B.A.J. CHARTERED ACCOUNTANT, PK (UK) LLP
AGAINST SCS AND AS
| SHERIFFDOM OF TAYSIDE CENTRAL AND FIFE AT PERTH Case Number: SD132/12 2014SCPER 13 |
| | Judgment by SHERIFF LINDSAY D R FOULIS In the cause B A J, Chartered Accountant, PFK(UK)LLP, 78, Carlton Place, Glasgow G5 9TH Pursuer; against (First) SDS and (Second) AS Defender: ________________ |
SC
PERTH, 8th May 2014
The sheriff, having resumed consideration of the cause, appoints parties to be heard as to further procedure and all questions of expenses on 4th June 2014 at 2pm.
NOTE
Proof in this action for recovery of possession of [property] and decree removing the Defenders therefrom took place on 26th April, 26th and 27th August, and 26th November 2013. Thereafter parties agreed to provide written submissions and I made avizandum on 30th December 2013. In the action the Pursuer also seeks authority to sell the subjects in terms of section 40 of the Bankruptcy (Scotland) Act 1985. The Pursuer was represented by M/s Weir, solicitor, Edinburgh, the Defenders by Mr Morris, solicitor, Perth. The Pursuer gave evidence himself and called M/s Donna Houston, and M/s Lorna Bingham as witnesses. The Defenders gave evidence and called M/s Janice Robson, and Messrs Glenn Fisher and John McPhail as witnesses. The written submissions provided by the parties are appended to this note.
Although no issues appear to have been noted, written defences were lodged on behalf of both Defenders. The Defenders resisted the Pursuer’s claim on the basis that the no notice had been given to Perth and Kinross Council in terms of section 40(3A) of the Bankruptcy (Scotland) Act 1985 and that it was not reasonable to grant decree by reference to section 40 of that Act. The second Defender also resisted the action on the basis that she had not been informed in terms of section 41 of that Act of her right to petition for the recall of her husband’s sequestration. In submission there was no insistence on the part of the Defenders regarding section 40(3A) of the 1985 Act and the Pursuer’s production number 33 seems to satisfy that requirement.
In considering matters, it seems to me logical that I examine the relevant provisions of the Bankruptcy (Scotland) Act 1985 as amended insofar as they operate in relation to section 41 of that Act. In terms of section 31, on the date of the first Defender’s sequestration, his whole estate vested in the Pursuer for the benefit of the former’s creditors. That estate would include the subjects of the present action. Section 41, in the event of that estate including a matrimonial home of which the bankrupt is an entitled spouse and the other spouse is non entitled, requires the trustee in sequestration of the entitled spouse to inform the non entitled spouse within fourteen days of that appointment as trustee of the sequestration of the entitled spouse, of the right to recall sequestration in terms of section 16 of the Act, and of the effect of section 41(1)(b). This obligation to inform only arises if the trustee is aware the bankrupt is married and knows the whereabouts of the non entitled spouse. In terms of section 41(1)(b) the non entitled spouse can petition in terms of section 16 of the Act. In that event the court can recall the sequestration in terms of section 17 of the Act or make an order protecting the non entitled spouse’s occupancy rights provided it is satisfied the purpose of bankruptcy was wholly or mainly to defeat those rights. The grounds for recall of sequestration are, however, far wider. Section 17(1) of the Act permits a sheriff to recall a sequestration if satisfied in all the circumstances that it is appropriate to do so. Accordingly the grounds for recall are wide. Reference is made to McBryde Bankruptcy 2nd Edit paras 6-07 to 6-12.
In my opinion section 41(1)(a) requires information to be provided about two separate matters. Firstly, there is the obligation to inform the non entitled spouse of a general right to petition for recall of the sequestration in terms of section 16. In addition, there is the obligation to inform that spouse of the effect of section 41(1)(b), namely the powers of the sheriff to grant that petition or make another order protecting the occupancy rights of the non entitled spouse. In this instance the sheriff is entitled to make either order but only when satisfied that the purpose for the sequestration was wholly or mainly to defeat these occupancy rights.
