of the said X having vested in their trustee in sequestration by virtue of the Bankruptcy (Scotland) Act 1985, as specified in the Proprietorship Section.

The exclusion of indemnity should also be reflected in the Charge Certificate.

Note: Indemnity is excluded in terms of section 12(2) of the Land Registration (Scotland) Act 1979 in respect of any loss resulting from a reduction of the Standard Security by said X to said creditor, the estate of the said X having vested in their trustee in sequestration by virtue of the Bankruptcy (Scotland) Act 1985.

5.8 Debtor’s transactions after discharge/expiry of 3 year inhibitory period

5.8.1 Property acquired by the debtor post-discharge

After his discharge, the debtor is free to acquire other property; such acquisitions will be of no interest to the trustee in sequestration and so title to such acquisitions, and any related transactions with the property acquired, can be registered in the normal way, without disclosure of the sequestration. Such acquisitions are not affected by a renewal of the sequestration using a memorandum of renewal.

5.8.2 Transactions by the debtor after 3 year period where trustee has recorded/registered title.

Where the trustee has a recorded/registered title to property that the bankrupt owned any transaction of that property should be by the trustee, rather than the debtor, unless appropriate evidence to support a grant by the debtor (or former debtor as the case may be) is submitted. Appropriate evidence would be one of the following:

1. a certificate of discharge of the trustee (not the debtor), issued by the Accountant in Bankruptcy under s 57 of the 1985 Act;
2. for pre-1 Apr 08 sequestrations: a formal letter from the trustee, confirming that he has abandoned the property in question to the debtor;
3. for post-1 Apr 08 sequestrations: an extract or certified copy of a notice of abandonment, registered in the ROI, relating to the property.

If no such evidence is forthcoming the application should be referred to a Senior Caseworker for consideration (in conjunction with Legal Services) of whether it is appropriate to accept the application subject to an exclusion of indemnity or to cancel the application.

5.8.3 Transactions by the debtor post-discharge with property vested in the trustee

Heritage which had vested in the trustee in sequestration, either at the date of sequestration or as acquirenda, but for which the trustee has not completed title (i.e. no application to register the trustee in sequestration’s interest has been submitted), does not automatically revert to the debtor upon the latter’s discharge.

However, when presented with an application in which a bankrupt/former bankrupt is transacting with property after the expiry of the 3-year inhibitory period, (or such longer period as is applicable where the debtor's discharge has either been deferred or where the trustee has recorded a memorandum of renewal), legal settlers need not seek evidence of the trustee's (or indeed the bankrupt's) discharge. As explained in paragraph 5.6.2 section 44(4)(c) of the Conveyancing (Scotland) Act 1924 provides that :

'No deed, decree, instrument or writing, granted or expede by a person whose estates have been sequestrated under…the Bankruptcy (Scotland) Act 1985…relative to any land or lease or heritable security belonging to such person at the date of such sequestration or subsequently acquired by him shall be challengeable or denied effect on the ground of sequestration if such deed, decree, instrument or writing shall have been granted or expede, or shall come into operation at a date when the effect of recording….under subsection 1(a) of section 14 of the Bankruptcy (Scotland) Act 1985 the certified copy of an order shall have expired by virtue of subsection (3) of that section, unless the trustee shall before the recording of such deed….in the appropriate Register of Sasines ( and Land Register)…have completed his title to such land…'

Any transaction by the former bankrupt after the 3-year inhibitory period (or such longer period as is applicable where the debtor's discharge has either been deferred or where the trustee has recorded a memorandum of renewal) is free from challenge. Consequently, evidence of the discharge of the permanent trustee, or of the debtor, is not required. Indemnity should not be excluded in respect of any loss that the trustee may incur through the inability to enforce his rights. Note: section 44(4)(c) only applies where the trustee in sequestration has not completed title. If the trustee has completed title to his or her interest (through registration of the Act and Warrant/Notice of Determination etc) the debtor is unable to rely on that provision in order to deal with the property.

