Insolvency, Receivership and Liquidation

5.9 Debtor’s transactions after discharge

5.9.1 Property acquired by the debtor post-discharge

After his discharge, the debtor is free to acquire other property; such acquisitions will be of no interest to the trustee in sequestration and so title to such acquisitions, and any related transactions with the property acquired can be registered in the normal way, without disclosure of the sequestration.  Such acquisitions are not affected by a renewal of the sequestration using a memorandum of renewal.

5.9.2 Transactions by the debtor post-discharge with property vested in the trustee

Heritage which had vested in the trustee in sequestration either at the date of sequestration or as acquirenda, does not automatically revert to the debtor upon the latter’s discharge. It remains vested in the trustee except insofar as he has divested himself of it.

However, when presented with an application in which a bankrupt/former bankrupt is transacting with property after the expiry of the 3 year period, (or longer if renewed), legal settlers need not seek evidence of the permanent trustee's (or indeed the bankrupt's) discharge. Authority for this is found in section 44(4)(c) of the Conveyancing (Scotland) Act 1924. It states:

'No deed, decree, instrument or writing, granted or expede by a person whose estates have been sequestrated under…the Bankruptcy (Scotland) Act 1985…relative to any land or lease or heritable security belonging to such person at the date of such sequestration or subsequently acquired by him shall be challengeable or denied effect on the ground of sequestration if such deed, decree, instrument or writing shall have been granted or expede, or shall come into operation at a date when the effect of recording….under subsection 1(a) of section 14 of the Bankruptcy (Scotland) Act 1985 the certified copy of an order shall have expired by virtue of subsection (3) of that section, unless the trustee shall before the recording of such deed….in the appropriate Register of Sasines ( and Land Register)…have completed his title to such land…'

Any transaction by the former bankrupt after the 3-year period (or longer where there has been a renewal) is free from challenge. Consequently, evidence of the discharge of the permanent trustee or of the debtor is required. Indemnity should not be excluded in respect of any loss that the permanent trustee may incur through the inability to enforce his rights under the Act and Warrant. This contrasts with the very different situation during the 3 year period (and subsequent period of renewal if there is one) whereby section 32(9) authorises the trustee in sequestration to reduce any dealing in relation to the bankrupt's property that he does not consent to. This power to reduce terminates when the debtor is automatically discharged under section 54(1).

For the avoidance of doubt, it is still competent for the trustee in sequestration to transact with the bankrupt's property after the expiry of the aforementioned 3-year period. The sequestration itself does not automatically terminate on the expiry of such a period. The trustee therefore remains vest in the property and is able to transact with it. In that event, the only evidence the Keeper requires to examine is the Act and Warrant issued by the Court on confirmation of the trustee's appointment.

If however a registration officer encounters an extant memorandum of renewal in the ROI, any application for registration of a deed granted by the bankrupt in relation to property either vesting in the trustee on the date of sequestration or acquired during the period of the sequestration and thus vesting in the trustee as acquirenda, will require to be supported by the following evidence:

(a) evidence of the bankrupt’s discharge; and

(b) evidence (from the trustee) that the trustee has released or abandoned the relevant property to the bankrupt.

In the absence of such evidence, an exclusion of indemnity will be appropriate.

5.10 Miscellaneous

5.10.1 Appeal on basis of trust deed

Section 15(5) provides that where a petition for sequestration is presented by a creditor or a trustee under a trust deed and the court refuses to award sequestration, the petitioner or any creditor concurring in the petition can appeal. If an appeal is made and either determined or abandoned, or no appeal is made, the clerk of the court must send a certified copy of the order refusing to award sequestration to the Keeper for recording.

5.10.2 Section 59 statutory notices

Section 59 and schedule 5 introduced two statutory notices which may be recorded in the ROI. The notices relate to trust deeds for creditors executed after 1 April 1986. The trustee under the trust deed may cause a notice to be recorded. Recordings shall have the same effect as the recording of letters of inhibition. It should be noted that the inhibitory effect in this case lasts for 5 years.

After the debtor's estate has been finally distributed or the trust deed has ceased to be operative, the trustee can record a further notice recalling the earlier notice.

5.11 Deeds by Receivers

Where a progress of title includes a deed granted by a receiver, it is essential that there be submitted in support of the application for registration, and examined by the legal settler, the instrument of appointment of the receiver and the floating charge itself. Examination of the floating charge is necessary to determine if it is sufficient in its terms to charge Scottish heritable property and has been validly constituted. Unless these requirements are satisfied, any deed granted by a receiver is invalid.

Section 61(1) of the Insolvency Act 1986 provides that where a receiver sells or disposes of any property or interest in property of the company which is subject to the floating charge by which the receiver was appointed, and

·        either that property is subject to any security or interest of, or burden or encumbrance in favour of, a creditor the ranking of which is prior to, pari passu with or postponed to the floating charge,

·        or that property is affected or attached by effectual diligence,

and the receiver cannot get the consent of the creditor or the person executing the diligence, the receiver can apply to the court for authority to sell free of the security or diligence.

Where a sale is carried out in accordance with the authority of the court, the recording/registration of the conveyance has the effect of

·        disencumbering the property of the security and

·        freeing the property from the diligence.