In a number of commentaries on section 41 of the 1985 Act, it seems to be suggested that the purpose behind the provision is to protect the occupancy rights of a non entitled spouse and the courts’ ability to protect these rights was restricted to situations in which the sequestration of the entitled spouse was wholly or mainly to defeat those occupancy rights. Indeed in Professor McBryde’s commentary to the 1985 Act when referring to section 41, he observed that the section would not apply when sequestration was sought for the normal reason of insolvency albeit section 40 might limit the powers of the trustee. In Clive The Law of Husband and Wife in Scotland 4th Edit para 16.025 the author also observed, by reference to section 41(1), that whilst section 40 of the Act endeavoured to balance the interests of a spouse with those of creditors, where the petition for sequestration was simply a device to defeat the occupancy rights of a non entitled spouse, the rights of that spouse were put first. However, I do not consider that when considering the obligation to inform in terms of section 41(1)(a) the sole aim of that provision is directed towards the ‘contrived’ sequestration. Section 41(1)(a) refers to ‘the right of petition which exists under section 16….and of the effect of paragraph (b) below.’ In paras 6-19 and 6-21 of Nichols and Meston The Matrimonial Homes (Family Protection)(Scotland) Act 1981 2nd Edit the authors also refer to the requirement to include information regarding the general right to petition for the recall of sequestration. In short, if the existence and whereabouts of the non entitled spouse are known by the trustee, then there is an obligation to inform that person of the general right to petition for recall of sequestration which, if exercised, may result on the court making orders in terms of section 41(1)(b)(i) and (ii) or, in theory, could result in the recall of the sequestration award generally in terms of section 17. The recall of sequestration on any grounds will have the effect of protecting the occupancy rights of the non entitled spouse. Accordingly, I do not agree with the Pursuer’s submission in paragraphs 4.2 and 7.8 that section 41 is limited to the ‘contrived’ sequestration.
Having considered the purpose behind section 41, I now turn to consider whether the Pursuer has complied with the provisions of section 41. The Pursuer’s position, by reference to the evidence from the Pursuer, M/s Donna Houston and M/s Lorna Bingham taken with production number 34, the letter to the second Defender dated 22nd November 2011, was that that obligation was satisfied. The Defenders dispute this. Section 41 refers to ‘inform the non entitled spouse’ as opposed to ‘notify’ in section 2(7) (notification to the debtor of sequestration) or ‘send’ in section 5(6) (copy petition sent to the Accountant in Bankruptcy). The purpose behind the section is to protect the rights of a non entitled spouse when the entitled spouse is sequestrated. As observed in Clive The Law of Husband and Wife in Scotland 4th Edit para 16.025 in relation to section 41(1), whilst section 40 of the Act endeavoured to balance the interests of a spouse with those of creditors, where the petition for sequestration was simply a device to defeat the occupancy rights of a non entitled spouse, the rights of that spouse were put first. As I have already observed, I do not accept that section 41 is simply restricted to the ‘contrived’ sequestration. The author’s remarks regarding the primary concern being to protect the rights of the non entitled spouse are nonetheless valid. In my opinion ‘inform’ must involve bringing the matters covered by section 41 to the attention of the non entitled spouse in order that that person can take steps to protect these rights if so desired. These are crucial rights as far as any non entitled spouse is concerned. Prior to the introduction of this provision with the 1985 Act, on sequestration of the entitled spouse, a non entitled spouse lost these rights. The obligation to inform in terms of the section has to be looked at from the point of view of the non entitled spouse rather than the trustee. If it is not proved that the necessary information was received that spouse, then the obligation in terms of the section has not been satisfied. There will be numerous ways in which that obligation can be performed. The information could, for instance, be given in a meeting with the non entitled spouse or by correspondence, written or electronic. It might even be satisfied if the information was given to a professional known to be currently representing that person. The less formal the means of communication, however, the more difficult it may be to counter an assertion that the non entitled spouse never received the information.