See section 5.6.1 where a debtor tries to deal with property vested in the trustee during the 3 year inhibitory period, or such longer period as is applicable where there has been a deferment or renewal.

For the avoidance of doubt, it is still competent for the trustee in sequestration to transact with the bankrupt's property after the expiry of the aforementioned 3-year period or such longer period as is applicable where there has been a deferment or renewal. The sequestration itself does not automatically terminate on the expiry of such a period. The trustee therefore remains vest in the property and is able to transact with it. In that event, the only evidence the Keeper requires to examine is the Act and Warrant, court decree or the Determination by the AiB on confirmation of the trustee's appointment. There is a caveat in respect of this as regards those transactions affecting sequestrations commenced on or after 1 April 2008.

See section 5.4.10 for details regarding disposal of bankrupt's family home.

Where the debtor's discharge has either been deferred or where the trustee has recorded a memorandum of renewal any application for registration of a deed granted by the bankrupt in relation to property either vesting in the trustee on the date of sequestration or acquired during the period of the sequestration and thus vesting in the trustee as acquirenda, will require to be supported by the following evidence:

(a) evidence of the bankrupt’s discharge; and
(b) evidence (from the trustee) that the trustee has released or abandoned the relevant property to the bankrupt, i.e. notice of abandonment.

In the absence of such evidence, an exclusion of indemnity will be appropriate. Such applications should be referred to a senior caseworker.

5.9 Miscellaneous

5.9.1 Appeals

Section 15(5) of the 1985 Act as amended by section 16(2)(e) of the 2007 Act provides that where a petition for sequestration is presented by a creditor and the sheriff refuses to award sequestration, the petitioner or any creditor concurring in the petition can appeal. If an appeal is made and either determined or abandoned, or no appeal is made, the sheriff clerk must send a certified copy of the order refusing to award sequestration to the Keeper for recording.

Section 15(3A) of the 1985 Act (inserted by paragraph 13 of schedule 1 to the 2007 Act) provides that appeals against the AiB's refusal to award sequestration on a debtor application will be heard by a Sheriff, and appeals against a decision of the sheriff to transfer a sequestration to any other sheriff will be heard by the sheriff principal (section 15(2A) of the 1985 Act, inserted by section 16(2)(c) of the 2007 Act).

5.9.2 Section 59 statutory notices

Section 59 and schedule 5 introduced two statutory notices which may be recorded in the ROI. The notices relate to trust deeds for creditors executed after 1 April 1986. The trustee under the trust deed may cause a notice to be recorded. Recordings shall have the same effect as the recording of letters of inhibition. It should be noted that the inhibitory effect in this case lasts for 5 years.

After the debtor's estate has been finally distributed or the trust deed has ceased to be operative, the trustee can record a further notice recalling the earlier notice.

Corporate Insolvency

5.10 Administration

Administration is considered as a tool to rescue an ailing business while it considered as still being viable. It provides time to restructure the company and protects against actions by secured creditors but can only be used where it is considered possible to achieve one of the following:

rescue the company as a going concern;
achieve a better result for creditors than if the company were wound up;
realising property to make a distribution to a secured or preferential creditor.

Administration is commenced by the appointment of a receiver which may be by

the court
A floating charge holder
the company, or
the directors of the company.

5.10.1 Appointment of Administrator

An administrator is usually appointed by a court order, evidence of which should be submitted with the application for registration. However an administrator can be appointed by a floating charge holder, or by the company or directors of the company, in a simplified process which does not involve a court order- the requirement is that the holder must file certain papers with the relevant court (in particular a statutory form of Notice of Appointment and evidence of the consent of the nominated administrator). In such a case, a copy of the Notice of Appointment certified by the clerk of court and endorsed with the date of presentation of the principal will be acceptable evidence of the filing of the relevant papers. If the registration officer is in doubt, a referral to a senior caseworker should be made. Where more than one administrator is appointed any deed should be executed by all of them unless their appointment makes it clear that one can act alone in relation to a transaction of the type being registered.

