Sheriff Appeal Court rules “debt” does not include interest in bankruptcy provision

In the appeal against the sheriff’s decision on the application of the Accountant in Bankruptcy in the sequestration of VCY, HMRC argued that in the context of section 17 of the 1985 Act “debt” included interest. 

The appeal was heard by Sheriff Principal Turnbull, sitting with Appeal Sheriff Cubie and Appeal Sheriff McFadyen. 

Ordinary debt 

VCY was originally sequestrated in March 2016 on the petition of HMRC, with a date of sequestration of 10 December 2015. The petition debt was £17,377.58 plus interest, with the debtor also liable for HMRC’s petition expenses. On 10 July 2018, VCY applied to the AIB for recall of the award of sequestration on the ground that he was able to pay his debts in full. 

The application was intimated to HMRC in accordance with the 1985 Act. HMRC refused the application, stating in its response that statutory interest must be paid in order to secure a recall of sequestration. The AIB then applied to the Sheriff Court for a recall of sequestration. 

The sheriff concluded that VCY’s debts had been paid in full, pointing out that “debt” is not a defined term in the 1985 Act. He did not consider that the definition of “ordinary debt” for the purpose of sections 73 and 51(1)(f) of the Act, which provide that an ordinary debt is a debt which is neither a secured debt nor a debt mentioned in any other paragraph in section 51(1), was helpful in resolving the issue. The effect of section 51 was that interest was only payable when all other debts had been paid. 

On appeal, HMRC submitted that the use of the word “debt” in section 17 must be read in the context of other provisions of the Act, in particular section 51. Against that background, a requirement that a debtor make payment of his debts in full must properly be viewed as requiring creditors to receive payment in respect of all the debts for which they are entitled to rank in the sequestration, including the payment of interest on ordinary and preferential debt. 

The AIB argued that the sheriff’s interpretation was the correct one, and it was in keeping with the express provision in section 17D(3) of the Act that the effect of a recall is to restore the debtor to the position they would have been in if the sequestration had not been awarded. 

No logical basis 

The opinion of the court was delivered by Sheriff Principal Turnbull. Noting the presumption that the same meaning for a word is used throughout a statute, he said: “It is true that section 51 regards interest as a debt –that much is apparent from the wording of sub-section (1), however, paragraph 1(1) of Schedule 1 treats interest separately from the various classes of debt. It is therefore necessary to consider the subject matter and purpose of both section 51 and paragraph 1(1) of Schedule 1.” 

Examining section 51 of the 1985 Act, he said: “The purpose of section 51 is to set out the order in which the available funds of the debtor’s estate are to be distributed by the trustee. It is not entirely clear what the sheriff means by a ‘solvent sequestration’, however, that is a matter which is of no moment for the purposes of this appeal, it being clear from the sheriff’s careful analysis of the relevant provisions of the 1985 Act that interest is only payable where the preceding classes of debt specified in section 51(1) have been paid in full and funds remain available for distribution to creditors in respect of interest. It is, however, notable that section 51 envisages that each of the various classes of debt could be paid in full and yet there are no further funds available to permit the payment of interest.” 

On section 1, he said: “The provisions of paragraph 1(1) of Schedule 1 are also applicable to a situation that is quite different to that envisaged by section 17, paragraph 1(1) stipulating the amount a creditor is entitled to claim and how that is calculated. As noted above, for the purposes of a claim in the sequestration, the debt comprises two separate elements -principal and interest, the latter being restricted to any interest which is due on the debt (which in this context means ‘principal’) as at the date of sequestration.” 

Comparing the two sections, he said: “It is, in our opinion, clear that the word ‘debt’ has a different meaning in section 51 as compared to that in paragraph 1(1) of Schedule 1; the two provisions being quite different in their subject matter and purpose. In the context of section 17, no logical basis has been advanced by the appellant, HMRC, upon which the meaning of the word in section 51 should be preferred to that in paragraph 1(1) of Schedule 1.” 

Examining the practical effect of an award, he said: “In terms of section 17(4), the effect of the recall of an award of sequestration is, so far as practicable, to restore the debtor and any other person affected by the sequestration to the position he would have been in if the sequestration had not been awarded. In the present case, HMRC received payment of the sum due to them as at the date of sequestration, which included interest to that date.” 

He continued: “In this case, to have required the payment of interest from the date of sequestration (10 December 2015) to, say, 26 July 2018 (the date upon which HMRC received payment of the sum due to them as at the date of sequestration) would have placed HMRC in a significantly better position than that they would have been in if the sequestration had not been awarded.” 

He concluded: “Recognising Parliament’s stated intent in relation to the effect of the recall of an award of sequestration, in our opinion the proper construction of the word ‘debts’ in section17(1)(a) does not include any interest which had accrued thereon from the date of sequestration. It follows that, as found by the sheriff, VCY’s debts have been paid in full.” 

For these reasons, the appeal was refused.