GLASGOW CITY COUNCIL v NAGMANA CHAUDHRY
SHERIFFDOM OF GLASGOW AND STRATHKELVIN AT GLASGOW
2015SCGLA31
SQ176/14
JUDGMENT
of
SHERIFF PRINCIPAL C A L SCOTT, QC
in the cause
Glasgow City Council
Petitioners
against
Nagmana Chaudhry
Respondent
Glasgow, 21 April 2015.
The sheriff principal, having resumed consideration of the appeal, allows same; recalls the sheriff’s interlocutor dated 10 December 2014; grants the award of sequestration; sequestrates the estate now belonging or which shall hereafter belong to the respondent before the date of the respondent’s discharge and declares the same to belong to the respondent’s creditors for the purposes of the Bankruptcy (Scotland) Act 1985; finds the respondent liable to the petitioners in the expenses occasioned by the appeal and the sequestration procedure as a whole; allows an account thereof to be given in and remits same, when lodged, to the auditor of court to tax and to report thereon; appoints the Accountant in Bankruptcy to be trustee of the respondent; and certifies the appeal as suitable for the employment of junior counsel.
NOTE:-
Introduction
[1] This appeal concerns the construction to be placed upon the wording of section 12(3A)(b) of the Bankruptcy (Scotland) Act 1985. In the present case, the petitioners benefit from a standard security in their favour over subjects owned by the respondent’s brother-in-law. The contention put forward on behalf of the respondent (hereinafter referred to as “the debtor”), before the sheriff and on appeal, is that the existence of that security meets the terms of sub section (3A) supra in that the debtor has thereby given or shown that “there is sufficient security for the payment of” the debt in question.
[2] Having been addressed on the matter, the sheriff determined that the debtor had forthwith shown that there was sufficient security for payment of the debt and as a result she could avoid sequestration being granted.
[3] In arriving at the foregoing conclusion, the sheriff, inter alia, considered the Inner House decision in the case of Advocate General v Zaoui 2001 SC 448. At paragraph [14] in her note, the sheriff stated that she preferred the approach taken by the Inner House which attached “forthwith” to the demonstration that the security is sufficient. She stated that “sequestration should not be an option for creditors who hold a standard security sufficient to settle the debt”. The petition was dismissed and sequestration refused.
Petitioner’s submissions
[4] Counsel for the petitioners submitted that the sheriff’s decision constituted an error of law. He addressed the court in respect of various authorities. The first of these was the case of Bank of Scotland v Mackay 1991 SLT 163. Lord Morton of Shuna’s decision in that case was said to be obiter. However, counsel for the petitioner sought to found upon a passage taken from the penultimate paragraph in his Lordship’s opinion:
“What the petitioning creditor in bankruptcy has sought prior to the presentation of the petition and, by the presentation of the petition is seeking, is payment of the debt, and not security for the debt and what the Act allows is an escape to the debtor, by provision of sufficient security for the payment of the debt, not sufficient security for the debt. An example of what I understand to be meant by ‘gives sufficient security for the payment of the debt’ is provided by the assignation which the respondent in this case has given after the date of the petition in favour of the petitioners of a payment that will become due to him from the Inland Revenue. In the present case the petitioners, as they were entitled to do, demanded payment of the debt. The debtor has not paid the debt since the demand or provided security that it will be paid.”
[5] Counsel also referred to the case of National Westminster Bank plc v W J Elrick & Co 1991 SLT 709. He relied upon passages taken from Lord Kirkwood’s opinion in that case. At page 713F his Lordship stated:
“In my opinion the general effect of section 12(3)(b) is that when a petition for sequestration is presented by an unpaid creditor and the debtor, who is apparently insolvent, appears to show cause why sequestration should not be awarded, he can resist an award of sequestration if he pays the debt, or produces written evidence that it has already been paid or can give the creditor security, or point to security already held by the creditor, which will ensure payment of the debt. In particular, the court should be able to be satisfied at the hearing that the security is valid, that it covers the whole of the outstanding debt and that it will result in the whole debt being paid without undue delay.”
[6] Counsel pointed out that Lord Kirkwood, at 713K-L, had also observed that:
“Even if a proof was held, and the issue as to the current value of the three heritable subjects was resolved, there would still be a time consuming procedure to be gone through before the security subjects could be realised and there could be no guarantee as to the amount which a sale of the security subjects would eventually realise on the open market.”