5.10.2 Powers of Administrator

The administrator has power to sell or dispose of the property of the company and any disposition should run in the name of the administrator (or the administrator and the company) and should be executed by the administrator.

5.10.3 Outstanding securities and inhibitions

Heritable securities should be discharged, unless the court has ordered otherwise - thus if no discharge is presented with an application, the security should continue to be disclosed unless the court orders under paragraph 71 of Schedule B1 to the Insolvency Act 1986 that the administrator can sell the property free of the heritable security. An extract of the court order to this effect should be submitted with the application.

Any floating charge granted by the company does not automatically attach to property in the event of that company entering administration; only if a floating charge has been noted on the title sheet should the Keeper seek a certificate of non-crystallisation.

It is also the view of the Keeper that an administrator probably cannot sell free of an inhibition affecting the company unless the court authorises this - paragraph 6.27 of the Registration of Title Practice Book provides that such an inhibition will be disclosed as an adverse entry with exclusion of indemnity unless it is discharged or the authority of the court is given to sell free of the inhibition.

5.11 Liquidation

Liquidation is the action of winding up the affairs of a company to realise the assets and distribute funds amongst creditors and members. The company does not have to be insolvent to be liquidated, this being a member's voluntary liquidation (MVL) when the company just wishes to cease trading and distribute the assets. When the company is insolvent it will be either a creditor's voluntary liquidation (CVL) or compulsory liquidation.

5.11.1 Appointment of liquidator

Companies may be liquidated by (a) voluntary winding up either by members or by creditors and (b) by compulsory winding up by the court. Where a company is in voluntary liquidation, the resolution passed to wind-up the company and appoint the liquidator will comprise the appropriate link in title. In cases of compulsory winding-up the court order should be submitted. It is possible for a voluntary winding-up to be converted to a winding up by the court upon application by a creditor or contributory (i.e. a person liable to contribute to the assets of a company in the event of its being wound up).

5.11.2 Power of liquidator

Once a liquidator is appointed the directors are no longer entitled to exercise any of their powers. The assets remain vested in the company but the powers of the directors are taken over by the liquidator. The Insolvency Act 1986 makes provisions regarding the powers of a liquidator.

A deed granted by a company in liquidation runs in the name of the company, but the narrative refers to the fact that the company is in liquidation. The liquidator executes the deed in place of the directors. (Where there is more than one liquidator appointed, both should sign the deed unless the terms of their appointment enable one to act independently of the other). Where a company in liquidation is conveying subjects, the registration officer must examine evidence of the appointment of the liquidator.

5.11.3 Outstanding securities and inhibitions

If the liquidator is selling asset that is encumbered by a standard security there is no requirement to obtain the consent of the creditor to the sale provided there will be enough funds realised to repay the creditor; in such instances the security should be discharged in the normal manner.

A secured creditor can seek to exercise their right under power of sale procedures. If either the liquidator or secured creditor intimates to the other their intention to sell the property this precludes the other from selling. For the Keeper in the event of the sale being by the virtue of power of sale the answers to the question on the application form will confirm that all statutory procedures have been complied with and no further enquiry is required; if the sale is by the liquidator then the creditor will grant a discharge of their security.

Any floating charge that is sufficient in terms to include the property will automatically become a fixed charge on the liquidation of the company. Accordingly evidence should be provided of the creditor under the floating charge

- consenting to the release of the subjects,
- consenting to the sale
- or having registered a memorandum of satisfaction of the charge (in full or part) with Companies House

5.11.3.1 Inhibitions executed on or after 22 April 2009

Inhibitions executed on or after 22 April 2009 but prior to the liquidation provide the creditor with no prior ranking and the power of the liquidator to sell any of the company's property shall not be challengeable (Sections 66(1A) and 166(1A) of the Insolvency Act 1986). These provisions apply to liquidations instigated by creditors, a liquidation instigated by the members is only appropriate where there are no debts and accordingly there should be no inhibitions.