In sales by receivers falling within the above category, settlers should requisition a copy of the court authorisation before omitting a security or diligence from the title sheet. It is stressed that a copy of the court authorisation (usually in the form of a court order) must be examined before the decision is taken to omit a standard security from a title sheet. If there is an apparent defect in the order, the matter should be referred to a senior officer.

See also Floating Charges executed on or after 15 September 2003

5.12 Deeds granted by Receivers: Prior Ranking Standard Securities

In the event of a limited company going into receivership, standard securities do not automatically fly off following a conveyance of the company’s property by the receiver. Standard securities granted by the company must be disclosed in the title sheet pertaining to any purchaser from the receiver, unless one of the following exceptions applies:

·        A discharge for each outstanding standard security is submitted.

·        The creditor in the outstanding security consents in the conveyance by the receiver, to the effect of either discharging the security or disburdening the subjects of the security.

·        The sale is being conducted under section 61(1) of the Insolvency Act 1986. See Deeds by Receivers above.

In cases of doubt, settlers should refer to Legal Services.

5.13 Sales by Receivers

The House of Lords decision in the case of Sharp v Thomson (1997 SCLR 328 and 1997 SLT 636) has prompted the Keeper to consider the risk to his indemnity in sales by receivers. One of the implications of the decision is that, once a disposition of heritable property by a company has been delivered to a purchaser, a floating charge over the company’s property and undertaking cannot attach to that heritable property. It is possible that if the company delivers a disposition to a purchaser, the purchaser (for whatever reason) will not record or register the deed. Later, after the company’s floating charge crystallises, the receiver may not learn about the earlier disposition and sell the property to someone else. The second purchaser is at risk of having their title defeated by the first purchaser who holds on the delivered but not recorded/registered disposition. That risk may well pass on to the Keeper if the second purchaser’s title has been registered without any exclusion of indemnity.

However, the Keeper considers the risk is too remote to justify a blanket exclusion of indemnity in all sales by receivers. A purchaser acting in good faith will be expected to have made appropriate enquiries of the receiver. If the receiver’s responses are less than satisfactory, the purchaser’s agent should seek the advice of Pre-Registration Enquiries Section, in which case a decision concerning indemnity may be made at that time.

In an application on behalf of a purchaser, to register a transfer of title from a receiver to themselves, the settler should take note of any copy correspondence between the agent and Pre-Registration Enquiries Section. If no such copy correspondence is enclosed with the application, the settler must pay special attention to the answer to the question on the application form which asks whether there is any person in possession or occupation of the property adverse to the interest of the applicant.

If any part of the application is unsatisfactory in respect of the above requirements, the case should be referred to a senior caseworker.

5.13.1 Floating charges executed on or after 15 September 2003

Provisions in section 250 of the Enterprise Act 2002, which came into force on 15 September 2003, amend the Insolvency Act 1986 to the effect that, subject to various exceptions, it is not competent for the holder of a floating charge executed after 15 September 2003 to appoint an administrative receiver. Thus any disposition by an administrative receiver (even if called by another name) would be void, as he would not have been validly appointed.

An administrative receiver is defined as a receiver appointed under section 51 of the Insolvency Act 1986 where 'the whole (or substantially the whole) of the company's property is attached by the floating charge'. The above provision would not apply if this was not the case, or if any of the complex exceptions narrated in the 2002 Act applied. The more usual practice has been to grant a floating charge over the whole of the company's assets.

Therefore in the case of any sale by a receiver appointed under a floating charge executed on or after 15 September 2003, registration officers should refer the case through the usual channels to Legal Services, since where there is a disposition by a purported receiver, whose receivership is struck at by section 72A, the disposition is considered void.

The 2003 Act introduces new provisions whereby the holder of a qualifying floating charge in respect of a company's property may instead appoint an administrator of the company.

5.14 Inhibitions and company liquidations

All inhibitions registered within a 60-day period, prior to the date of commencement of the winding up of a company, can be disregarded as ineffective. The justification for this approach is to be found in section 185 of the Insolvency Act 1986, which applies to the winding up of companies registered in Scotland under inter alia section 37(2) of the Bankruptcy (Scotland) Act 1985. Section 37(2) provides that no inhibition on the estate of the debtor, which takes effect within the period of 60 days before the date of sequestration, shall be effectual to create a preference for the inhibitor.

The situation with inhibitions registered before the 60-day period is less clear (see, for example, Gretton: The Law of Inhibition and adjudication, chapter 11). Some commentators (see for instance, Palmer’s Company Insolvency In Scotland, chapter 4) argue that liquidators can sell free of any prior inhibition against the company, whilst others are less certain. Gretton, for example, discusses the possibility that a distinction can be made between a voluntary and a compulsory winding-up, arguing that the latter cannot be held to be a voluntary act of the company and so prior inhibitions against the company cannot be effective. Since all such views must remain speculative until the matter is clarified by legislation or settled by the courts, the Keeper is obliged to adopt the prudent line that all prior inhibitions registered against a company before the 60-day period are effective, and so require to be disclosed as adverse entries with attendant exclusion of indemnity. This is the case whether the winding-up is compulsory or voluntary.

For inhibitions executed on or after 22 April 2009 the situation is more clear cut. In terms of section 154 of the 2007 Act any inhibition executed on or after this date does not confer any preference in ranking to the inhibiting creditor in the event of the winding-up, receivership or administration of the debtor company, or in the event of proceedings in relation to a company voluntary arrangement affecting that company.

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