Scottish Sheriff Court Decisions

SHERIFFDOM OF LOTHIAN AND BORDERS AT EDINBURGH

Case No: SQ110/05

NOTE   by   SHERIFF WILLIAM HOLLIGAN in the Note of Appeal   by   KENNETH WILSON PATTULLO, Insolvency Practitioner, Begbies Traynor, 3rd Floor Finlay House 10/14 West Nile Street, Glasgow G1 2PP Appellant   in the sequestration of   ELIZABETH JANE McAREAVEY, residing at Drylaw House, 32 Groathill Road North, Edinburgh, EH4 2SL

 

Appellant :Graham

Respondent (Accountant in Bankruptcy): Lloyd

 

Edinburgh, 12th April 2010

The sheriff having resumed consideration of the appeal, refuses the same; Reserves all questions of the expenses of the appeal and assigns 28^th April 2010 at 9.30am in the Sheriff Court 27 Chambers Street, Edinburgh as a diet in relation thereto.

 

 

[1] This is an appeal brought pursuant to section 49(6) of the Bankruptcy (Scotland) Act 1985 ("the 1985 Act"). The appellant was appointed trustee on the estates of the debtor in or about 11th August 2004 in terms of a trust deed for creditors ("the trust deed"). The estates of the debtor were sequestrated pursuant to the 1985 Act in or about 6th April 2005. The Accountant in Bankruptcy was appointed permanent trustee on 20th June 2005. The Accountant in Bankruptcy appointed Mr David Rutherford CA to be her agent. In this Note, I shall refer to the trustee appointed pursuant to the trust deed as "the appellant"; the respondent as "the AIB"; and Mr Rutherford as "the agent".

 

[2] There is no dispute between the parties as to the material facts. They are set out in a joint minute of admissions. It is unnecessary for me to record all that is set out in the joint minute for the purposes of this Note. I refer only to the relevant parts thereof. In his submission, Mr Graham began to develop an argument as to whether the trust deed was a protected trust deed in terms of the provisions of Schedule 5 to the 1985 Act then in force (now amended by the Bankruptcy and Diligence (Scotland) Act 2007). However, Mr Lloyd conceded, at least for the purposes of the argument before me, that the trust deed was a protected trust deed. Both parties were content that I should proceed on the basis that it was.

 

[3] It was submitted that the effect of the award of sequestration was, for all practical purposes, to bring to an end to the power of the appellant to intromit with the bankrupt's estate. Whether he thought the sequestration ought to have been granted or not, the appellant had no funds to challenge it. I was told that the appellant had commenced proceedings to challenge an alleged gratuitous alienation of part of her estate by the debtor but that these proceedings had not come to a conclusion at the date of the sequestration.

 

[4] The appellant submitted a claim in the sequestration in the sum of £25, 909.42 ("the claim"). The claim relates to fees and outlays incurred by the appellant in the performance of his duties as trustee under the trust deed. The agent has, in circumstances to which I will refer, adjudicated upon the claim. He has admitted the whole claim to an ordinary ranking in the sequestration. The appellant says that the claim should be admitted to a preferential ranking.

 

The Issues

 

[5] There are two issues in this appeal: (1) was the appeal lodged timeously; (2) what is the correct ranking of the claim?

 

[6] The first issue relates to what I will call the time bar issue. As I have said, the appeal is brought pursuant to section 49 of the 1985 Act. I will refer to these provisions in detail later in this Note. It was accepted that, for the purposes of determining the relevant time limit, the provisions of section 49(6)(b) apply. Read short, they provide that an appeal to the sheriff must be made not later than two weeks before the end of the accounting period. Section 52 deals with accounting periods. It was also a matter of agreement that the duration of a relevant accounting period at the material time was six months. I will also return to this.

 

[7] Put shortly, the agent says that he adjudicated upon the appellant's claim and dealt with it by letter dated 8 November 2007. The terms of that letter are as follows:-

"I refer to previous correspondence and in particular to your claim for £25,909.42 in the above insolvency.

