Sequestration: Creditor Rights

• Introduction
• The award of sequestration
• The interim trustee
• Administration by the permanent trustee
• Sederunt book
• Formal examination of the debtor
• Discharge of the debtor
• Dividend to creditors
• Composition with creditors
• Discharge of the permanent trustee
• Further information

Introduction

This section explains the sequestration process and the rights of creditors. The notesin square brackets, for example [section 22], refer to sections of the Bankruptcy (Scotland) Act 1985.

The award of sequestration

The debtor may be sequestrated;

1. on their own application; or
2. on the petition of a qualified creditor or creditors (a creditor or creditors owed individually or together at least £1,500).

In either case the court appoints an interim trustee.

Unless the petitioner nominates an insolvency practitioner who accepts the nomination, the court will appoint a public official called the Accountant in Bankruptcy as interim trustee.

After sequestration has been awarded, there is no significant difference in what happens whoever petitioned and whoever is interim trustee. However, this has been specifically written about sequestrations where the Accountant in Bankruptcy is appointed.

When appointed as interim trustee, the Accountant may administer the sequestration herself, or assign it to an agent to administer for her. The work of the interim trustee, the permanent trustee, and the Accountant in Bankruptcy can be done by authorized members of the Accountant's staff ('we' in this booklet) or by an insolvency practitioner acting on her behalf. You will receive a letter telling you who is acting in the sequestration.

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The interim trustee

The first duty of the interim trustee is to interview the debtor. This is to establish the state of their assets and liabilities; and to investigate their financial affairs.

An interim trustee has powers, and can, if necessary, obtain additional authority from the sheriff to safeguard the estate and prevent the debtor incurring further debts. For example they can close down a business. Essentially the function of the interim trustee is to establish the full extent of the debtor's assets and liabilities and to protect the estate from loss pending the election or appointment of a permanent trustee.

It is also the duty of the interim trustee:

• to discover who all the creditors are;
• to tell them of the sequestration; and
• to ask them to submit claims [section 22].

If the interim trustee is the Accountant in Bankruptcy, she is not obliged to call a statutory meeting but must, within 60 days of the date on which sequestration was awarded, tell you whether or not she intends to call the meeting.

If the Accountant decides not to call the meeting, you can request that she do so. If at least one-quarter in value of the creditors ask for this, she must call the meeting [section 21A(4) & (5)].

You can also petition for the recall of the sequestration if you believe it ought not to have been awarded [section 16(1)(a)]. And, if on the other hand someone else has presented a petition for recall, you can lodge answers to the petition and object to there call being granted [section 16(3)].

Unless she becomes the permanent trustee, the Accountant must, within 3 months of the permanent trustee being confirmed in office, produce an account of her intromissions, and issue a determination for her entitlement to costs and reimbursement of necessary outlays and expenses. All creditors will be advised of:

• the Accountant's determination;
• the right to appeal to the sheriff regarding it; and
• the Accountant's entitlement to be discharged as interim trustee [section 26(4), (5)(a) & (5)(b) and section 27(2)(a)].

The Accountant's fees for acting as interim trustee are fixed by Statutory Instrument at £32 per hour for the first 5 hours and at £57 for each hour after that spent by the Accountant and her staff or her agents and their staff, in carrying out the Accountant's statutory obligations.

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Administration by the permanent trustee

If no-one else is elected or appointed to be permanent trustee, the Accountant in Bankruptcy will automatically be appointed. Once confirmed in office, it is the duty of the permanent trustee to recover and realise your estate.

The Accountant will write to insurance companies, banks, company registrars, etc, regarding any holdings in the your name, and arrange for valuations of moveable assets and for these to be uplifted for auction.

If the you own heritable property, the Accountant will:

1. enquire into the equity position; write to the secured creditor;
2. arrange for a valuation of the property, if appropriate,

and

1. either negotiate the sale of sequestration's interest;
2. or arrange a sale on the open market.

The Accountant will consider whether you are able to make a contribution from income and, if so, set up the necessary arrangements. She will also make arrangements with creditors to repossess leased goods or goods held on a retention of title basis.

Except for the sale of the house, most of this activity usually takes place in the first few months of the sequestration. But every 6 months the trustee will monitor and review your financial status to consider whether, for example, a contribution might besought or increased or whether you have acquired any assets, etc.

Also, 6 months after the date of sequestration (and at subsequent intervals as she determines) the Accountant must produce an account of her transactions and a claim for remuneration and reimbursement of her outlays and expenses. This account must be produced within 2 weeks of the accounting date, and on each occasion the Accountant will issue a determination of her entitlement to fees, etc. She will send a copy of that determination to all creditors. The creditors may, within 8 weeks of the accounting date, lodge an appeal against the determination with the sheriff [section53(6)].

The Accountant's fees for acting as permanent trustee are fixed by Statutory Instrument. The fees are £55 for each hour spent by the Accountant and her staff or her agents and their staff in carrying out the Accountant's statutory obligations to administer the sequestration and in recovering, realising, managing and distributing the debtor's estate, etc.

