Human rights challenge to Scots bankruptcy law provision dismissed

The case raised the issue of whether the terms of section 34(4) of the Bankruptcy (Scotland) Act 1985 were compliant with the European Convention on Human Rights (ECHR), but a judge in the Court of Session held that the provision struck an “appropriate balance” between the defender’s rights and the interests of the creditors.

Lord Armstrong heard that the pursuer, the Accountant in Bankruptcy, the trustee in the sequestration of the debtor John Gerard Walker, raised action of payment of the sum of £172,895.25 against Pauline Farrell, the debtor’s ex wife.

Prior to his sequestration on 1 April 2009 and the appointment of the trustee, the debtor was the sole proprietor of a property in Rutherglen, which was sold for £435,000 in December 2007 – a month after the couple were married.

After deduction of an outstanding mortgage, and the costs of sale, the net free proceeds of sale were £178,723.82, of which the debtor mandated transfer to the defender of the sum of £172,895.25.

The defender subsequently purchased property at 56 Picketlaw Farm Road, Carmunnock in her sole name.

She told the court in contemplation of marriage, both she and the debtor sold their respective properties in order to purchase that property as a matrimonial home.

The purchase price was said to be £866,000, funded by a mortgage of £380,000, a contribution by the defender of approximately £313,000 from the sale of her property, and the sum of £172,895.25 which was transferred by the debtor to the defender as a gift in consequence of their marriage to purchase the matrimonial home.

The couple separated in January 2008, but she continued to live at the property with her son and daughter, and continued to pay the mortgage and maintain the property without contribution from the debtor before and since their divorce August 2010.

She averred that if decree was granted in the sum sued for, it would result in a number of personal and financial consequences for her, as the property suffered a substantial fall in value since it was purchased – now valued at about £560,000 with £380,000 remaining due on the mortgage.

In the first place, she would require to sell her home, and its diminution in value would mean that she would lose her contribution of £313,000. Secondly, she and her children would lose their family home with no means of buying or privately renting another home. And thirdly, the sale of the property would not allow her to make payment of the full amount to the pursuer and she herself would be sequestrated.

However, the pursuer’s position was that the transfer of £172,895.25 was a “gratuitous alienation” by the debtor to the defender, and as such it is challengeable under section 34 of the 1985 Act.

The pursuer sought payment of the sum transferred to the defender in order to restore it to the estate of the debtor for the benefit of the general body of creditors.

At a procedure roll discussion, the pursuer insisted on her preliminary plea, challenging the relevance of the defender’s pleadings, and sought decree de plano.

The defender did not expressly dispute that the transfer of £172,895.25 was a gratuitous alienation and did not seek to invoke any of the defences afforded by section 34(4).

Her complaint was that the statutory defences to a challenge to a gratuitous alienation, set out in section 34(4), had no regard to the circumstances of the alienation, or to the reasonableness or proportionality of making the order sought, or to the personal or financial circumstances of the person against whom the order was sought.

She maintained that the provisions of section 34(4) were incompatible with the rights of the defender and her family under Articles 6, 8, 14, and Article 1 of the First Protocol (A1P1), of the European Convention, but that they could be read and given effect to in a way which was compatible with the Convention, in terms of section 3(1) of the Human Rights Act 1998, by interpreting and applying the section in a way which permitted the court to consider the circumstances of the person against whom an order was to be made.

However, the pursuer’s position was that defender’s case that the provisions of section 34(4) violated her Article 6 rights was “misconceived”. The defender’s concern was not with the fairness of the process for determining her substantive rights, but rather with the “lack of a stateable statutory defence which reflected her circumstances”, meaning Article 6, which protected the defender’s right to a fair trial, was “not engaged”.

In relation to Article 8, the defender’s position was that the grant of decree in the pursuer’s favour would compel the sale of her home, which would constitute an interference in her family life and that of her dependent children, but that argument too was misconceived. The case was an action for the payment of a sum of money, and nothing more. The pursuer was not seeking an order which would compel the defender to sell her home, or any other property to which she had title or interest.

In relation to Article 14, the defender’s position was that the extended period referable to gratuitous alienations in relation to the spouse of a debtor was “discriminatory”, in that, in terms of section 34(3)(a), the relevant period in respect of associates of the debtor was one of five years, rather than that of two years in respect of others. In that regard, however, Article 14 was not engaged. The defender averred only that the family, and thus the defender and her family, was a category of status protected by Article 14. She failed to specify the basis of discrimination on any grounds prohibited by Article 14.

In relation to A1P1, the defender’s position was that decree for payment would interfere with her peaceful enjoyment of her possession, in the shape of her home. In that regard, it was to be noted that all that was sought by the pursuer was decree for payment of a sum of money. No order was being sought in respect of the defender’s home.

In any event, it was submitted that the aims of section 34 were “legitimate” and struck a “proper balance” between the interests of a debtor’s creditors and those in the position of the defender. Its effect was “reasonably proportionate” to that aim and any interference with the defender’s rights was “proportionate” and “necessary” for the legitimate protection of the rights of others.

The judge ruled that the defender’s pleadings in defence to the action were “irrelevant” and therefore, having regard to the submissions made on record, granted decree de plano.

In a written opinion, Lord Armstrong said: “In the whole circumstances, I am not persuaded that the terms of section 34(4) are unjustified, arbitrary or disproportionate. Rather, for the reasons submitted by the pursuer and the minuter, I find that the terms of the section strike an appropriate balance between its legitimate aim and the means of securing that aim, and that the degree of interference which might impact on the defender’s rights, is proportionate to the need to protect the interests of the general body of creditors, in the wider public interest. On that basis, I determine, in particular, that section 34(4), as currently interpreted, is compatible with the European Convention of Human Rights…Accordingly, I am not satisfied that there is a requirement to read down the terms of section 34(4), in accordance with section 3 of the 1998 Act, or that a declaration of incompatibility, in terms of section 4 of that Act, is appropriate.”