I have ingathered the estate's interest in the debtor's heritable property and I am in a position to pay a first and final dividend to ordinary creditors. I advise that I have adjudicated upon your claim, and I enclose a full list of adjudicated ordinary and preferential claims.

Any creditor may, if dissatisfied with the acceptance or rejection of any claim, appeal to the court within two weeks of that acceptance or rejection (section 49(6) Bankruptcy (Scotland) Act 1985 as amended refers). Thereafter I will pay a dividend to creditors and seek my Discharge as his (sic) Trustee".

Annexed to this letter is a list of claims headed "Unsecured Creditor Claims Agreed". Item 2 of that list includes the claim. The relevant accounting period ended on 5th April 2008. The present appeal was not lodged until 31st July 2009. It is said that the appeal is thus time barred.

 

[8] In support of his submission that the claim was not time barred, Mr Graham referred to various items of correspondence copies of which were lodged in process and the terms thereof undisputed. In particular, Mr Graham referred to a letter from the agent to the appellant dated 22nd July 2009. The relevant paragraph thereof says:-

"I confirm that every creditor has returned their acceptance but yours. I now give you a final opportunity to return your acceptance to(sic) the dividend within 14 days of receipt of this letter. If you fail to do this or insist on your quasi lien over an unprotected Trust Deed (as verified by the Accountant in Bankruptcy), I will assume you are formally appealing my adjudication to the Sheriff at Edinburgh. I will therefore seek confirmation from the Accountant in Bankruptcy that they(sic) will meet my costs of attending the Court."

That letter came, I was told, at the end of a protracted correspondence between the parties. By letter dated 2nd October 2008, the AIB wrote to the appellant in the following terms:-

"Mr Rutherford is reluctant to enter into a legal battle with another Insolvency Practitioner and has asked for the Accountant's advice on how to advance this matter, with a view to finalising the case.

We are aware that you are regulated by the Insolvency Practitioners Association (IPA). With your permission we intend to write to the IPA and seek a decision on this case. David Rutherford has agreed to this course of action, and to abide by any decision the IPA reach(sic). I can confirm to you that the Accountant in Bankruptcy would also abide by any decision given.

The proposed action would hopefully allow us to resolve the situation without any party having to resort to legal action."

I was informed that a reference was made to the Insolvency Practitioners Association in an effort to resolve matters. However, the Association declined to become involved as mediator, taking the view that there was a statutory mechanism for resolving disputes between the parties.

 

[9] In the course of his submission, Mr Graham said that the adjudication of 8th November 2007 was "vitiated" by the subsequent actings of the AIB in the correspondence, particular by reference to mediation and the "final adjudication letter" of 22nd July 2009. The AIB was now acting in bad faith by relying on a strict application of the statutory timetable. The AIB could not encourage a non-judicial resolution and then, at a later point, insist upon the time limit. Mr Graham said that the AIB had waived the right to object to the competency of the appeal. Furthermore, the appellant did not know and was not told when the relevant accounting period ended.

 

[10] Mr Lloyd submitted that the time limits set out in section 49(6) are prescriptive and fell to be applied in this appeal. The date of the sequestration was 6th April 2005. The relevant accounting periods commenced in April and October. The adjudication was dated 8th November 2007. The appellant therefore had within two weeks before the end of the accounting period in April 2008 within which to appeal. He did not do so and could not now maintain the appeal. On a practical level, the mechanism set out in the 1985 Act made sense. Both the debtor and the creditor may appeal. An adjudication was made by reference to a particular accounting period and the funds held at that time. It was important to uphold the relevant statutory framework. If the appellant's argument was one of personal bar then, to succeed, there needed to be actings which occurred before the time limit expired which entitled the appellant to believe that the time limit would not be insisted upon. In this case, the correspondence all post dates the point by which the time limit had expired. Mr Lloyd submitted that the court has no power to extend the time limit contained within section 49(6). Section 63 of the 1985 Act would not be available to the appellant if he prayed it in aid. On that argument, Mr Lloyd did accept that all the parties, including both the agent and the AIB, were wrong in entering into the correspondence as to resolution of the issue by other means because neither they nor the court could vary or extend the already expired time limit prescribed by the 1985 Act.