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Sederunt book

The permanent trustee must keep an official record of the sequestration process. This record is called the sederunt book and it contains copies of:

1. all court orders;
2. copies of the trustee's audited accounts and determinations of his fees and
3. expenses;
4. records of creditors' meetings etc.

You can examine the sederunt book at any reasonable time by arrangement with us[section 62(1)].

The Accountant will continue to administer the estate for as long as necessary, managing assets in the interests of the creditors and discovering and realising any further assets. If you are dissatisfied with the Accountant's conduct of the sequestration, you have a number of rights.

You can:

1. require the permanent trustee to call a creditors' meeting [Schedule 6 para.(1)]; make a formal complaint to the Accountant in Bankruptcy [section 1A(1)(a)];
2. apply to the sheriff to give directions to the permanent trustee [section 3(7).]

Generally speaking, a permanent trustee acts independently and is personally liable. If they go beyond their powers, or if their inaction causes loss to the sequestration, they may be held personally liable for the loss.

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Formal examination of the debtor

The public examination of the debtor used to be an integral part of the sequestration process. Now, it is very rare, only happening if the permanent trustee believes that the debtor is concealing information which is more likely to be revealed by examination under oath before the sheriff. Normally, it is the permanent trustee's decision to have a public examination. But a you can ask for such an examination, and if one quarter in value of the creditors do request it, the permanent trustee must apply to the sheriff for the necessary order [section 45(1)(b)]. You must be notified of the date, time, and place of the examination and have the right to attend [section 45(3)].

It is also open to the permanent trustee to call the debtor, or anyone else who they believe may have relevant information about the debtor's financial affairs, to a private examination before the trustee and if necessary to seek an order from the sheriff compelling attendance at this examination [section 44(2)].

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Discharge of the debtor

On the third anniversary of the date of sequestration, the debtor is automatically discharged from bankruptcy, unless the sheriff grants an order deferring that discharge. You or the permanent trustee can apply to the sheriff for a deferment of this discharge, but the application must be made at least 3 months before the date of automatic discharge [section 54(3)].

The debtor's discharge absolves them of personal liability for all the debts they had at the date of sequestration (except for any fines or penalties owing to the Crown and except for any debt incurred fraudulently). They can acquire property again and you and the permanent trustee have no further claim on them.

The debtor does not, however, get back any property or right to property which vested in the permanent trustee before the date of discharge. Their house, insurance policies, private pension plans (where appropriate), etc, if unrealised, remain the property of the trustee. The trustee still has a duty to realise these whenever possible for the benefit of the creditors who remain entitled to repayment of their debts out of that estate which remains vested in the permanent trustee.

The debtor's discharge does not affect their continuing duty to co-operate with the permanent trustee but it would affect the vesting of assets, for example, an inheritance received after your discharge could not be claimed by the permanent trustee. Also, any contributions would cease. It is open to the permanent trustee ort o any creditor, at least 3 months before the date of automatic discharge, to apply to the sheriff to have the discharge deferred [section 54(3)] or to make representation about another person's application for such a deferment [section 54(6)].

The sheriff can defer your discharge for repeated periods of up to two years. Further applications for deferment must also be made at least 3 months before the (deferred)date of discharge.

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Dividend to creditors

At any point where the trustee has realised sufficient funds he can pay a dividend to preferred and ordinary creditors. However, they only makes these payments after paying or making adequate provision for the administrative costs of the sequestration (and, if appropriate, the petitioning costs of the petitioning or concurring creditor).

Before paying a dividend the trustee must adjudicate on the creditors' claims for ranking purposes. He must also advise you of her decisions and of your right to appeal to the sheriff against those decisions [section 49(6)].

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Composition with creditors

At any time during the sequestration the debtor can propose a composition settlement with the creditors [Schedule 4]. Composition must offer the creditors a dividend of not less than 25p in the £ for the ordinary debts in return for a full and final discharge of their claims. You do not have to accept an offer, but it will be binding on all creditors if a majority in number and at least two-thirds in value do accept it.

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Discharge of the permanent trustee

After the final distribution of funds, and/or when there are no assets left in the estate, and no further functions to perform, the trustee will prepare their final account for audit and tell you of their intention to discharge themselves as permanent trustee. This discharge absolves the Accountant of all further liability as your permanent trustee. You can object to the sheriff to the trustee's discharge [section 57(2)].

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Further Information

Further information may be obtained from us at:

Accountant in Bankruptcy
PO Box 8313
Irvine
KA12 2AA
LP - 4 Irvine
E-mail: helpline@aib.gov.uk
Telephone helpline: 0845 7626171
(calls charged at local rates)

Disclaimer:

The information given on this page is for general guidance only. It is not a detailed or full statement of law.

© Accountant in Bankruptcy - Updated September 2003