[7] It was noted that both the Mackay and Elrick cases concerned an earlier version of the section 12 provisions but counsel for the petitioners stressed that nothing turned on that and, indeed, when senior counsel for the respondent came to make his reply no issue was taken with that assessment. However, the case of Clydesdale Bank plc v Grantly Developments 2000 SLT 1369 did, indeed, concern the same provisions as those considered by the sheriff in the present case. In Grantly, counsel submitted that Lord Nimmo Smith’s observations at the end of paragraph 10 and throughout paragraph 11 were worthy of consideration and supported the petitioners’ argument in the appeal:
“[10]…as I understood his submission, a debtor who had granted a standard security was entitled to more time to enable him to take steps such as the firm proposed to do here, which was either to constitute its claim for damages against the bank or alternatively to have time to refinance the debt owed to the bank. He submitted that the security contemplated by the Act was such as would give security to the creditor while steps such as these were taken.
[11] I am bound to say that I have found some difficulty in following this argument. Section 12(3A)(b) of the Act makes it clear that the debtor can only escape an award of sequestration if he forthwith inter alia pays the debt or gives or shows that there is sufficient security for the payment of the debt (my emphases). This is not a form of words which is intended to enable the debtor to buy time in the hope that something will turn up. There can be little scope for Micawberism in the application of bankruptcy legislation and procedures. In my opinion the correct approach is as laid down in the cases referred to by counsel for the bank, and in particular National Westminster Bank plc v W J Elrick & Co, and a standard security is only sufficient security if it is capable of realisation forthwith and will accordingly result in payment of the whole debt without undue delay.”
[8] In referring the court to the case of Advocate General v Zaoui 2001 SC 448, counsel for the petitioners accepted that it was not directly in point. The question of what actually constituted sufficient security for payment of the debt was not actually in issue. However, he founded upon Lord Prosser’s observations within paragraph 19. Those observations, inter alia, involved the court’s satisfaction that the sufficiency of any security must be demonstrated to the satisfaction of the court “forthwith”, whatever the scope of that word may be. Lord Prosser could not envisage “forthwith” as covering more than a matter of days. At the end of paragraph 19, he stated that he was in no doubt that the submissions advanced on behalf of the petitioners (ie in Zaoui) in relation to the history of the legislation and the principles involved were sound and that once a debtor appeared before the court “to show cause why sequestration should not be awarded” the statute required him to do so at that hearing, although perhaps with some brief deferment or continuation.
[9] In light of Lord Prosser’s approval of the submissions advanced on behalf of the petitioner in Zaoui, counsel for the petitioners in the present appeal also referred to those submissions as recorded, particularly, within paragraphs 11 to 14 in the court’s opinion.
[10] Sheriff Morrison’s decision in the case of Advocate General v Walter Dickie 2010 WL 3515628 (Edinburgh Sheriff Court), whilst obiter, was also drawn to the court’s attention. In particular counsel for the petitioners highlighted the final two paragraphs:
“Section 12(3A) must mean more than the petitioner simply being added to the list of secured creditors. It seems to me that the wording of sub-section (3A), against the background of the principles of sequestration to which I have referred, envisages that the security is for payment of the debt and not merely security for the debt. This point was made in Bank of Scotland v Mackay 1991 SLT 163, 165D-E under the old law. Although I was not referred to it, that case is referred to in Zaoui. It seems to me that the statutory provision envisages payment of the debt and not merely postponement with security.
In the case before me the respondent had gone no further than offering, not giving, security. It could not be known, by the time the security was recorded, that there was sufficient security. Furthermore, in view of the fact that there were no offers for purchase of the house and no closing date, it cannot be said that payment of the debt was in prospect. Accordingly, I granted sequestration on 29 July.”
[11] Accordingly, in the submission of counsel for the petitioners, the terms of the sub‑section had to mean more than the mere existence of a sufficient security covering the debt in question. It was, he argued, also an important requirement of the statutory provisions that the security must be capable of immediate realisation so as to lead to payment of the debt without undue delay. Counsel reminded the court that the onus lay with the debtor. The debtor required to make out the defence available to her and required to do that forthwith, in other words, at the hearing on the petition and answers.
[12] Counsel for the petitioners emphasised the factual matrix involved. The standard security in question had been granted by a third party, not the debtor. The heritable subjects covered by the security were residential in nature. Whilst there was no issue between the parties as to the existence or validity of the security or, indeed, the value of the subjects, it was not accepted by the petitioners that the debtor had demonstrated that the security could be realised to bring about payment without undue delay. The fact that a creditor might be in a position to commence the process of enforcement did not mean that the creditor could also control the timescale or outcome of that process inter alia standing legislation pertaining to securities held over residential subjects.