 

The second issue

 

[11] In support of his submission that the appellant should be admitted to a preferential, and not just an ordinary, ranking. Mr Graham referred me to the following authorities: Thomson v Tough's Trustee (1880) 7 R 1035; Salaman v Rosslyn's Trustees (1900) 3 F 298; Mess V Hay (1898) 1 F (HL) 22; Miln's Judicial Factor v Spence's Trustees 1927 SLT 425; McBryde, Bankruptcy (2^nd edition) para 20-75; Goudy, The Law of Bankruptcy page 487. Mr Graham submitted that the actings of the appellant had been directed at benefiting the general body of creditors. The appellant should not be treated as a "mere creditor", an expression to be found in some of the authorities. Section 51 deals with the order of priority in a distribution. There is no mention of a trustee under a trust deed. As a matter of fact, in this case, sequestration should not have happened. However, another reason why it does not appear on the list set out in section 51 is that the appellant has a "quasi lien" for fees and outlays. In Thomson v Tough's Trustee, the trustee's right referred to an executory contract but here it is wider than that and relates to fees and outlays incurred by the appellant as trustee under a trust deed. Salaman v Rosslyn's Trustees supported the appellant's position. Mess v Haig turned on its own facts although the underlying reasoning supported the appellant. Miln's Judicial Factor v Spence's Trustee supported the proposition that the lien existed. A preferred ranking is a logical consequence of the existence of the lien. Section 38(4) of the 1985 Act (which relates specifically to liens) expressly preserves the preference of the holder of the lien. It follows that the agent erred in refusing to admit the appellant to a preferential ranking.

 

[12] Mr Lloyd began his submission by reference to section 51 of the 1985 Act. The appellant's claim did not fall into any of the categories provided for in section 51(1). The definition of "preferred debt" (section 51(1)(e) and part 1 of Schedule 3) did not assist the appellant either. The appellant was in the same position as a trustee who petitioned in terms of section 5(2C) (the power given to a trustee under a trust deed to petition for sequestration). In this case there was a gratuitous alienation. However, the only funds available to the appellant amounted to £6859.95 (see paragraph 17 of the joint minute). These the appellant retained to pay legal fees. The appellant had no other assets under his charge. Subsequently, after the agent was appointed, the gratuitous alienation action was settled and monies were paid over to the agent. It was at that point that the appellant submitted a claim for fees and outlays. The provisions of section 51(6)(b) do not apply because the appellant did not relinquish any title deeds or documents. There was nothing over which the appellant had exercised a lien. A lien is a possessory remedy. There is no evidence that the appellant possessed anything which he gave up. Thomson v Tough's Trustees was distinguishable as the trustee there had carried out certain works on his own account. In all the authorities there was reference to possession - there was evidence as to something the trustee gave up. Here there was no evidence of that. Mr Lloyd referred to Adam & Winchester v White's Trustee (1884) 11 R 863 and McLachlan v Keith (1885) Sh Ct Rep 142 and also made reference to a number of the authorities referred to by Mr Graham.

 

[13] In his reply, Mr Graham submitted that the fees of a petitioner under section 5(2C) are covered by section 51(1)(a). As to the suggestion that the appellant was only interested in the estate when he became aware that funds were available, it was the appellant who had raised the action of reduction in relation to the gratuitous alienation. It was that which enabled funds to become available (see paragraph 17 of the joint minute). Mr Graham accepted that there was nothing said in the joint minute as to what had been handed over by the appellant - if indeed anything had. The AIB had acknowledged claims such that the present in other cases. In relation to the time bar, Mr Graham did not seek to invoke the provision of section 63.

 

DECISION

 

The first issue

 

[14] The relevant parts of section 49 provide as follows:-

"(2) Where funds are available for payment of a dividend out of the debtor's estate in respect of an accounting period, the trustee for the purpose of determining who is entitled to such a dividend shall, not later than four weeks before the end of the period, accept or reject every claim submitted or deemed to have been resubmitted under this Act; and shall at the same time make a decision on any matter requiring to be specified under paragraph (a) or (b) of subsection (5) below.

