PETITION OF WILLIAM GEORGE POLLOCK AS EXECUTOR NOMINATE OF THE LATE ALEXANDER MILLER FOR AN AWARD OF SEQUESTRATION OF THE ESTATE OF THE LATE ALEXANDER MILLER
SHERIFFDOM OF LOTHIAN AND BORDERS AT LIVINGSTON
[2016] SC LIV 48
SQ17/15
NOTE
by
SHERIFF DOUGLAS A KINLOCH,
Advocate
In the Petition of
WILLIAM GEORGE POLLOCK, as Executor Nominate of the late Alexander Miller
Petitioner;
for
An award of sequestration of the estate of the late Alexander Miller
Act: MacColl, Advocate; Lindsays
Alt: Logan, Advocate; Messrs Basten Sneddon, Dunfermline
NOTE:
[1] This is a petition by the executor of the late Alexander Miller, whereby the executor seeks to have the deceased’s estate sequestrated. The sequestration is opposed by one of the deceased’s children, Alexander Douglas Miller, who is the respondent in the case.
[2] Warrant to cite in the petition was granted by interlocutor dated 16 March 2015, in terms of which a hearing was fixed on the petition for 24 April 2015. Another of the deceased’s children, Charles Miller, attended at court on 24 April 2015 having had the petition intimated to him, but advised the court that he did not intend to enter appearance. On that date the presiding sheriff assigned a further half day hearing on the petition for 2 June 2015.
[3] The action called before me on 2 June 2015 as a hearing on the petition and the answers (as adjusted) which had been lodged. The petitioner was represented by Mr MacColl, Advocate (as instructed by Lindsays, Solicitors, Edinburgh), and the respondent was represented by Mr Logan, Advocate (as instructed by Messrs Basten Sneddon, Solicitors, Dunfermline).
[4] While the hearing before me raised a short point of law for determination, namely, whether the executor of a deceased’s estate has an absolute and unfettered right to seek sequestration of the deceased’s estate without the estate being insolvent, the factual background to this petition for sequestration is of course relevant, and I will try and summarise the background here.
[5] As I understand it, and as set out in the petitioner’s brief averments, the deceased, who died some five and a half years ago, was a farmer. He had four children, namely two sons Charles and Alexander, and two daughters Fiona and Jennifer. He was divorced. He left an estate of considerable value, said to be worth at least £1.3 million. The petitioner is the deceased’s executor in terms of his will dated 14 November 2001. I was not told if he is related to the deceased in any way. From a reading of the parties’ averments it seems that the executor has transferred part of the deceased’s estate worth about £1 million to one of the children, namely Charles (I presume by disponing the farm to Charles). It is averred by the respondent that these assets should not have been transferred to Charles and, as I understand the averments, the position is said to be that there is now insufficient money in the estate to pay the legal rights which are due to the respondent, which I was told have a value of between £100,000 and £120,000. It is said that the executor is now seeking, by way of court action in the Court of Session, to recover the assets transferred to Charles. There is also a second action by the executor against the two sons. This seems to be an action of accounting, but it has not been progressed. There is a third action by Alexander against the executor for payment. The precise nature of the legal basis of the three Court of Session actions is not made clear in the pleadings.
Basis on which petition for sequestration is brought
[6] The basis on which the petition for sequestration is brought is on averments that the deceased’s estate is insolvent. This is averred in statement 3 as follows:
“As at the present date the estate has at its immediate disposal assets of less than £30,000 … The estate’s current debts are reasonably projected to be approximately £100,000 … There is therefore presently an excess of liabilities over assets of approximately £70,000. The estate is accordingly insolvent.”
These averments are supported by a plea-in-law as follows:
“1. The Estate of the late Alexander Miller being insolvent in terms of the Bankruptcy (Scotland) Act 1985 and the petitioner being entitled to seek sequestration of the estate, sequestration should be awarded and such further orders as the court may deem proper should be made, all as craved.”
Defence
[7] The defence to the action, as I understand the averments and the submissions made to me, is that the estate is not insolvent. This is averred in answer 2. It is averred that it is not insolvent because the executor has breached the duties incumbent on him in transferring assets out of the estate, and that he has an obligation to make good to the estate any losses incurred as a result of his actions, and when that is done the estate would be in a position to pay its debts. Those averments by the respondent are supported by his first plea-in-law and there is a further plea-in-law, number 4, to the effect that “sequestration of the estate is unnecessary and should be refused”.