Turning to the evidence, I am satisfied that the second Defender was not informed of her rights in terms of section 41. I have come to that conclusion primarily because I am not satisfied that she received the letter to her dated 22nd November 2011, production number 34. I have reached this conclusion for a number of reasons. The evidence of the second Defender is to that effect. I would, however, observe that her evidence generally was fairly vague and her assertion alone would not necessarily have persuaded me. There is, however, supporting evidence. Her e mail to Janice Robson dated 24th November 2011 only makes reference to the communication to the first Defender dated 22nd November 2011, Pursuer’s production number 8. If she had received the letter addressed to her, it is a little odd that no mention is made of it. The e mail reply from Janice Robson the following day, in my opinion, does not assist the Pursuer. It simply indicates a belief on the part of the Pursuer’s colleagues that the letter should be on its way to the second Defender and that it requires to be sent out within a certain period. M/s Robson said in evidence that there was no response to her reply. It might be expected that if the second Defender had
received the material letter, she would either have responded that she had indeed received such a letter by that stage or when it did actually arrive. The letter from the first Defender dated 13th December 2011, the Defenders’ first production, refers to a letter which was going to be sent to his wife but had not arrived. In evidence, he did not assert that he was referring to the non entitled spouse letter which might have been expected as clearly he would by that time be aware of its potential significance. The meeting on 5th December 2011, inter alia, covered the issue of the sale of the subjects. M/s Bingham accepted that the non entitled spouse letter was raised at that meeting and thus the letter the first Defender is referring to could well be that. The explanation given by M/s Houston and M/s Bingham that the letter referred to is one relating to the furniture in Clyde Street is certainly no more likely. No such letter was sent to the second Defender. A letter regarding the furniture was sent to the first Defender, the Pursuer’s production number 9. The explanation given by M/s Houston was that the letter was sent to him as she assumed both Defenders would communicate. This is not really a convincing explanation. The minutes of the meeting on 8th February 2012 made by the respective parties, Pursuer’s production number 37 and the Defenders’ production number 10, both assert that no letter in terms of section 41 was received by the second Defender. There is accordingly a consistency in the position from the Defenders regarding this letter. The assertion from the Pursuer that it was received made in the letter of 10th February 2012 to the second Defender, Pursuer’s production number 17, is not supported by the evidence of M/s Robson nor the e mail traffic produced.
In addition I regret to say that I am not confident that the actual letter was sent to the second Defender around 22nd November 2011. Aside from Mr Morris’ minute examination of the type face used in the letters of that date and the content of the footnote, the evidence displayed an element of laxity in the office procedures of the Pursuer’s firm. For a start, the letter was not sent out recorded delivery. I was informed this was an oversight. This oversight leaves the Pursuer in difficulties in light of my observations regarding the obligation to inform if, as here, the non entitled spouse denies receipt. The Pursuer understandably is the figurehead and thus could give no detailed evidence regarding the critical letter. However, M/s Houston, who prepared the letter, explained that this letter, although dated 22nd November 2011, was not sent that day as it required amendment. This, she said, would explain the second Defender receiving the letter to her husband dated 22nd November 2011, Pursuer’s production number 8, but not receiving her non entitled spouse letter at the same time. She said that the amendments were necessary because the style text on the firm’s letter system had not taken account of the changes brought about by the Bankruptcy and Diligence etc. (Scotland) Act 2007. This, as Mr Morris commented, was hardly impressive bearing in mind the 2007 Act had been in force since spring 2008. M/s Houston responded that the style was still out of date at the time she gave evidence. All this undermines the apparent infallibility of the Pursuer’s firm’s procedures. Notwithstanding these apparent necessary amendments, the date of the letter was not changed. M/s Bingham also spoke of the necessity of changing the text and the letter being delayed a day. As Mr Morris pointed out that explanation was not consistent with the second paragraph of the Pursuer’s letter to the second Defender dated 10th February 2012, Pursuer’s production number 17. The explanation that this was an oversight may be correct. Unfortunately, however, it is another oversight. She further accepted that the production of the paper file could have confirmed the issue of the amended letter. At the end of the day, M/s Bingham really could only assume she signed the letter and it was sent to the second Defender. For all these reasons I am not convinced that the letter was sent. They further, in any event, bolster my acceptance of the Defenders’ position regarding non receipt. For completeness, I do not hold to the view that the letter, Pursuer’s production number 34, was not actually prepared in November 2011. I say this because the letter is simply addressed to ‘Mrs S.’ That is logical because at that stage the Pursuer and his staff would only be aware of her existence as spouse of the first Defender. It is only later that they learnt her first name. Hence subsequent letters to her are addressed to ‘Mrs A S.’
