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Realisation or Reversion? – dealing with the family home in a sequestration

In the recent Sheriff Court judgment in the case of The Accountant in Bankruptcy v Peter A Davies, the Sheriff sought to clarify how a family home should be dealt with following the sequestration of an individual.

Background

The debtor was sequestrated in October 2010.

In October 2020, the Accountant in Bankruptcy (‘AiB’) applied to the Sheriff under section 40 of the Bankruptcy (Scotland) Act 1985 (now section 112 of the Bankruptcy (Scotland) Act 2016) to permit the sale of the debtor’s family home.

This application was defended by the debtor on the following grounds:

  • That due to the fact that the sequestration was granted more than 3 years prior to the application, the family home had re-vested in the debtor, in accordance with section 39A(2) of the Act;
  • That the AiB had failed to renew the memorandum with the Register of Inhibitions in accordance with section 14(4) of the Act and had also failed to properly exercise any of the actions under section 39A(3), thereby failing to prevent the re-vesting of  the family home in the debtor; and
  • That the AiB was personally barred from maintaining that the commencement of earlier recovery of possession proceedings prevented the operation of section 39A of the Act.

It was agreed that the debtor’s home was a ‘family home’ as defined under section 40 of the Act.

The Sheriff clarified that the principal purpose of sections 40 and 39A of the Act is to provide protection and certainty to the family members who would be affected by the trustee’s actions. As such, the issues which a court has to consider under a section 40 application are wholly distinct from those under a straightforward action for recovery of heritable property.

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

Section 39A(3) provides that this reversion does not apply if, “at the end of the period of 3 years beginning with the date of sequestration” the trustee has taken one or more of the actions listed in its paragraphs (a)-(f), including in particular:

“(c) the trustee sends a memorandum to the keeper of the register of inhibitions under section 14(4) of this Act;

(e) the trustee commences proceedings—

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

(ii) in an action for division and sale of the family home; or

(iii) in an action for the purpose of obtaining vacant possession of the family home”

The Sheriff made the point that section 39A(3) is concerned only with what the trustee has done by that date, and that what the trustee may or may not do on a date thereafter cannot affect what happens on the date of the third anniversary. It reverts on that date or it does not.

The AiB’s position was that that it had complied with section 39A(3)(c) and (e)(iii) and therefore the debtor’s home remained vested in the sequestrated estate. This was contested by the debtor.

The Sheriff’s decision in respect of the memorandum:

The Sheriff held that the trustee had complied with section 39A(3)(c).

The AiB had sent a memorandum to the Keeper of the Register of Inhibitions under section 14(4) of the Act prior to the expiry of the 3 year period. Section 39A(2) therefore did not apply and the debtor’s family home remained part of the sequestrated estate.

Although the debtor argued that the AiB was required to send a memorandum on the expiry of every subsequent three year period (which had not been done), the Sheriff held that this was not necessary and that 39A(3)(c) only required a memorandum to be sent during the initial three year period.

The Sheriff’s decision in relation to proceedings in respect of the family home:

The Sheriff did not accept that the AiB had complied with any of the other provisions listed in section 39A(3), and in particular she did not accept that the trustee had commenced proceedings in respect of the family home prior to the third anniversary of the sequestration of the debtor. The AiB had argued that an earlier action for recovery of possession of heritable property constituted such proceedings, but the Sheriff did not agree.

Although Sheriff McCrossan accepted that the earlier proceedings were in relation to the same property, they were specifically not proceedings in respect of those subjects as a ‘family home’. Indeed, the AiB’s pleadings in that action specifically averred that the property was not a family home.

Personal Bar:

Finally, the Sheriff dealt with the debtor’s argument that the AiB was personally barred from arguing that the earlier action fell within section 39A(3)(e)(iii) as a result of a letter sent from the AiB in October 2012 in which the AiB accepted that the property was a family home. The Sheriff did not accept this argument, noting that what the trustee may or may not have said to the debtor in correspondence cannot alter whether he has or has not taken certain steps by a due date and thus triggered an automatic consequence.

The Sheriff accepted however that the correspondence may not be wholly irrelevant and highlighted that the debtor may be able to persuade a Sheriff that the content is a relevant circumstance which he should have regard to when determining whether to give authority to the trustee to sell the property.

The Sheriff concludes her judgment by emphasising that the purpose of section 39A is to ensure that the trustee deals with the debtor’s family home within a reasonable period. This is achieved in the first instance by a rule that it automatically re-vests in the debtor after a period of 3 years. The Sheriff notes that this can of course, be disapplied by the trustee taking one or more of the steps set down in section 39A(3).

The Sheriff goes on to highlight however that the sending of a memorandum to the Register of Inhibitions is not a proactive step in dealing with the property as it does not by itself ensure the realisation of the debtor’s interest in the family home within a reasonable time, and nor does it provide certainty to the debtor’s family.

The Sheriff was also of the view that there was an alternative route for the trustee to consider if he finds himself unable by the third anniversary to take a proactive step towards realising the debtor’s family home. The Sheriff suggested that instead of seeking to dis-apply section 39A(2) by way of memorandum to the Register of Inhibitions, the trustee could consider using section 39A(7) and request the Court to substitute a longer period before the family home automatically reverts to the debtor. In the Sheriffs 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 around the realisation of the debtor’s family home in a sequestration, and the steps which a trustee must take in order to prevent the property from automatically re-vesting in the debtor three years after the date of sequestration.

The Sheriff’s comments in this case also serve to highlight that the current legislation is perhaps not operating in a way which ensures that the debtor’s family home is dealt with by the trustee within a reasonable period or in way which provides certainty for a debtor’s family.  While the Sheriff’s suggestion of utilising section 39A(7) (now section 112(6) of the 2016 Act) to extend the three year period may well be appropriate in certain cases, the cost of such an application has to be balanced against the convenience of sending a memorandum to the Register of Inhibitions.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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