Scott Clair

Where an individual is sequestrated, the totality of their assets and potential assets (subject to certain exceptions) will pass to (or “vest”) in the trustee in sequestration for the benefit of the individual’s creditors. One of the potential assets that will vest in the trustee is any “non-vested contingent interest” which the debtor has.

What is a non-vested contingent interest?

The term “non-vested contingent interest” is not a term of art in Scots law, albeit, it is a term which has been utilised in the drafting of insolvency legislation in Scotland for at least a century. It is a term which is thought to have its origins in the Bankruptcy (Scotland) Act 1913, section 2 of which referred to:

“any non-vested contingent right of succession or interest in property conceived in favour of the bankrupt under the will or settlement of any person deceased, or under marriage contract, or under any other deed, instrument, or writing of an irrevocable nature”.

Historically, it had been accepted that the most common - perhaps only - example of a non-vested contingent interest was that of a spes successionis (a hope, or chance, of succession): e.g. rights arising under a revocable deed such as the Will of a living person. But what of other expectancies which might be regarded as “non-vested contingent interests”? McKenzie-Skene on Bankruptcy observes that the precise scope remains uncertain.

A triple bench of the Sheriff Appeal Court in John McGleish v Graham Cameron Tough & Maureen Leslie [2018] SAC Civ 19 has now held that the term is more expansive than had initially been thought.

Before considering the case, it is necessary to consider the effect of a non-vested contingent interest on the sequestration process.

What is the effect of a non-vested contingent interest on sequestration and discharge?

The current formulation of the rule is found in section 78(9) of the Bankruptcy (Scotland) Act 2016, which provides:

“Any non-vested contingent interest which the debtor has vests in the trustee as if an assignation of that interest had been executed by the debtor (and intimation of assignation made) at the date of sequestration.”

This repeats the wording found in the analogous section in the forerunner to the 2016 Act, section 31(5) of the Bankruptcy (Scotland) Act 1985. Prior to 1 April 2008, the practical effect was that if the contingency eventuated after the debtor was discharged, it would still vest in the trustee. Take for example the straightforward case where a debtor was the beneficiary under a will at the time of his sequestration and was subsequently discharged prior to the testator’s death. In such a case, any asset the debtor may have inherited would have vested in the trustee.

It came to be recognised that a balance had to be struck between the interests of the debtor and of his creditors. Accordingly, the Bankruptcy and Diligence etc. (Scotland) Act 2007 went on to qualify the rule in the 1985 Act by inserting a new section 31(5A) as follows:

“Any non-vested contingent interest vested in the trustee by virtue of [the foregoing subsection] shall, where it remains so vested in the trustee on the date on which the debtor’s discharge becomes effective, be reinvested in the debtor as if an assignation of that interest had been executed by the trustee and intimation made thereof at that date.”

Relying on section 31(5A), had the above scenario occurred, provided the debtor had been discharged before the contingency eventuated (i.e. before the testator’s death), then he would have been entitled to the inheritance and not the trustee.

The analogous provision in the 2016 Act (section 78(10)) has now postponed reinvestment in the debtor to the date 4 years after the date of sequestration. This can be said to follow the general direction of travel in recent insolvency legislation in bringing more elements back into the control of the trustee for the benefit of the debtor’s creditors.

John McGleish v Graham Cameron Tough & Maureen Leslie

Mr McGleish and his late wife took out a joint life level term assurance policy with critical illness cover with CIS Co-operative Insurance (“CIS”) on 6 February 2001. He and his wife were then subsequently sequestrated on 11 July 2008. Their sequestration took place subject to the – now repealed - regime under the 1985 Act. Mr McGleish was automatically discharged from his sequestration on 11 July 2009. Mrs McGleish died on 5 February 2010. The proceeds of the policy were paid not to Mr McGleish, but to his trustee.

Mr McGleish raised an action against his trustee seeking payment of the proceeds, based on the assertion that his interest in the policy was a non-vested contingent interest, which under the then-regime ought to have reinvested in him on his discharge, being some months prior to his wife’s death.

Having been unsuccessful at first instance, he appealed to the Sheriff Appeal Court. The trustee maintained that Mr McGleish’s interest in the policy was not in fact a non-vested contingent interest, but was instead a right in incorporeal moveable property, which was governed not by section 31(5A), but by section 31(4). Section 31(4) provided as follows:

“Any moveable property, in respect of which but for this subsection-

                  (a) delivery or possession; or

                  (b) intimation of its assignation,

would be required in order to complete title to it, shall vest in the trustee by virtue of his appointment as if at the date of sequestration the trustee had taken delivery or possession of the property or had made intimation of its assignation to him, as the case may be.”

The Sheriff Appeal Court found in favour of Mr McGleish in that they held that his interest in the policy was a non-vested contingent interest, meaning that it had reinvested in Mr McGleish by the time of his wife’s death and, as a result, the proceeds of the policy ought to have been paid to him and not to the trustee.

Commentary

The case is thought to be the first authoritative opinion as to what other rights or interests beyond rights in succession may be held to be non-vested contingent interests. Whilst under the current regime set out in the 2016 Act, the proceeds would have vested in the trustee and not Mr McGleish (as his wife died within four years from the date of his sequestration), the court’s determination that such an interest ought to be characterised as a non-vested contingent interest means that the case is of importance in situations where the triggering event purifying the contingency occurs four years after the date of sequestration (provided the debtor had been discharged). In those situations, the debtor will be free to benefit from the proceeds.

It is of note that the Appeal Sheriffs rejected the trustee’s argument that merely because the right itself was assignable, it could not be a non-vested contingent interest. It is clear that the two are therefore not mutually exclusive and the fact of assignability is not determinative.

The Sheriff Appeal Court went on to opine that the phrase “non-vested contingent interest” ought not to be given a restricted interpretation and that by tracing the development of the law from 1913 onwards, one can see that the intention of Parliament was to further expand the categories of such expectancies.

In a sense, the decision can be thought of as one of common sense. As the court itself noted, the appellant’s interest in payment was contingent upon certain things happening and not happening and his interest was a possibility which may never eventuate. The inevitable question which remains is are there any other categories of interests which are capable of falling into the category of non-vested contingent interests?

Scott Clair is a solicitor at Balfour and Manson