...

(4) Where the trustee rejects the claim, he shall forthwith notify the creditor giving reasons for the rejection.

(5) where the trustee accepts or rejects a claim, he shall record in the sederunt book his decision on the claim specifying -

(a) the amount of the claim accepted by him,

(b) the category of debt, and the value of any security, as decided by him, and

(c) if he is rejecting the claim, his reasons therefor.

(6) The debtor... or any creditor may, if dissatisfied with the acceptance or rejection of any claim (or, in relation to such acceptance or rejection, with a decision in respect of any matter requiring to be specified under subsection (5)(a) or (b) above), appeal therefrom to the sheriff-

(a) if the acceptance or rejection is under subsection (1) above, within two weeks of that acceptance or rejection;

(b) if the acceptance or rejection is under subsection (2) above, not later than two weeks before the end of the accounting period

and the trustee shall record the sheriff's decision in the sederunt book."

 

The basic structure of the section is clear. Section 49(2) anticipates that the trustee holds funds with which to make a payment of a dividend, such payment to come out of those funds. He must then make a decision as to the acceptance or otherwise of all or part of a claim and the matters contained in section 49(5)(b). He must make that decision no later than four weeks before the end of the accounting period. If he rejects the claim, he must give reasons for his decision (section 49(4)). If the creditor is dissatisfied with the trustee's decision he may appeal to the sheriff within two weeks of the end of the accounting period. The timetable for decisions, both by the trustee and the creditor, enables the trustee to know whether he can make a distribution to creditors by the end of the accounting period. If no one objects he can do so. Over the next accounting period, if he has funds to make a distribution, the process is repeated. I do not think it was argued that the letter of November 2007 was anything other than an adjudication by the agent on the appellant's claim. On the facts of this case, the relevant accounting period was, as I understand it, from October 2007 to April 2008. The adjudication was therefore well within the four week period set out in section 49(2). The letter I have referred to does not specify when the relevant accounting period ends. Indeed, the letter says that an appeal to the court may be made within two weeks of rejection of the claim. As I read the provisions of section 49(6)(b), a timeous appeal must be marked not later than two weeks before the end of the accounting period not two weeks from the date of the decision. The letter does not specify when the accounting period expires. However, on any view of the material, no appeal was marked within the time limit fixed by section 49(6)(b).

 

[15] Leaving aside the legal issues, the correspondence I was referred to makes it abundantly clear that all the parties involved in this matter proceeded upon the basis that the claim was still at large after, and indeed well after, the relevant time limit had expired. In this case, no issue was taken as to the respective positions of the AIB and the agent or the role each played in this matter. Nor are any issues raised in terms of section 1B of the 1985 Act. As I have said, Mr Graham did not seek to invoke the terms of section 63 of the 1985 Act. Mr Lloyd did make certain submissions in relation thereto. Also, neither party suggested to me that section 65 had any application to this case. (I observe that, in the case of a reference to arbitration, section 65(2) allows the AIB to "vary any time limit" in respect to which any procedure under the Act may be carried out pending the arbitration.)

 