5.11.3.2 Situation for inhibitions prior to 22 April 2009

All inhibitions registered within a 60-day period, prior to the date of commencement of the winding up of a company, can be disregarded as ineffective. The justification for this approach is to be found in section 185 of the Insolvency Act 1986, which applies to the winding up of companies registered in Scotland under inter alia section 37(2) of the Bankruptcy (Scotland) Act 1985. Section 37(2) provides that no inhibition on the estate of the debtor, which takes effect within the period of 60 days before the date of sequestration, shall be effectual to create a preference for the inhibitor.

The situation with inhibitions registered before the 60-day period is less clear (see, for example, Gretton: The Law of Inhibition and adjudication, chapter 11). Some commentators (see for instance, Palmer’s Company Insolvency In Scotland, chapter 4) argue that liquidators can sell free of any prior inhibition against the company, whilst others are less certain. Gretton, for example, discusses the possibility that a distinction can be made between a voluntary and a compulsory winding-up, arguing that the latter cannot be held to be a voluntary act of the company and so prior inhibitions against the company cannot be effective. Since all such views must remain speculative until the matter is clarified by legislation or settled by the courts, the Keeper is obliged to adopt the prudent line that all prior inhibitions registered against a company before the 60-day period are effective, and so require to be disclosed as adverse entries with attendant exclusion of indemnity. This is the case whether the winding-up is compulsory or voluntary.

5.12 Receivership

Receivership is the action of enforcement of a floating charge on behalf of the creditor. The receiver's role is to realise assets to repay the floating charge creditor and any prior ranking creditor to the floating charge.

Provisions in section 250 of the Enterprise Act 2002, which came into force on 15 September 2003, amend the Insolvency Act 1986 to the effect that, subject to various exceptions, it is not competent for the holder of a floating charge executed after 15 September 2003 to appoint an administrative receiver. Accordingly the appointment of receivers will be gradually diminishing.

5.12.1 Floating charges executed on or after 15 September 2003

As the Enterprise Act 2002, provides that, subject to various exceptions, it is not competent for the holder of a floating charge executed after 15 September 2003 to appoint an administrative receiver any disposition by an administrative receiver (even if called by another name) would be void, as he would not have been validly appointed.

An administrative receiver is defined as a receiver appointed under section 51 of the Insolvency Act 1986 where 'the whole (or substantially the whole) of the company's property is attached by the floating charge'. The above provision would not apply if this was not the case, or if any of the complex exceptions narrated in the 2002 Act applied. The more usual practice has been to grant a floating charge over the whole of the company's assets and accordingly the appointment of the receiver will be struck at by the foresaid provisions.

Therefore in the case of any sale by a receiver appointed under a floating charge executed on or after 15 September 2003, registration officers should refer the case to senior caseworker, since where there is a disposition by a purported receiver, whose receivership is struck at by section 72A, the disposition is considered void. The senior caseworker, in consultation with legal services as appropriate, will consider whether the receivership is covered by one of the exceptions in the 2002 Act

The 2002 Act introduces new provisions whereby the holder of a qualifying floating charge in respect of a company's property may instead appoint an administrator of the company.

5.12.2 Floating charge executed prior to 15 September 2003

Where a progress of title includes a deed granted by a receiver, it is essential that there be submitted in support of the application for registration, and examined by the legal settler, the instrument of appointment of the receiver and the floating charge itself. Examination of the floating charge is necessary to determine if it is sufficient in its terms to charge Scottish heritable property and has been validly constituted. Unless these requirements are satisfied, any deed granted by a receiver is invalid.

5.12.3 Outstanding securities and inhibitions

In the event of a limited company going into receivership, standard securities do not automatically fly off following a conveyance of the company’s property by the receiver. Standard securities granted by the company must be disclosed in the title sheet pertaining to any purchaser from the receiver, unless one of the following exceptions applies:

- A discharge for each outstanding standard security is submitted.
- The creditor in the outstanding security consents in the conveyance by the receiver, to the effect of either discharging the security or disburdening the subjects of the security.
- The sale is being conducted under section 61(1) of the Insolvency Act 1986.