Accordingly, the Pursuer has not complied with the obligation incumbent upon him in terms of section 41. His response is this failure is of no significance as the present action is one based on section 40. The only significance is that in the event of the second Defender petitioning for the recall of sequestration she could found on this failure in support of her failure to present the petition within the statutory time limits. This has some initial attraction when account is taken of the fact that the second Defender was advised of her rights no later than mid February 2012 when she was provided with a copy of the letter, Pursuer’s production number 34. She accepted that she received this copy then and also in August 2012. Further, notwithstanding these copies, she has not taken any steps to recall the sequestration since that time. Indeed, there is more than a suggestion, when account is taken of the circumstances in this case, that she has no basis for any such petition.
On further reflection however, any initial attraction for that submission fades. As I have already noted, section 41 provides an important protection for a non entitled spouse. Whilst failure to comply with that statutory obligation by the trustee might enable the spouse to petition for recall out of time using section 63, success is not guaranteed. The grant of any relief in terms of that section is discretionary. In any event, the initial problem arises because the Pursuer has not complied with his obligation in terms of section 41. It is open to him to apply for relief in terms of section 63. No doubt he could found on the fact that the information was provided albeit outwith the period specified in the provision and no petition for recall has been subsequently presented. It seems to me entirely appropriate that the Pursuer is the one to seek discretionary relief in terms of section 63. To do otherwise would mean that the protection provided by section 41 was significantly undermined. In this case, the second Defender did receive information regarding her rights, albeit late. There could, however, be instances were a non entitled spouse never received the necessary information until an action such as the present was raised. Would one issue in such an application then have to be whether there existed grounds for a petition for recall on the part of the Defender? Reference by Mr Morris to Brown v Middlemas of Kelso Ltd 1994 SLT 1352 tended to support these observations in my view. Their Lordships observed that it would be wrong to extend time limits when Parliament had made no such provision for extension. It seems to me inappropriate effectively to allow non compliance with a statutory obligation imposed on the trustee to provide the spouse of a bankrupt with the opportunity to preserve rights which would otherwise continue but for the sequestration. The Pursuer’s submission comes down to that. In those circumstances I consider that the provisions of section 41 have not been complied with and if any application for relief is to be made, the Pursuer is the appropriate person to have recourse to section 63.
I now intend to turn to consider the operation of section 40 in this case before deciding the appropriate disposal. The factors set out in section 40(2) are not exhaustive. The decision is one which falls within the court’s discretion. The court’s powers in terms of that subsection are quite extensive. There are some matters which are not in dispute or I am prepared to accept.
The Defenders married in 2004 and are middle aged. The second Defender has retired. Their children have grown up. They have resided in the subjects from March 2009. Whilst the Defenders might have hoped that the subjects would be their final home, this undoubtedly was not set in stone. In August 2009 the subjects were marketed by the Defenders because of financial pressures faced by them at that time. The subjects have at least four bedrooms. The value of the subjects in late 2009 was £2,500,000. By late 2011 this had dropped £1,000,000 in value. The first Defender worked from the subjects and his wife acted as his secretary/personal assistant. Meetings might take place at the subjects but again I cannot say I consider this of any significance in light of the first Defender being prepared to sell the subjects from August 2009. At the time of the first Defender’s sequestration, his assets were approximately £2,100,000 and his liabilities £2,600,000. The second Defender suffers from angina and knee problems resulting in her having limited mobility. The parties are presently dependent on benefits amounting to approximately eight hundred pounds a month.