Submissions
[8] The hearing before me took the form of a debate and the parties had helpfully lodged an outline of their submissions beforehand. These are available for reference.
[9] Stated in the briefest of terms, the petitioner’s argument was that an executor has an absolute right to petition at any time for the sequestration of an estate under his control. There was no requirement for the estate to be insolvent, and notwithstanding that the petitioner’s averments were to the effect that the estate was insolvent, the executor was entitled to have sequestration granted without further ado.
[10] The respondent’s arguments, in essence, were that an executor had no right to seek the sequestration of the deceased’s estate unless the estate was insolvent. It was argued also that the petitioner’s averments did not disclose true insolvency, as either the executor had a right to recover assets said to have been wrongly transferred to Charles, or had a personal liability to repay debts to the estate, and in either event the estate could not be said to be insolvent. It could not be said therefore that the executor was “under the necessity of applying to the Court for sequestration” as averred in statement 4.
[11] In support of his arguments, Counsel for the petitioner referred me to the detail of the Bankruptcy (Scotland) Act 1985. He suggested that insolvency was not a requisite for sequestration in a number of instances. Thus, section 5(1) and 5(2) made it clear that in the case of a living debtor it was not necessary that the debtor was insolvent, because sequestration could be sought by a temporary administrator, a member State liquidator, or a trustee acting under a trust deed, in circumstances where the debtor was not insolvent. Taking the example of a petition for sequestration by a trustee under a trust deed, while it might be very unusual for a debtor to have entered into a trust deed without being insolvent, that was perfectly competent, because a trust deed was a voluntary arrangement between a debtor and creditors which did not actually require the debtor to be insolvent. The debtor might, for example, simply have thought that it was prudent for him to enter into a trust deed. However, once a trust deed was entered into then the trustee could apply for sequestration where, inter alia, he felt that “it would be in the best interests of the creditors that an award of sequestration be made” (section 5(2C)(b)). The position, Counsel for the petitioner argued, was even clearer in relation to the sequestration of the estate of a deceased debtor. Section 5(3) of the Act allowed sequestration of a deceased debtor to take place merely on the petition of “an executor or a person entitled to be appointed as executor on the estate”. There was nothing whatsoever in the Act, Counsel argued, which necessitated that the deceased’s estate be insolvent. Moreover, Counsel pointed out that in terms of section 8(3)(b) a petition for the sequestration of the estate of a deceased debtor may be presented at any time. There was simply no express provision in the 1985 Act which required insolvency on the part of the deceased’s estate before sequestration could be sought. This view, Counsel argued, was supported by a passage in the main modern textbook on the law of bankruptcy, McBryde on Bankruptcy, 2nd Ed., at paragraph 4-12, where it is said as follows:
“The sequestration of a deceased’s estate can be merely a process of distribution under which creditors may be paid. It is not necessary that the estate or the deceased be apparently insolvent unless a creditor wishes to petition within six months of the death.”
Counsel for the petitioner argued that although there were averments in the petition to the effect that the reason for seeking sequestration was that the deceased’s estate was insolvent, these averments did not limit the petitioner to seeking sequestration on the that basis, and they were wide enough to allow the executor to exercise his right to seek sequestration. To say that there was money which might be recovered by the estate from the executor would force the executor to remain in office and force him to sue himself, which was clearly wrong. Sequestration should accordingly be granted forthwith, as no proof of insolvency was necessary.
