IP Briefing: William Cleghorn as trustee in the sequestration of Mark Edward Fortune v Medwin Investments Limited, 1 July 2016

Practitioners will be interested in a recent Inner House decision concerning a trustee in sequestration who challenged a number of deeds granted by the debtor.

The pursuer (“C”), was appointed as the defender’s, (“F”) trustee in early 2011, the warrant to cite having been granted on 24 December 2010. For reasons which could not be explained (but which have had something to do with the date!) the Sheriff Clerk failed to send a certified copy of the warrant to cite to the Keeper to record in terms of the provisions of section 14 the Bankruptcy (Scotland) Act 1985. This issue only came to light in December 2013, when C sought to renew the inhibition. To rectify the position, he sought an order in terms of section 63 of the 1985 Act. An initial interlocutor was pronounced on 6 February 2014 and registered by the Keeper on 11 February. A further interlocutor, allowing belated registration of the December 2010 warrant to cite, together with renewal memorandum, was pronounced on 12 May (although the Keeper had, in fact, already recorded the warrant by this time). In the meantime, in March and April 2014, F (who had by this time been discharged from his sequestration) granted a number of dispositions and standard securities in favour of Medwin Investments Ltd, (“M”) despite the fact that the properties involved still vested in C.

The Law
Section 14(2) of the 1985 Act provides that the registration of the warrant to cite has the effect of creating an inhibition over the debtor’s estate from the date of sequestration (which is the date of the warrant to cite). The purpose of the inhibition is to inform the world that the trustee holds a personal right to the estate. In practice, it should serve as a “red flag” to any party considering dealing with the debtor. As practitioners will be acutely aware, if a trustee does not deal with heritable property within three years from the date of sequestration he or she has to either complete title or renew the inhibition. If the inhibition expires without being renewed section 44(4)(c) of the Conveyancing (Scotland) Act 1924 takes effect. Section 44(4)(c) acts as a protection to third party buyers purchasing assets which would have formed part of the sequestrated estate by providing that, unless a trustee has recorded title, no deed granted by the debtor “shall be challengeable or denied effect on the ground of such sequestration”.

M sought dismissal of the action relying on the wording of section 44(4)(c) of the 1924 Act. They claimed that as C had not recorded title to the properties concerned and three years had expired since the date of sequestration the properties no longer vested in C. C argued that the three year period specified in section 14 of the 1985 had not expired because it had not started until the Sheriff’s interlocutor of 12 May authorising belated recording of the warrant to cite. He also argued that the “offside goals” rule applied because M was in bad faith as they were aware of F’s sequestration when F granted the deeds. The Lord Ordinary rejected M’s arguments at first instance, determined that the “offside goals” rule applied and ordered production and reduction of the deeds. M reclaimed on the basis that the bad faith issue was not relevant and the 1924 Act applied to the circumstances of the case regardless of whether the warrant to cite had been recorded or not.

The Lord Justice Clerk and Lord Malcolm wrote separate opinions and both are worth reading. The Lord Justice Clerk stated that section 44(4)(c) of the 1924 Act does not entitle a person who has actual knowledge of a debtor’s sequestration to transact with the debtor in relation to a sequestrated estate in a way which deprives the trustee of his rights. Section 44(c) does not impose a “temporal restriction” upon section 32(8) of the 1985 Act which provides that “any dealing of the debtor relating to his estate vested in the trustee…shall be of no effect in a question with the trustee”. What M was suggesting was that even an obviously fraudulent transaction could not be challenged because it would enjoy the protection of the 1924 Act if the “prohibitory effect” of section 14 of the 1985 Act had expired. That was clearly absurd in the context of bankruptcy.

Lord Malcolm’s opinion gave a more detailed analysis of the effect of the inclusion of the words “on the ground of such sequestration” in section 44(4)(c) and concluded that they were there for a purpose. He observed that the prohibitory effect alters the status of third parties acting in good faith. Deeds in their favour can be struck down solely “on the ground of sequestration”. When the prohibitory effect expires something more, such as bad faith, is required to make a deed challengeable. In his opinion the expiry of the prohibitory effect restores to good faith third parties the advantage of being able to rely on the information in the Registers of Scotland but it does not present new opportunities to third parties who are aware of the issues.

Whilst we always advocate that property rights should be timeously protected, it is a simple fact of life that mistakes do happen. However, practitioners will be reassured that the court was not prepared to allow debtors and third parties to execute a “statutorily sanctioned fraud” in situations where there is obvious bad faith.

Contact our Insolvency Solicitors in Edinburgh & Wick Today

To speak to one of our highly experienced insolvency solicitors, get in touch today to make an appointment.