Scottish Sheriff Court Decisions

SHERIFFDOM OF LOTHIAN AND BORDERS AT EDINBURGH

 

SQ479/08

 

JUDGEMENT

 

of

 

SHERIFF WILLIAM HOLLIGAN

 

In the sequestration of

 

ALLAN ANTHONY CAMPBELL, residing at 3/2 Cochran Terrace, Edinburgh EH7 4BJ

 

_____________

 

Act: Lloyd, Harper Macleod

 

7^th September 2011

 

[1] In this sequestration the Accountant in Bankruptcy is the trustee. She appointed Mr Mitchell, chartered accountant to be her agent. Although the note before me was presented by her agent, for convenience, I will refer to the noter as "the trustee". The debtor is Allan Anthony Campbell ("the debtor"). The trustee's note is brought pursuant to section 54 of Bankruptcy (Scotland) Act 1985 ("the 1985 Act") in which the trustee seeks the deferment of the discharge of the debtor for a period of up to two years. After various sundry procedure, the note first called on 17^th August 2011. Largely at the instance of the debtor and his solicitor, although I heard certain submissions on that date, I adjourned proceedings further until 1^st September 2011 for further submissions. On 1^st September 2011 the trustee was represented by Mr Lloyd. There was no appearance by or on behalf of the debtor. Having heard Mr Lloyd and considered what had previously been submitted together with the material lodged in process I granted the application and deferred the discharge of the debtor for a further period of two years. I said I would issue my reasons at a later date which I now do.

 

[2] The relevant statutory provisions are as follows:-

"Section 54

(1)   Subject to the following provisions of this section, the debtor shall be discharged on the expiry of 1 year from the date of sequestration.

...

(3)   The trustee or any creditor may, not later than 9 months after the date of sequestration, apply to the sheriff for a deferment of the debtor's discharge by virtue of subsection (1) above.

(4)   On an application being made to him under subsection (3) above, the sheriff shall order -

(a)    the applicant to serve the application on the debtor and... the trustee; and

(b)   the debtor to lodge in court a declaration -

(i)        that he has made a full and fair surrender of his estate and a full disclosure of all claims which he is entitled to make against other persons; and

(ii)      that he has delivered to the trustee every document under his control relating to his estate or his business or financial affairs;

and, if the debtor fails to lodge such a declaration in court within 14 days of being required to do so, the sheriff shall defer his discharge without a hearing for a period not exceeding 2 years.

(5)   If the debtor lodges the declaration in court within the said period of 14 days, the sheriff shall -

(a)    fix a date for a hearing not earlier than 28 days after the date of the lodging of the declaration; and

(b)   order the applicant to notify the debtor and the trustee... of the date of the hearing

and the trustee... shall, not later than 7 days before the date fixed under paragraph (a) above, lodge in court a report upon the debtor's assets and liabilities, his financial and business affairs and his conduct in relation thereto and upon the sequestration and his conduct in the course of it.

(6)   After considering at the hearing any representations made by the applicant, the debtor or any creditor, the sheriff shall make an order either deferring the discharge for such period not exceeding 2 years as he thinks appropriate or dismissing the application...

(9) The trustee or any creditor may, not later than 3 months before the end of a period of deferment, apply to the sheriff for a further deferment of the discharge; and subsections (4) to (8) above and this subsection shall apply in relation to that further deferment.

 

Section 55

(1)   ... on the debtor's discharge under section 54 of this Act, the debtor shall be discharged within the United Kingdom of all debts and obligations contracted by him, or for which he was liable, at the date of sequestration."

 

[3] As originally enacted, section 54 provided that the period before which a debtor could be discharged was 3 years. The section was amended by section 1 of the Bankruptcy and Diligence (Scotland) Act 2007 ("the 2007 Act") so as to substitute a period of 1 year for 3 years. It also renamed the heading of the section so as to read "Automatic discharge of the debtor". Given that the date of the sequestration is the date of the warrant to cite (section 12(4) of the 1985 Act) and that the trustee must make an application to defer the discharge not later than 9 months after the date of sequestration, the period of time within which the trustee now has to make a decision as to an application for a deferment is considerably shorter than originally provided for.

