Accountant in Bankruptcy wins appeal over ‘interest’ to apply for reappointment as trustee in sequestration

The Sheriff Appeal Court held that the Accountant in Bankruptcy could make an application to a sheriff under section 63(1)(b) of the Bankruptcy (Scotland) Act 1985 for a declaration that the office of permanent trustee in the sequestration of Gordon Stephen had become vacant and for the re-appointment of the AIB as trustee in that sequestration.

Sheriff Principal Derek Pyle, Sheriff Principal Marysia Lewis and Sheriff A MacFadyen heard that Mr Stephen was sequestrated in September 2006 and the AIB was appointed as trustee – the primary function of which in terms of section 3(1)(a) and (b) of the 1985 Act is to recover, manage and realise the debtor’s estate and to distribute the funds among the creditors.

Following distribution of the estate, Mr Stephen was discharged in September 2009 and the AIB was discharged two months later.

However, after the respective discharges the Bank of Scotland sent to the AIB £8,378.30, which was due to Mr Stephen under the PPI reimbursement scheme.

The AIB had not previously been aware of the existence of such a claim and was faced with the prospect of returning the funds to the bank or retaining the money and seeking a means of managing and distributing the funds to the creditors.

The AIB chose the latter option and applied to the sheriff in Aberdeen under section 63(1)(b) of the 1985 Act for a declaration that the office of permanent trustee in the sequestration of Gordon Stephen had become vacant and for the reappointment of the AIB, as a person having an “interest”, as trustee in that sequestration.

The application was not opposed for the debtor, Mr Stephen, could not be traced, but the sheriff scheduled a hearing on the application because on that same day he issued a decision in the case AIB v Sadler, which had markedly similar facts, in which refused to grant the application, primarily because the AIB “no longer had any interest” for her interest had “terminated at the point of her discharge”.

Following a hearing of the present application on 23 March 2016, the sheriff followed his decision in AIB v Sadler and dismissed the application, as he considered that it would have been “completely inappropriate” to come to a different view on a case involving essentially similar facts.

The AIB appealed and the Sheriff Appeal Court and granted the application after ruling that the sheriff had erred.

Delivering the opinion of the court, Sheriff Principal Lewis said: “The problem of assets emerging post discharge as has arisen here is not new and has been considered by the courts over many years and under different bankruptcy regimes. The discharge of a debtor and of the trustee does not end the sequestration (unless there is a discharge on composition).”

Counsel for the appellant explained that as the creditors of Mr Stephen had not been paid in full nor had there been a discharge on composition, the sequestration had not come to an end.

The appeal sheriffs continued: “We agree with his assessment that the basic purpose of sequestration, which is reflected in the primary functions of a trustee (section 3(1) of the Act), should not be ignored when an overlooked or unidentified asset emerges – otherwise a debtor, who is stripped of all of his assets at the date of sequestration and also of all property that may come into his possession prior to discharge, may obtain an unfair, unforeseen benefit.

“To deal with such a situation and to avoid such unfairness, the courts have tended to look favourably on applications for the appointment of a new trustee.”

On the question of who may make such an application, the sheriff concluded that a discharged trustee had “no duty” to investigate potential sources of recovery, but as the court observed, “the AIB did not go searching for funds – they fell into her lap”.

The appeal sheriffs added: “We agree with the sheriff that it would have been open to a creditor to make application for the appointment of a trustee in these circumstances and that the Bank of Scotland fits neatly into that category. However, a trustee as opposed to a creditor may also make an application to the nobile officium.”

The sheriff further held that the remedy within section 63 of the Act had “no relevance” to the present circumstances, as it was concerned with the correction of errors, acts or omissions on the part of the trustee.

Sheriff Principal Lewis said: “In his view there had been no acts or omissions requiring correction and in any event, returning to his primary point, the trustee had been discharged. We consider that the sheriff has fallen into error in taking such an approach.

“Section 63 is much wider in its scope for it also allows the sheriff on the application of a person having an interest to make such order as may be necessary to enable anything to be done that cannot otherwise be done in the sequestration process (section 63(1)(b) of the Act). The ‘interest’ is quite simply a matter of circumstances which relates to the sequestration.

“The funds now in the hands of the AIB are said to be an asset of the estate of Gordon Stephen. To our minds, the thing that cannot be done is the intromission with and distribution of those funds.

“The acts of intromission and distribution are connected with the sequestration – indeed go to the heart of the sequestration for the distribution is for the benefit of the general body of creditors. The funds deriving from the PPI claim provide the basis upon which the AIB can assert an interest in terms of section 63.”

She added: “Put simply, the AIB requires to set forth a prima facie case for averring that the funds fall to the estate. In our view the averments in the present application are sufficient in that respect.

“For the foregoing reasons we are satisfied that as a matter of law, the AIB does have interest to bring an application under section 63(1)(b) of the Act.”