Achievement or Reversion? – take care of the family home in receivership

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In the recent Sheriff Court judgment in the case The Bankrupt Accountant v Peter A Davies, the sheriff sought to clarify how a family home should be treated following the confinement of an individual.

Background

The debtor was placed in receivership in October 2010.

In October 2020, the bankrupt accountant (‘AiB‘) applied to the sheriff under section 40 of the Bankruptcy (Scotland) Act 1985 (now section 112 of the Bankruptcy (Scotland) Act 2016) to allow the sale of the debtor’s family home.

This claim was defended by the debtor for the following reasons:

  • That due to the fact that the sequestration was granted more than 3 years before the request, the family home was returned to the debtor, in accordance with article 39A (2) of the Law;
  • That the AiB had not renewed the memorandum with the register of prohibitions in accordance with Article 14 (4) of the Law and also failed to properly exercise one of the actions under Article 39A ( 3), thus failing to prevent the revolu- tion of the family home to the debtor; and
  • That the AiB was personally precluded from arguing that the initiation of a prior proceedings for the recovery of possession precluded the application of section 39A of the Act.

It was agreed that the debtor’s home was a “family home” within the meaning of section 40 of the Act.

The sheriff clarified that the main objective of sections 40 and 39A of the Act is to provide protection and certainty to family members who would be affected by the actions of the trustee. As such, the issues that a court must consider under a section 40 claim are entirely separate from those that arise in a simple action for the recovery of inheritable property.

Section 39A requires the AiB to sell or otherwise dispose of the debtor’s interest in a family home within 3 years from the date of receivership, failing which the property reverts to to the debtor. This statutory reversion is triggered only by the passage of this particular period, and not by anything else.

Article 39A (3) provides that this reversion does not apply if, “at the end of the 3-year period from the date of escrow”The trustee has taken one or more of the actions listed in its paragraphs (a) – (f), in particular:

“C) the trustee sends a memorandum to the keeper of the inhibitions register in accordance with article 14 (4) of this law;

(e) the trustee initiates proceedings—

(i) obtain authorization from the sheriff under section 40 (1) (b) of this Act to sell or dispose of the right or interest;

(ii) in an action for the division and sale of the family house; Where

(iii) in an action to obtain vacant possession of the family home ”

The sheriff pointed out that section 39A (3) only concerns what the trustee has done on that date, and that what the trustee may or may not do at a later date cannot affect what happens to the date of the third anniversary. It comes back on that date or not.

The AiB’s position was that it had complied with Article 39A (3) (c) and (e) (iii) and that, therefore, the domicile of the debtor remained vested in the sequestered estate. This was contested by the debtor.

The Sheriff’s Decision Regarding the Memorandum:

The sheriff ruled that the trustee had complied with section 39A (3) (c).

The AiB sent a memorandum to the keeper of the prohibition register under section 14 (4) of the law before the expiration of the 3-year period. Article 39A (2) therefore did not apply and the debtor’s family domicile was still part of the sequestered estate.

Although the debtor argued that the AiB was required to send a memorandum at the expiration of each subsequent three-year period (which was not done), the sheriff felt that this was not necessary and that 39A (3) (c) only required one memorandum to be sent within the initial three-year period.

Sheriff’s ruling on family home proceedings:

The sheriff did not admit that the AiB had complied with any of the other provisions listed in section 39A (3), and in particular it did not admit that the trustee had initiated proceedings concerning the family home before the third anniversary of the debtor’s receiver. The AiB had argued that an earlier action to recover possession of hereditary property constituted such a proceeding, but the sheriff disagreed.

Although Sheriff McCrossan admitted that the earlier proceedings were for the same property, they were not specifically proceedings regarding these matters as a “family home.” Indeed, the AiB’s writings in that action specifically stated that the property was not a family home.

Personal bar:

Finally, the Sheriff addressed the debtor’s argument that the AiB did not have a personal right to argue that the prior action fell under Section 39A (3) (e) (iii) as a result of ‘a letter sent by the AiB in October 2012 in which the AiB accepted that the property was a family home. The sheriff disagreed with this argument, noting that what the trustee said or not told the debtor in correspondence cannot change whether or not he took certain actions at the due date and therefore triggered an automatic consequence. .

The sheriff, however, admitted that the correspondence might not be entirely irrelevant and pointed out that the debtor may be able to persuade a sheriff that the contents are a relevant circumstance he should take into account when determining whether he should. give the power to the trustee to sell the property. .

The sheriff concludes his judgment by stressing that the object of section 39A is to ensure that the trustee deals with the family home of the debtor within a reasonable time. This is achieved in the first place by a rule according to which it automatically reinvests itself in the debtor after a period of 3 years. The sheriff notes that this can of course be overlooked by the trustee by taking one or more of the actions set out in section 39A (3).

The sheriff emphasizes, however, that sending a memorandum to the prohibition register is not a proactive step in the treatment of the property because it does not in itself guarantee the realization of the debtor’s interest in the family home in a reasonable time, nor does it offer certainty to the debtor’s family.

The sheriff was also of the opinion that there was another avenue for the trustee to consider if he found himself unable by the third anniversary to take a proactive step towards the realization of the debtor’s family home. The sheriff suggested that instead of seeking to remove section 39A (2) by memorandum from the prohibitions register, the trustee could consider using section 39A (7) and ask the court to automatically substitute a longer period before the family home. returns to the debtor. In the sheriff’s view, this would provide more certainty and a clearer timeline for the debtor’s family.

Conclusion

This decision is a useful reminder of the law surrounding the realization of the family home of the debtor under sequestration, and the steps that a trustee must take in order to prevent the property from automatically returning to the debtor three years after the date of sequestration. .

The sheriff’s comments in this case also serve to highlight that current legislation may not work in a way that ensures that the debtor’s family home is treated by the trustee within a reasonable time or in a manner that ensures the security for the family of a debtor. While the sheriff’s suggestion to use Section 39A (7) (now Section 112 (6) of the 2016 Act) to extend the three-year period may be appropriate in some cases, the cost of a such request must be balanced against the convenience of sending a memorandum to the Prohibition Register.


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