 

[4] The factual background to this matter is set out in the trustee's report lodged in process. A petition for sequestration was presented on 12^th November 2008. Sequestration was awarded on 7^th January 2009. The trustee caused to have lodged an application to defer the debtor's discharge on 15^th July 2009 which application was granted following the failure of the debtor to lodge the declaration pursuant to section 54(4). The discharge was deferred for 2 years. The grounds set out in the trustee's note seeking deferment of the discharge are not the same as those relied upon in the present proceedings.

 

[5] The areas of present concern to the trustee include: (a) the debtor's ownership of a 25% interest in a race horse; (b) his interest in a limited company, Oatridge Limited; (c) a bank account known as Weatherbys bank account. In short, the debtor failed to declare an interest in any of the foregoing at the relevant time. He has admitted such a failure but says that he did not declare his interest in the horse because he believed the horse to be of no value. Whether it was of no value at an earlier and relevant point is not disclosed. He said the bank account was maintained to help pay for the upkeep of the horse and if anything, the horse has proved a liability rather than an asset. However, it also appears that lodgements were made in this account during the period of the sequestration amounting to some £94,908. The debtor admitted the deposit of these sums but says that they were made to assist a friend in a building project. The trustee believes that the debtor has continued trading. The debtor also appears to have had some interest in a business called Oatridge Limited although the extent of this was somewhat limited. The trustee reported (at page 3) that "The debtor has been cooperative in as much as he completed his statement of assets and liabilities, albeit outwith the statutory time limits, attended at requested interviews and whilst he does respond to correspondence he often fails to provide the required information... The debtor has consistently ignored the sequestration process, probably due to his belief that he should not have been sequestrated in the first place." The trustee reports the debtor's conduct has been reported to the procurator fiscal.

 

[6] The procedure set out in section 54 involves four stages. Firstly, in terms of section 54(3) the trustee (or creditor) may apply to the sheriff for deferral of the debtor's discharge. I have already referred to the time limit prescribed. Absent such an application, on the expiry of the period set out in section 54(1) (1 year), the debtor shall be discharged. To that extent the discharge is automatic. Any such application has to be by way of a note. Section 53(3) is silent as to the basis upon which any application may be made. In this case, as one would expect, the trustee set out the basis for the application in his note.

 

[7] The second stage is the declaration of the debtor in terms of section 54(b)(ii). In my opinion, this provision is significant. Failure to lodge the declaration means that the sheriff "shall" defer the discharge for a period of up to 2 years which is indeed is what happened in relation to the earlier application to defer. Read short, the provisions of section 54(b)(ii) concern a full surrender of the estate; a full disclosure of all claims; and delivery of all relevant documents.

 

[8] If the declaration is made, then the trustee must lodge a report upon the debtor's assets and liabilities; his financial and business affairs and his conduct in relation thereto; and his conduct in relation to the sequestration. (Procedurally it seems a little odd that the trustee is called upon to produce such a report having already lodged a note seeking deferral of the discharge.)

 

[9] The final stage is the hearing which the sheriff must assign pursuant to section 54(6). Having heard parties the sheriff "shall" make an order either deferring the discharge for a period of time not exceeding 2 years or dismiss the application.

 

[10] Nowhere in these provisions is there any specific statutory guidance given either as to the basis upon which an application to defer a discharge may be sought or upon what basis the sheriff ought to reach his decision. There is also no guidance as to what form of inquiry into the facts, if any, the section requires.

 

[11] When the matter called before me on 17^th August 2011 the agent for the trustee was able to assist me on factual matters but, understandably, not on legal ones. The agent for the debtor lodged a written note setting his clients reply to the agent's concern but the reply dealt largely, although not exclusively, with factual matters. As I have said, the agent for the debtor invited me to continue the matter for further submission. Given the fact that this issue was contested I also wish to be addressed on the correct approach to the interpretation of section 54.

