Sequestration: Debtor Rights

• Introduction
• The award of sequestration
• The interim trustee
• Your assets
• Administration by the permanent trustee
• Heritage
• Contributions and income
• Trustee's accounts
• Other matters
• Public examination
• Discharge from bankruptcy
• Composition with creditors
• Discharge of the permanent trustee
• Payment of dividends to creditors
• Further information

Introduction

This page is for debtors who have been sequestrated and aims to explain the sequestration process and their obligations and rights. The notes in square brackets, for example, [section 18(4)], refer to sections of the Bankruptcy (Scotland) Act 1985.

The award of sequestration

You may have been sequestrated

• on your own application; or
• on the petition of a qualified creditor or creditors (that is, a creditor or creditors you owed individually or together at least £1,500)

In either case the court appoints an interim trustee.

Unless you or another petitioner nominated an insolvency practitioner and they accepted that nomination, the court will have automatically appointed the Accountant in Bankruptcy, to be your 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 for sequestrations where the Accountant in Bankruptcy is appointed.

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

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The interim trustee

The first duty of an interim trustee is to find out what you own and the value of your estate, and also the full extent of your debts. The interim trustee will arrange to interview you to do this. The interim trustee has legal powers, and can, if necessary, obtain additional authority from the sheriff to take any action necessary to protect your estate from further loss until a permanent trustee is appointed.

They may also take action to prevent you from incurring further debts. For example, if you have a business that is losing money, he might close it down.

Finally, it is the duty of the interim trustee to discover who your creditors are, advise them of the sequestration, and invite them to submit claims.

You are legally obliged to co-operate with the interim trustee and give them any information they ask for about your personal financial and business affairs. Failure to co-operate is an offence for which you can be prosecuted.

The interim trustee is also entitled to instruct you in the management and safeguarding of your assets, and can require you to sign documents. You do however, have the right to appeal to the sheriff if you wish to object to any direction given to you by the interim trustee [section 18(4)].

If you have been sequestrated by a creditor and you think you should not have been, or if your circumstances have changed since applying for your own sequestration,

you may be able to ask the court to recall the sequestration [section 16(1) (a)]. The interim trustee may advise whether you have grounds to apply for a recall but you must seek independent legal advice and representation from a solicitor.

If the Accountant in Bankruptcy does not become your permanent trustee, she must, within 3 months of the permanent trustee being confirmed in office:

1. prepare an account of her dealings with your estate; and issue a formal determination of her fees, and of her outlays and expenses
2. for reimbursement.

You will be told of this determination and your right to appeal to the sheriff about it [section 26A(5)] and to the discharge of the Accountant as interim trustee.

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 spent by the Accountant and her staff or by her agents and their staff, in carrying out her statutory obligations.

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Your Assets

The effect of sequestration is to transfer all your assets, that is, money and other property and any rights you have to receive money or other property which you are entitled to receive at some future date, to your permanent trustee [section 31(1)].

Any money and other property that you acquire after your sequestration and before your discharge, must also be received by, or delivered to, your permanent trustee [section 32(6)].

The only exceptions are:

1. employment income; DSS Benefits; or
2. any payments under an authorised pension scheme already in payment at the date of your sequestration.

If you have disposed of any assets within the 5 years before your sequestration for less than their full value, the trustee can ask the court to have the transaction set aside and for the assets to be given to them to sell for the benefit of your creditors [section 34(1)].

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Administration by the permanent trustee

Once confirmed in office, it is the duty of the permanent trustee to recover and realise your estate. They will write to insurance companies, banks, company registrars, etc about any holdings in your name, and arrange for valuations of moveable assets and for these to be uplifted for auction.

The trustee will assume any property in your possession belongs to you unless you, or the person claiming to be the owner, prove otherwise. You or the other person can apply to the sheriff for an order stopping the trustee from taking property which does not belong to you, or which should be excluded from vesting [section 31(6)].

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Heritage

If you own the house you live in or any other heritable property, the trustee will:

1. check whether there is any equity in it;
2. write to the secured creditor; and
3. arrange for a valuation.