Section 61(1) of the Insolvency Act 1986 provides that where a receiver sells or disposes of any property or interest in property of the company which is subject to the floating charge by which the receiver was appointed, and

- either that property is subject to any security or interest of, or burden or encumbrance in favour of, a creditor the ranking of which is prior to, pari passu with or postponed to the floating charge,
- or that property is affected or attached by effectual diligence,

and the receiver cannot get the consent of the creditor or the person executing the diligence, the receiver can apply to the court for authority to sell free of the security or diligence.

Where a sale is carried out in accordance with the authority of the court, the recording/registration of the conveyance has the effect of

- disencumbering the property of the security and
- freeing the property from the diligence.

In sales by receivers falling within the above category, settlers should requisition a copy of the court authorisation before omitting a security or diligence from the title sheet. It is stressed that a copy of the court authorisation (usually in the form of a court order) must be examined before the decision is taken to omit a standard security from a title sheet. If there is an apparent defect in the order, the matter should be referred to a senior officer.

Section 61(1A) of the 1986 Act (inserted by S155 of the 2007 Act) provides that for the purposes of said sub-section 61(1) an inhibition that takes effect after the creation of the floating charge by virtue of which the receiver was appointed is not an effectual diligence.

Any unusual circumstances should be referred to a senior caseworker.

5.12.4 Sales by Receivers - prior sale of part of subjects

The House of Lords decision in the case of Sharp v Thomson (1997 SCLR 328 and 1997 SLT 636) has prompted the Keeper to consider the risk to his indemnity in sales by receivers. One of the implications of the decision is that, once a disposition of heritable property by a company has been delivered to a purchaser, a floating charge over the company’s property and undertaking cannot attach to that heritable property. It is possible that if the company delivers a disposition to a purchaser, the purchaser (for whatever reason) will not record or register the deed. Later, after the company’s floating charge crystallises, the receiver may not learn about the earlier disposition and sell the property to someone else. The second purchaser is at risk of having their title defeated by the first purchaser who holds on the delivered but not recorded/registered disposition. That risk may well pass on to the Keeper if the second purchaser’s title has been registered without any exclusion of indemnity.

However, the Keeper considers the risk is too remote to justify a blanket exclusion of indemnity in all sales by receivers. A purchaser acting in good faith will be expected to have made appropriate enquiries of the receiver. If the receiver’s responses are less than satisfactory, the purchaser’s agent should seek the advice of Pre-Registration Enquiries Section, in which case a decision concerning indemnity may be made at that time.

In an application on behalf of a purchaser, to register a transfer of title from a receiver to themselves, the settler should take note of any copy correspondence between the agent and Pre-Registration Enquiries Section. If no such copy correspondence is enclosed with the application, the settler must pay special attention to the answer to the question on the application form which asks whether there is any person in possession or occupation of the property adverse to the interest of the applicant.

Provided

- that question is answered in the negative,
- there is no other documentation in the application to suggest a prior disposition of the property by the company, and
- the required documentation concerning the appointment and acting of the receiver is submitted

the settler may proceed to register the title without an exclusion of indemnity.

If any part of the application is unsatisfactory in respect of the above requirements, the case should be referred to a senior caseworker.

5.13 Company Voluntary Agreement (CVA - also referred to as Creditors or Corporate Voluntary Agreement)

A CVA is put in place when it is considered that a company remains viable. If accepted the company continues to trade and the director's continue to act in their existing capacities under the supervision of an insolvency practitioner. Once accepted by all parties, including secured creditors, there are no implications for the Keeper under a CVA, however due to the uncertainties in the finances of the company it does not preclude the possibility of a company going down some other insolvency route in the future.

If it comes to the Keeper's attention that a company is subject to a CVA then reliance can be placed on the answer provided to the questions on the application form regarding the standing and actions of the company; no further enquiry is required.

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