[12] Counsel for the respondent accepted that in terms of section 8(3) of the 1985 Act an executor could present a petition for sequestration at any time. He accepted that there was no requirement, as with the case of a petition by a creditor for the sequestration of a living debtor, that the petitioner demonstrate apparent insolvency or that the petition had to be brought within certain strict time limits. He argued that, however, before an executor was entitled to seek sequestration of a deceased’s estate it had to be demonstrated that the deceased’s estate was insolvent. He argued that sequestration was a process for dealing with the consequences of insolvency, and while the 1985 Act allowed some applications for sequestration to be brought without there being absolute insolvency (the most obvious being that in relation to a living debtor, and where the petitioner was a qualified creditor, there needed to be only apparent insolvency) these had to be seen as being exceptions to the general rule which required the debtor’s estate to be insolvent. Counsel suggested that there was nothing in any of the textbooks to suggest that an executor was entitled to seek to sequestrate the deceased’s estate where the deceased’s estate was not insolvent, or that such an application had ever been made. He suggested that the present application was a unique application, the validity of which was not supported by anything in the textbooks. In support of this argument he referred me to Coull on Bankruptcy, at page 18, where there is a reference to an executor being entitled to apply for sequestration if “the estate of a deceased person is insolvent”. He referred me also to Currie on Confirmation at paragraphs 1-59 to 1-61 where it is said that if, after an executor has been appointed, it becomes clear that the estate is absolutely insolvent, then the executor should not continue to act, but must petition for the sequestration of the deceased’s estate. He argued also, and separately, that the petitioner’s averments did not demonstrate insolvency on the part of the estate, for the reasons outlined above. In this connection, he argued, under reference to case law listed in his list of authorities, that the executor had a duty to recover any assets he had given away by mistake, and on that money being recovered the estate would not be insolvent. He suggested that a trustee in bankruptcy would not have the same obligations as an executor to seek to recover money or assets by litigation. The trustee if he were without funds to pursue litigation would have no obligation to seek to recover money or assets, whereas an executor who had wrongly given away assets would have such a duty. He suggested that the executor here was seeking to be released from his obligations and that the executor had to “get on and do his job” which was to in-gather all sums due to the estate and to pay all debts.
Decision
[13] I found the submissions made on behalf of the respondent to be the more persuasive submissions, and I was not persuaded that the executor has an absolute and unfettered right to seek sequestration of the deceased’s estate for any reason. A number of considerations led me to that conclusion.
[14] The opening words of Professor McBryde’s textbook on Bankruptcy suggest that sequestration, and bankruptcy, “is concerned with the consequences of the insolvency of individuals, partnerships and some other entities”. While that is no doubt a generalisation, it shows that sequestration is, at root, concerned with insolvency. The consequences of sequestration are serious and involve the debtor’s estate being transferred to the trustee in bankruptcy. The trustee is given complete control of the sequestrated estate, and it would surely be surprising if such a serious step did not require some justification. That is especially so bearing in mind that the costs of a sequestration, where the trustee will almost invariably be a professional person, are likely to be significant. I found the idea that an executor could incur the costs of sequestration, possibly to the detriment of the beneficiaries of the estate, without any other justification than that the executor wished to do so, difficult to accept. While no doubt an unjustified sequestration would be a breach of the executor’s fiduciary duties to the beneficiaries, and might give rise to a remedy against the executor, it seemed to me that it would not be satisfactory that the beneficiaries were left in the position that they could not prevent a sequestration taking place, and would have to allow the costs of a sequestration, if it turned out to be unjustified, to be incurred leaving them with only the hope that they might recover these costs from the executor if they could prove that there had been a breach of duty, and if the executor was in a position to repay any costs. The reference by Professor McBryde to sequestration being merely “a process of distribution” to the creditors, therefore had to be read, it seemed to me, as applying to the situation where the deceased’s estate could not pay its debts and read in that way it did not seem to me to support any wider principle.
[15] Section 5 of the 1985 Act provides that the “estate of a debtor may be sequestrated in accordance with the provisions of this Act”. The legislation does not say explicitly that for a deceased debtor the deceased’s estate has to be insolvent, but that, in my view, is really the implication to be taken from the initial words of section 5. While, as Counsel for the respondent conceded, it might be possible to conceive of some extreme circumstances where the executor of a deceased’s estate might seek sequestration of the estate without there being insolvency, I was persuaded that the legislation envisages, and effectively requires (subject to certain exceptions), the deceased’s estate to be insolvent before an application for sequestration can be made at the instance of the executor.
[16] It also seemed to me that there was force in the submissions that it would be very unfortunate if the court was prohibited from refusing the executor’s application for sequestration where, to use the phraseology of the pleadings, sequestration was not necessary. If sequestration is unnecessary, and would be to the detriment of the beneficiaries (perhaps simply by virtue of the costs of a sequestration) then it might be thought that the court should be able to refuse to grant sequestration, otherwise the beneficiaries, as I have said, might well be left with no practical remedy against the executor. There surely has to be some necessity for sequestration before it can take place. The interpretation of the legislation urged upon me by Counsel for the petitioner did not seem to me to be an interpretation which would serve the interests of justice in some cases.