I am further prepared to accept that the first Defender has plans. Perusal of the company appointments held by him, Pursuer’s production number 40, suggests someone who always has ‘fingers in pies’. This impression is supported by his resume, Defenders’ production number 12. The problem is that on examination there is nothing concrete. His evidence was that from late 2013 for approximately two years there would be the planning and then the contract process. He anticipated that the project would run until late 2018. He indicated that cash would begin to be generated after the first stage. He said that he believed in the project and that prospects were buoyant. The problem was that there was nothing concrete to support his optimism. He had prepared the contents page for the Prospectus for business development. This consisted of a single A4 sheet. A number of appendices were referred to but I was advised they could not be produced on grounds of confidentiality. For completeness I did not consider the evidence from Messrs McPhail or Fisher added anything in this regard.
It cannot be overlooked that the writ seeking the sequestration of the first Defender was presented in May 2011 with the award being made in mid November 2011. The application had been continued over a six month period because of a debt payment programme which did not come to fruition for whatever reason. Following sequestration, attempts were made by the Pursuer to have the Defenders sign consents to the sale of the subjects. These were unsuccessful. I am not going to apportion blame. Suffice it to say that the parties came at that issue from different directions. However, by letter dated 27th April 2012, Pursuer’s production number 21, the first Defender was referring to working towards a proposal. In his letter of 2nd July 2012, Pursuer’s production number 27, he says he was ‘close to a firm proposal.’ No firm proposal was forthcoming and that fundamentally remains the position. The Defenders have had over eighteen months in the property since the present action was raised in August 2012 and almost three years there since the first deliverance was granted in the petition for the sequestration of the first Defender. In light of my decision regarding the section 41 point, they are going to have a longer period in residence.
The Defenders in evidence and submission made reference to the difficulties in obtaining alternative accommodation. It may be understandable that the Defenders would be reluctant to move to local authority accommodation but their preferences have to be balanced against the interests of the creditors of the first Defender, particularly when regard is had to time passing.
The Pursuer founded on a proposal made to the Defenders that they vacate the subjects and move to [property] which was said to have been rejected by them because it was unsuitable for their pet dogs. This was challenged in cross examination and no reference is made to this proposal in either record of the meeting in February 2012. This is perhaps not surprising, bearing in mind the focus of the meeting was the sale of [property]. That was the most valuable asset. However, whether or not the alternative of [property] was discussed at that meeting, the property was vacant at the time and the Defenders had previously lived there over a period of eighteen months whilst [property] was being built. It was also situated in Auchterarder. It had two bedrooms. It realistically was suitable for their purposes. The only drawback would have been that it would not have qualified for protection in terms of section 40. However, a reasonable period of occupancy might have been able to have been negotiated if [property] had been marketed and sold. It seems to me that this was an option which the Defenders might, at least, have put up for discussion in the general conversation regarding the potential sale of [property]. It was an option which was worthy of discussion. It was another property in the first Defender’s name with suitable accommodation for himself and his wife in the same area. The value of these subjects to the Pursuer and the first Defender’s creditors was significantly lower than [property].
The interests of the creditors, even if in reality this simply relates to the heritable creditor of [property], will clearly be affected by further delays. The value of the subjects has fallen since 2009. I should observe at this point that I do not place any weight on the observation made on behalf of the Defenders as to the evidence relating to the value of the subjects. It was open to the Defenders to obtain a valuation if they wished. Indeed, it would be easier for them to organise such a valuation as they are in occupation. That observation aside, however, the drop in value might be reversing in light of the apparent economic upturn. Even if the value of the property is now increasing, the longer the subjects remain occupied by the Defenders and not exposed for sale, the longer the sequestration of the first Defender will take to reach a conclusion. The costs of the sequestration will continue to rise.