[16] Accordingly, that leaves me with Mr Graham's submission that the adjudication of November 2007 is "vitiated". Mr Graham did not put forward any authority in support of this submission and I confess that I am not entirely clear what the legal basis for this submission is. It seems to me that Mr Lloyd's submission comes down to the proposition that the provisions of section 49(6)(b) (and I think that it is accepted that section 49(6)(a) does not apply) are mandatory and that no conduct by the agent or the AIB could affect its terms. Furthermore, the court itself has no power to do anything other than apply the subsection. Therefore, whatever the agent and AIB may have done or said is to no effect. If that is correct then it would follow, for example, that if an appeal against a deliverance were marked one day late, it would not be open to the permanent trustee to waive the failure, nor for that matter could the court entertain the appeal. Whatever Mr Lloyd may now say, it is clear that none of the parties turned their minds to the question of time bar. Indeed, it seems to me that on a fair reading of the correspondence, there was a common assumption that if the parties could not resolve the differences amongst themselves then they would refer the matter to the court and indeed the last item of correspondence was an open invitation to the appellant to do just that. I hasten to add that I intend no criticism of Mr Lloyd in advancing the proposition which he did. It is not unusual for the position of parties to change after they have had the benefit of taking legal advice. On the facts of this case, if in law it were open to me to hold that the AIB/agent could waive the right to insist on adherence to the statutory timetable, I would have held that, by implication, such a right was waived. The difficulty is, in my opinion, twofold. Firstly, the 1985 Act has its own timetable. To introduce general concepts of waiver and the like into the provisions of section 49 risks undermining the procedure laid down in the section. Strict adherence to the regime set out in the 1985 Act and its predecessors is a theme running through much of the law on this subject. Secondly, there is section 63. I appreciate that Mr Graham did not rely on its terms. As I have said, if he had, Mr Lloyd would have submitted that it cannot apply. Without expressing any view as to whether section 63 could have had any application to the issue of time bar in this case, the existence of the section is, in my opinion relevant to the question of whether the plea of waiver is open to the appellant. It seems to me that, where there has been a failure to adhere to the timetable, recognising that strict adherence to the timetable may give rise to injustice, the 1985 Act provides a mechanism to apply to excuse such a failure. The section is headed "Power to cure defects in procedure". Having provided such a mechanism I do not consider that, in relation to appeals brought pursuant to section 49, there is room for the application of the common law rules as to waiver. To do so would be to introduce another ground for excusing compliance with the statutory procedure in addition to that laid down in section 63 and I do not consider that can be correct. Accordingly, and given the correspondence I have referred to, with I may say some regret, I conclude that the appeal is out of time.

 

The second issue

 

[17] In the event I am wrong on the first issue and given the nature of the second issue, I deal with the question of whether the appellant is entitled to a preferential or an ordinary ranking in respect of the claim. Both agents agreed that, for the purposes of section 49(6), the nature of an appeal is that the whole matter is at large for the court to decide. The section does not otherwise limit the scope of an appeal. I say that because, on one construction of the appellant's pleadings, it might be thought that an appeal can only be determined on a somewhat narrower basis, such as error of law and so forth.

 

[18] I start by reference to section 31(1) which, read short, provides that the whole estate of the debtor vests in the trustee as at the date of sequestration. Section 33(3) provides that section 31 is without prejudice to the right of any secured creditor which is preferable to the rights of the trustee. "Secured creditor" and "security", taken together, are defined in section 73 as including a right of lien. A lien is a possessory right. If the holder of the lien were entitled to withhold delivery of relevant material this might operate to impede the orderly conduct of the sequestration which is, no doubt, why section 38(4) was enacted. This latter provision (the right of the trustee to demand delivery of documents notwithstanding a lien) has been a common feature of the bankruptcy legislation - see the opinion of the Lord President in Adam & Winchester. I agree with Mr Lloyd that, whatever right the appellant might have, it is not a "preferred debt" in terms of section 51(1)(e) and part 1 of Schedule 3. However, I do not think that Mr Graham sought to contend that it was.

 

[19] I do not read the 1985 Act as dealing with the issue of when a lien may properly be claimed and other than in general terms what, if any, right a lien might or might not confer upon its holder. That appears to be left to the common law.

 

[20] As a matter of general principle, a lien is a right of possession. So, a solicitor may refuse to hand over documents until his fees and outlays are paid; a garage owner may refuse to hand over the car until his account is settled. An agreement may be reached in which items are handed over in return for an express acknowledgement that possession is yielded in return for an agreed payment or a promise of a payment to come. In the case of sequestration the effect of section 38(4) is to override the right of the lien holder to retain possession but is "without prejudice to any preference of the holder of the lien". Accordingly, an express reservation of a right or an agreement thereto may not be necessary (see Lord President again in Adam & Winchester at page 865). I may say neither agent was able to specify just what the nature of the preference is and how, precisely, it is allowed for.