[13] In that regard, counsel for the petitioners made reference to sections 5 – 5B of the Heritable Securities (Scotland) Act 1894 and to the provisions of the Conveyancing & Feudal Reform (Scotland) Act 1970 particularly sections 24 – 24B concerning, for instance, pre-action requirements. Counsel stressed that before payment of the debt could be satisfied via realisation of the security, the various, statutory pre-action requirements had to be complied with. That feature, in itself, would generate delay and counsel also pointed out that no consent had been forthcoming in the present instance. The affidavit in process from the heritable proprietor of the security subjects was, submitted counsel, of no value in the present circumstances. Counsel submitted that the necessary certainty regarding realisation of the property value in monetary terms simply did not exist.
[14] With regard to the decision section of the sheriff’s note, counsel observed that the sheriff had distinguished the case of Grantly. However, counsel maintained that Lord Nimmo Smith’s observations (all as referred to supra) took the form of general propositions which were not reliant upon the particular facts and circumstances of that case. Moreover, his Lordship had, in turn, drawn support from Lord Kirkwood’s opinion in the Elrick case. Counsel for the petitioners submitted that it could not have been the intention of either judge to limit their comments to the facts of any particular case. Counsel also generally challenged the approach taken by the sheriff in paragraphs [11] to [14]. He invited the court to allow the appeal and to grant the debtor’s sequestration.
Debtor’s submissions
[15] At the outset, senior counsel for the debtor highlighted part of the submission advanced by him in front of the sheriff, viz. the security had been capable of being called up since the bond was fractured in 2012. (See paragraph [6] in the sheriff’s note). Senior counsel observed that the petitioners had benefited from the option of calling up the standard security for a period of some 2 years prior to the petition for sequestration being warranted and yet they had done absolutely nothing to that effect during that period.
[16] Senior counsel argued that within sub-section (3A)(b) only the words “pays or satisfies” embraced the concept of immediate payment. The words “undue delay” were entirely absent. Senior counsel submitted that the statutory provisions had to be read on the hypothesis that all other legal avenues by way of debt recovery had been pursued before sequestration was sought. In other words, he suggested that a creditor holding a standard security was not entitled to seek sequestration of a debtor without calling up the security simply because the latter course might involve further passage of time. Were that not so, senior counsel queried the purpose of reference being made to “sufficient security” within sub-section (3A). He submitted that it was not a question of a choice being available to creditors such as the present petitioners.
[17] Senior counsel for the debtor contended that the dispute forming the de quo of the appeal had not been fully embraced by the authorities cited by counsel for the petitioners. Senior counsel maintained that the application of sub-section (3A) demanded close analysis in each and every case. The term “security” invariably involved security for payment of a debt or other sum of money. Senior counsel submitted that, at the heart of the argument, lay consideration of the theory of what amounted to security.
[18] It was also argued that even if the words “undue delay” were to be read into the sub-section, the terms of the sub-section still required to be construed having regard to the particular circumstances of each case. (Senior counsel envisaged the words “without undue delay” being inserted between the word “payment” and the word “of” where those words appear in the fifth line of sub-section (3A)).
[19] Where the law required certain processes to be followed, for instance, in the case of the 1970 Act pre-action requirements, senior counsel submitted that any passage of time associated with such procedure could not be regarded as being “undue”. Senior counsel supported the approach taken by the sheriff to the effect that sequestration should not be an option for creditors who hold a standard security sufficient to settle the debt. (See paragraph [14] in the sheriff’s note). He invited me to refuse the appeal.
Reply for petitioners
[20] In a brief response to the submissions advanced by senior counsel for the debtor, counsel for the petitioners pointed out that there had been no reference to any authority to vouch the propositions advanced by senior counsel. Moreover, counsel noted that whereas section 12 of the 1985 Act had been amended by the Bankruptcy (Scotland) Act 1993, the pre-action requirements desiderated by section 24A of the 1970 Act post-dated the change of wording in sub-section (3A) by a number of years.
[21] When it came to the formulation “without undue delay” as used in certain of the cases cited by counsel for the petitioners, he sought to point out that the phrase was not associated with the conduct of the creditors in question. On the contrary, it was associated with payment of the debt instead.
Discussion
[22] Contrary to the approach envisaged by the sheriff, the argument in this case, to my mind, ought not to concern sufficiency of the standard security being evidenced. (See paragraph [11] in sheriff’s note). The more acute issue is whether the standard security held by the petitioners is sufficient for the payment of the debt (see Lord Morton of Shuna in Mackay supra and Lord Nimmo Smith in Grantly supra) and, where payment is concerned, sub‑section (3A) clearly envisages payment being made without delay.