Having regard firstly to the factors specifically set out in section 40, the subjects are clearly larger than would be required for the Defenders. The subjects were not occupied as a family home for a significant period. The subjects on sale might not realise the most recent value of £1,500,000. However, even if it only resulted in the figure suggested in paragraph 17 of the Defenders’ submission, this would make significant inroads on the sums due to the heritable creditor. I appreciate that the Defenders’ financial position is not such that they will have an extensive choice regarding alternative accommodation but that is often the position when a person is made bankrupt. At worst, however they will obtain accommodation courtesy of a local authority or housing association. There is also the observation previously made regarding the availability at one point of the flat at [property]. A significant period has elapsed since application was made for the sequestration of the first Defender. The Defenders will have a further period to take steps to identify alternative accommodation. In my view, examination of the correspondence which passed between the parties indicates a degree of evasion on the part of the Defenders in that no definite proposals were ever forthcoming and that still remains the position. The first Defender’s business venture has not resulted in anything concrete being produced to date. In all
the circumstances, I consider that but for the Pursuer’s failure to inform the second Defender in terms of section 41(1), it would have been appropriate to grant the Pursuer authority to sell [property]. For completeness, I do not consider the issue regarding the eligible housing cost application to be of any significance to the determination of this issue.
What is the appropriate disposal in light of the decisions I have reached? Mr Morris submitted that, in the event of my decision quoad the second Defender being as above, by reference to the decision in Stewart’s Trustee v Stewart 2012 SLT (Sh Ct) 231 there was no useful purpose in granting decree against her husband and I should refuse to grant decree. I have significant reservations about that approach. In Stewart’s Trustee the property was in joint names. Accordingly, the sequestration resulted in a one half pro indiviso share of the property being vested in the trustee. In the present instance, the first Defender is the sole proprietor of the subjects. On his sequestration the subjects vest in the Pursuer in terms of section 31. The first Defender has no right to remain in the property and therefore decree for removing him from the subjects logically should be granted. However, I do recognise that the grant of such a decree would not have any practical effect at this stage due to my decision in respect of the section 41 submission regarding his wife. In addition, if either Defender chooses to remain in the property and does not consent to its sale or disposal by the trustee, an order is required by the Pursuer in terms of section 40 to sell the subjects. The issue raised by section 40 has however been fully investigated in the present proceedings. There is an argument that it would be perverse, leave aside a complete waste of judicial time, for the Pursuer to require to litigate upon the same matter again in circumstances in which the evidence would almost certainly be the same.
But for my decision in respect of the section 41 point I would have granted decree in the Pursuer’s favour. It seems to me that there are two possible options open to me regarding disposal. In light of my concluding observations in the preceding paragraph, there may be merit in continuing this matter for a period to ascertain what the Pursuer will do in the light of my conclusions. Aside from anything else, there was no suggestion in evidence that the second Defender would actually exercise her rights in terms of section 41. In order to proceed as he appears to intend will require an application for relief in terms of section 63. If the Pursuer makes such an application then the second Defender can oppose the application. Even if such an application is granted, the second Defender would still be able to exercise her rights in terms of section 41(1)(a) and (b) on the appropriate information being provided her by the Pursuer then complying with the provisions of that section. If she fails to exercise these rights successfully, then by continuing the matter it is open to me then to grant decree. This would been the result but for the Pursuer’s identified failure.
There is another option. Does the Pursuer’s failure to comply with section 41 render the action incompetent with the appropriate disposal being one of dismissal? Certainly, there is attraction for the argument that such a failure means the Pursuer cannot obtain decree against the second Defender in this action. Compliance with that section is a prerequisite for the remedies the Pursuer seeks against her and thus should have taken place prior to the action being raised. My hesitation is founded on the observations I made regarding there being no apparent reason for decree for removing not being granted against the first Defender. I could however supersede extract of that decree until a future date or perhaps event.
In all the circumstances I consider that it is appropriate for the parties to consider the options I have identified. I shall accordingly bring this action out to enable parties to make any further submissions they consider appropriate. I shall also deal with the issue of expenses at that hearing.