[17] I also thought it significant that Counsel for the petitioner was unable to point to any authority which was directly in support of his essential proposition.
[18] In any event, and importantly, even if I was wrong in my view that as a general rule a deceased’s estate has to be insolvent before the executor can apply for sequestration, it seemed to me that the whole basis of the application as averred in the petition was that the deceased’s estate is insolvent. It seemed to me that as I could not say simply on the basis of contested averments whether or not the deceased’s estate was insolvent, the insolvency or otherwise of the estate is something that would require a proof. Proof of insolvency would require an investigation into the question of whether money or assets were wrongly given away by the executor and whether these allegedly wrongful payments can be recovered by the estate. That, in turn, would as I see it require a consideration of whether the executor has indeed acted wrongfully and has thereby incurred a personal liability to make good the effects of his allegedly wrongful actions. Such a proof might raise complicated issues of fact and law, but it nevertheless seemed to me that the question of whether the estate is insolvent could not be answered without such a proof. The purpose of the petition is for the petitioner to set out the basis of his claim, and the purpose of intimation of the petition to the beneficiaries (which was necessary in terms of the rules of court) was to give the beneficiaries notice of the basis of claim, and to allow them to consider whether the application ought to be opposed. I agree with Counsel for the respondent that if an executor is entitled, as of right, to obtain sequestration, then there would be little, if any, purpose in having the petition intimated to the beneficiaries, and I think this supports the view that the basis of the application for sequestration as averred, that is insolvency, had to be demonstrated before sequestration can be awarded.
[19] In this connection, I would mention that although the undesirability of a proof was mentioned by the petitioner’s Counsel, it was not argued on behalf of the petitioner, as I recall it, that it would be contrary to the immediacy involved in sequestration proceedings for a proof to take place into the question of whether there was insolvency. Thus there was no suggestion by the petitioner that the present case raised the type of issue which was raised in the recent case of Glasgow City Council v Chaudhry, 21 April 2015, where Sheriff Principal C.A.L. Scott QC held that in the case of a living debtor a standard security in favour of the creditor did not constitute “sufficient security” for payment of the debt, as there was no certainty that such a security would provide payment of the debt with the immediacy envisaged by the legislation.
[20] The reasons set out above are the main reasons why I found the respondent’s arguments to be more persuasive, and why I refused to award sequestration without inquiry into the facts. As I took the view that insolvency had to be demonstrated, at the very least as the averred basis on which sequestration was sought, and as the petitioner’s averments as to insolvency were not accepted, it seemed to me to follow that a proof had to be fixed to allow for inquiry into the question of whether the deceased’s estate was indeed insolvent. I understood that Counsel on both sides agreed with the view that if sequestration were not to be awarded forthwith a proof would be necessary.
Leave to appeal
[21] At the conclusion of the hearing, and having given my decision, Counsel for the petitioner sought leave to appeal. Counsel for the respondent accepted that the case raised a novel issue, in that there was no authority which had been found which gave a direct answer to the question of whether an executor had to found on insolvency in order to obtain an award of sequestration. Moreover, if the matter had to proceed to proof before any appeal could be marked, then the considerable expense of a proof would have been a needless expense. Counsel for the respondent did not therefore really resist the application for leave to appeal. For the reasons I have just given, it seemed to me also that it was appropriate to grant the petitioner the leave to appeal which he sought.
Expenses
[22] I was asked to deal also with the question of expenses. Counsel for the respondent initially sought to have the executor found personally liable in the expenses of the hearing before me, but then departed from that motion, and accepted that the deceased’s estate ought to be found liable in the expenses as occasioned by the hearing before me. Counsel for the petitioner did not expressly consent to that award of expenses, but the respondent having been successful, and the respondent not asking for the petitioner to be found liable in expenses, it seemed to me that there really could be no other outcome than that the expenses come out of the estate.
ADDENDUM
The appeal was abandoned in March 2016 and the case remitted to the Sheriff to proceed as accords. On 15 July 2016 the case called at Livingston Sheriff Court when the court was advised that the parties were agreed that the case ought to be dismissed.