[23] Aside from the concept of immediacy historically associated with bankruptcy and sequestration procedure, the authorities relied upon by counsel for the petitioners all point towards the conclusion that the mere existence of a standard security in favour of a creditor does not per se justify the court’s refusal to award sequestration under sub‑section (3A).
[24] Whilst it may be that the facts and circumstances pertaining to, for example, the Grantly & Zaoui cases differ from the factual matrix under consideration in this appeal, there would appear to be no good reason for treating the observations made by Lords Nimmo Smith and Prosser respectively as being anything other than statements of general proposition, applicable in principle to most cases of this nature.
[25] Lord Nimmo Smith’s focus on payment of the debt is telling. As he put it, “…a standard security is only sufficient security if it is capable of realisation forthwith and will accordingly result in payment of the whole debt without undue delay.”
[26] In Zaoui, counsel for the petitioner had argued that a creditor was entitled to his award of sequestration against the debtor unless the debtor could avert that by immediate action. Significantly, Lord Prosser was “…in no doubt that the submissions advanced on behalf of the petitioner, in relation to the history of the legislation, and the principles involved, are sound, and that once a debtor appears before the court ‘to show cause why sequestration should not be awarded’ the statute requires him to do so at that hearing, although perhaps with some brief deferment or continuation.”
[27] The terms of sub-section (3A)(b) themselves are imbued with immediacy. Properly construed, they embrace payment or satisfaction of the debt forthwith; or production of written evidence of the payment or satisfaction of the debt forthwith; or the demonstration forthwith that there is sufficient security for the payment (my emphasis) of the debt. In the context of the bankruptcy legislation, I am satisfied that Parliament did not intend that, on the one hand, the avoidance of sequestration would be where immediate payment was or had been made and yet, on the other, it could nevertheless be avoided by a debtor pointing to the mere existence of a standard security. Actual payment of the debt would then be subject to the vagaries of enforcement of the standard security which would, therefore, as at the date of the section 12(2) hearing before the sheriff, be indeterminate.
[28] The fact that the petitioners had declined to call up the standard security for a significant period prior to petitioning for sequestration is, to my mind, of no particular moment as far as the issue in dispute is concerned. No doubt their reluctance to proceed down that route was informed by a number of factors. In any event, the approach taken by the petitioners favoured the debtor in the sense that no direct action was being taken to recover the debt. At all odds, it seems to me that the petitioners’ inaction in relation to calling up the standard security over the 2 year period prior to the petition being warranted was, at best, neutral.
[29] The sheriff’s note concludes with the proposition that sequestration should not be an option for creditors who hold a standard security sufficient to settle the debt. That proposition was, in turn, urged upon the court by senior counsel for the debtor. I regret to say that I find myself unable to support that proposition.
[30] As a matter of general principle, I do not accept that holders of standard securities should be excluded from procuring sequestration of a debtor merely because the security held happens to be sufficient in its scope to embrace the value of the debt in question. The key factor is that, whilst, at best for a debtor, the security may serve to facilitate payment eventually, it requires to be enforced and that takes time. As Lord Nimmo Smith noted, sub-section (3A)(b) is not about “…a form of words which is intended to enable the debtor to buy time…” (Grantly at paragraph [11]).
[31] The outcome, should a quick sale of the subjects be achieved (and that, in itself, cannot be guaranteed) is unpredictable. In my opinion, unlike consignation or caution (see Goudy, Law of Bankruptcy, Fourth Edn, at pages 137 to 138), security in the form of a standard security over heritable subjects does not per se constitute “sufficient security for the payment of the debt…” on the occasion of the section 12(2) hearing before the sheriff (or even shortly beyond it if one were to factor in the brief deferment or continuation which Lord Prosser had in mind in the case of Zaoui).
[32] The authorities cited by counsel for the petitioners all tend to support the petitioners’ argument to the effect that sequestration ought to have been granted. In contrast, senior counsel for the debtor was unable to point to any authority in support of his line of argument or, more particularly, in support of the proposition referred to at paragraph [29] supra.
[33] Sufficient security for the payment of the debt, in my opinion, means a form of security which, by its nature, brings about immediate payment or guarantees such payment albeit subject to “some brief deferment or continuation” of the section 12(2) hearing.
Decision
[34] It will be seen, therefore, that I have found favour with the submissions advanced on behalf of the petitioners. It follows that, in my view, the appeal ought to be allowed. I have recalled the sheriff’s interlocutor dated 10 December 2014 and, in lieu thereof, I have awarded sequestration. I have also found the debtor liable to the petitioners in the expenses of the appeal in addition to the sequestration procedure as a whole. It seemed to me that, having regard to the arguments canvassed in the appeal, it was appropriate to certify the hearing as suitable for the employment of junior counsel.