 

[12] In relation to section 54 there is no authoritative judicial guidance as to its interpretation. The few authorities which do exist, referred to at paragraph 18-51 of the second edition of McBryde on Bankruptcy, turn upon their own facts and do not appear to me to set out any detailed analysis of the provisions. McBryde (at paragraphs 18-50 to 18-55) refers to certain authorities decided under previous legislation. Mr Lloyd also referred to Goudy on Bankruptcy at chapter 28 which sets out the law as it applied under the Bankruptcy (Scotland) Act 1913 ("the 1913 Act"). Sections 143 and 149 of that Act governed the relevant procedure then in force. Goudy describes (at page 375) the policy of the law in treating a discharge in the sequestration process as a privilege to the bankrupt rather than a right. Indeed, it would appear that under common law processes of insolvency there was no mechanism by which a debtor could be freed from the claims of his creditors except by paying them in full. Bankruptcy legislation (for example, section 146 of the Bankruptcy (Scotland)Act 1856) innovated upon that procedure. However, I suspect that the general approach to a debtor's discharge has been influenced by the common law background. Although I have no doubt that the provisions of section 143 and 149 were, to a certain extent, the model for section 54 I am not convinced that the earlier authorities are of assistance now. The procedures in the 1913 Act were elaborate and detailed. However, of more importance I detect that the policy of the 1985 Act, as amended, has brought about a move away from regarding discharge as a privilege rather than a right. The effect of section 1 of the 2007 Act is to align the period of time before which a debtor may be discharged with those in England as introduced by section 256 of the Enterprise Act 2002 which allows for a more forgiving attitude to commercial misfortune.

 

[13] If a discharge is available to a debtor within a year of the date of sequestration one might ask what is the statutory purpose of a deferment? As I have already commented, prima facie at least, none is expressly stated in the section. One way to deal with this is to ask what would happen absent such deferral? Section 55(1) provides that a discharge discharges the debtor from all debts and obligations contracted by him at the date of the sequestration. As Mr Lloyd pointed out, the debtor's discharge does not end the sequestration. As in this case, the trustee continues with her responsibilities and continues to exercise her powers. On the facts of this case, the trustee cannot point to any prejudice to her in the discharge of her duties should the debtor be discharged at least insofar as it relates to the identification and ingathering of assets. That procedure continues.

 

[14] Such limited authority as there is suggests that in reaching a decision as to deferment the court is exercising a discretion. McBryde says that the issue is wholly discretionary (paragraph 18-51). For my own part, I regard a conclusion as to deferment pursuant to the present legislation as one of judgement. By definition, the power to defer a discharge or, in effect, to permit it to proceed in accordance with the statute, is exercised within the confines of the provisions which I have described and the material put before the court. That material is the declaration which satisfies section 54(4)(b)(ii) and the report which satisfies section 54(5). Now it may be that the deferment has a specific function such as that in Watson v Henderson 1998 SCLR 439 (a claim for damages for personal injury). However, more likely, attention will focus upon the conduct of the debtor and of the sequestration itself. That seems to me to be very much the thrust of the statutory provisions I have referred to above. In my opinion, although it may have, a deferment need not have a specific future purpose in the sense that, if it is not granted, then the trustee may not be able to do something. I see no reason why the court should not look back at past events and, having regard to these, conclude that the debtor is not entitled to his discharge. I accept that, as the debtor's solicitor submitted, there are penalties within the 1985 Act for a debtor's failure to cooperate. However, I agree with Mr Lloyd when he submitted that the trustee and the court are entitled to expect compliance with the disclosure and cooperation provisions set out in the Act. A debtor who disregards these is not entitled to demand that his discharge proceeds automatically. I appreciate that this construction comes close to using the deferment provisions as a penalty. I prefer to view this as a matter of rights and obligations. The right to a deferment is balanced by an obligation to comply with the provisions of the 1985 Act.

 

[15] On the facts of this case, it appeared to me there was ample material to justify the conclusion that the debtor has, read short, not complied with his obligations under the 1985 Act. He failed to disclose the existence of a bank account which has a number of significant entries in it or its operation. He failed to disclose the existence of his interest in the horse. Whatever he may have thought about the value of these assets or the way in which they were being operated, it was his obligation to make the appropriate disclosure to the trustee and that he failed to do. His explanations were unsatisfactory. However aggrieved he may feel about the sequestration process it does not detract from his obligation to engage properly in it. Indeed, I venture to suggest that had he cooperated more fully the whole procedure could have been over a great deal more quickly. In my opinion, in reaching a judgement as to whether to defer his discharge, I was entitled to have regard to these matters. I concluded that the deferment should be for a period of two years.

 

[16] Lastly, the matter of how a court should deal with disputed matters was touched upon at an earlier point in the procedure. In my opinion, the structure of section 54 assumes that the court will deal with the matter upon the basis of the debtor's declaration and the trustee's report. I consider that it would only be in very exceptional circumstances (and much to be discouraged) that any evidence would be led.