 

[21] Up to now I have used the word "lien". The appellant's pleadings refer to a "quasi-lien". Just what a "quasi-lien" is and what, if any, difference there is between a quasi-lien and a lien was not explained to me. For present purposes I assume there is no difference. At this point I turn to the authorities to which I was referred. The relevant passages in McBryde on Bankruptcy (2^nd edition) pages 442 to 443 and Goudy on Bankruptcy page 487 would seem to suggest that a trustee under a trust deed may have a lien over documents for sums due to him. The textbooks make reference to a number of the authorities to which I was referred. I did not find Thomson v Tough's Trustees to be particularly helpful. The reasoning in the opinion of the court is very brief. Judging from the factual position, a trustee under a trust deed had undertaken certain works. The truster was subsequently sequestrated and a question arose as to who was due the money for the works undertaken. An action of multiple poinding was raised. The court held that the trustee responsible for instructing the work was entitled to be paid, subject to an obligation to account to the trustee in sequestration. Adam & Winchester involved an action directed against a trustee personally following the issue of a solicitor's lien. The action was held to be irrelevant. Mess v Hay failed on its facts because the party claiming the lien had never had possession of the estate in security. There are various dicta to the effect that, if he had, the outcome might have been different. McLachlan v Keith bears to follow Thomson v Tough and seems to be a decision on not wholly dissimilar facts. The case of Salaman v Rosslyn's Trustees also appears to me to be of limited help. A majority of the court appear to have held, without much argument on the point, that the right of the trustee in bankruptcy was subject to "all reservation of proper outlays which the trustees had made in the management of the estate" (see the opinion of the Lord Justice Clerk at page 310). The real issue in that case was whether there was a trust deed for creditors at all or whether the trust deed was more akin to a family trust. In my opinion, Miln's Judicial Factor v Spence's Trustee is helpful. The case involved a competition between, in effect, a trustee or trustees under a trust deed for creditors and a judicial factor. The estate comprised a farm. The Lord Ordinary gave a preferential ranking to the trustees in respect of a lien which they had as possessors of the trust deed. The trust deed had been surrendered to the judicial factor under reservation of the right of lien. A further argument took place as to whether the preferential right given to the trustees gave them a priority over the necessary expenses of administration by the judicial factor. Put another way, the trustee claimed a preference over the gross estate ingathered by the judicial factor without deduction of charges of any kind and, in particular, without deduction of the judicial factor's own remuneration. The Lord Ordinary held that the trustee's claim was not well founded. In the course of his opinion, at page 427 Lord Fleming said:-

"It has to be kept in view that until the trust deed was handed over by Spence's trustees to the judicial factor their right of lien was a very ineffective security. They had no powers of realisation, and even if they had had such powers, the trust deed was in itself of no value whatever. The efficacy of their lien lay in the fact that the judicial factor desired possession of the document and that they were not bound to part with it until their claims had been met. They did, in point of fact, part with the document and also with their right of lien, and in return they are entitled to a preference on the estate...

 

[22] As I have said, a lien is a right of possession. So much is recognised by the words of section 38(4) and section 51(6)(b) both of which refer to a right of lien over a title deed or document. The passage from the opinion of Lord Fleming to which I have referred makes clear that any preference assumes that there has been something over which a lien has properly been claimed in the first place. The difficulty is that there is nothing in the material before me which discloses that there were any documents or title deeds over which a lien was asserted or that any such documents or title deeds were passed over in terms of section 38(4) or otherwise. The right of lien does not arise by virtue of, in this case, the appellant having held the office of trustee under a voluntary trust deed. Such a party may claim a lien over documents and title deeds and, if he is called upon to deliver them to the permanent trustee, he must do so. In doing so he is entitled to lay claim to a preference. If there are no documents or title deeds in his possession, or the permanent trustee has no need of them and does not ask for them, then there is nothing over which to claim a right of lien. I as I have said, there is no factual material before me which suggests that there were any title deeds or documents over which a lien was asserted nor in fact that a lien was in fact claimed. Accordingly, even if I am wrong on the first issue, on the basis of the material before me, my conclusion is that the appellant is not entitled to insist on a preferential ranking of the claim and that the adjudication was correct.

 

[23] I shall accordingly refuse the appeal. I have reserved all questions of expenses and have assigned a hearing for that purpose.