If appropriate, the trustee will either negotiate the sale of the sequestration's interest in the property with you or your spouse, or arrange a sale on the open market. If the house is jointly owned, they will not be able to sell his interest without the consent of the co-owner. But if this consent is withheld, the trustee can ask the court for authority to sell. Similarly, if the house is wholly owned by you, but you have a wife or children with occupancy rights, under the terms of the Matrimonial Homes (Family Protection) Act 1981, the trustee cannot sell the house without the consent of those persons. But again the trustee can ask the court for authority to sell.

In both cases the co-owner, or person with occupancy rights, can attend court and argue that the trustee's application should be refused or deferred [section 40(2)].But it is important to understand that the trustee cannot simply abandon their interest in the house even if there is little or no equity in it, nor if the court decides that it cannot be sold immediately. Unless the court has told the trustee they can never sell the house, they will eventually have to negotiate its sale to you or your spouse, or sell it on the open market after the time specified by the court. This can even happen after you have been discharged from bankruptcy.

The trustee understands the importance of this to you and will make every effort to come to an arrangement where you do not have to leave your home. However, you should also remember that the trustee must keep in mind all the circumstances of your sequestration, including the interests of all your creditors. It can happen that the secured creditor's interest of the secured creditor dictates a course of action beyond your trustee's control. The trustee will explain what is likely to happen to your house at the start of your sequestration. If you remain anxious or unsure, get back in touch with him at any time.

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Contributions and income

The trustee will consider if you can make a contribution from income and, if so, set up the necessary arrangements. They will try to reach a voluntary agreement with you but if this is not possible, they can ask a Sheriff for an order. You can make representations to the sheriff about the amount to be paid [section 32(2)]. If an order is in place and your circumstances change, you can ask for it to be varied [section 32(4)]. In extreme cases, the trustee can ask the Sheriff to extend your sequestration if you fail to make contributions when you could do so.

Except for the sale of the house, most of this activity takes place in the first few months of the sequestration. But every 6 months the trustee will send you a questionnaire-a current status report-and review your financial position to consider if, for example, a contribution might be sought or increased, or if you have acquired any other assets etc.

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Trustee's accounts

Six months after the date of sequestration, and at other subsequent intervals decided by the trustee, they must produce an account of their transactions and a claim for remuneration and reimbursement of their outlays and expenses. This account must be produced within 2 weeks of the accounting date. Within 6 weeks of this date, the Accountant, as trustee, must issue a determination of her entitlement to fees, expenses, and outlays.

A copy of this determination will be sent to you and you have the right, within 8weeks of the accounting date, to lodge an appeal against that determination to the Sheriff. The purpose of the determination is to let you and your creditors know the amount of the trustee's remuneration, outlays and expenses. It is not a bill issued to you for direct payment.

The Accountant's fees for acting as permanent trustee are fixed by Statutory Instrument at £32 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 recover, realise, manage, and distribute a debtor's estate, etc.

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Other matters

The trustee will continue their administration for as long as necessary, managing assets in the interests of the creditors and discovering and realising assets. If you have any reason to believe the trustee has exceeded their powers or has in any other way not properly carried out their duties, you may:

1. complain to the Accountant in Bankruptcy, [section 1A(1)(a)]; or
2. ask the Sheriff to give directions to the permanent trustee [section 3(7)]

The trustee must keep an official record of the sequestration process. This is called a sederunt book and it should contain:

1. all Court Orders;
2.  copies of the trustee's audited accounts; and
3. determinations of fees, expenses, etc.

You have the right to examine the sederunt book, by arrangement with the trustee, atany reasonable time [section 62].

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Public examination

A public examination of the debtor in court before the sheriff used to be an essential part of the sequestration process. Now it is only rarely done if the permanent trustee believes that the debtor, or anybody else, is concealing information which is more likely to be revealed by examination under oath before the sheriff. A private examination in the trustee's office is more common today.

Failure to attend a public or private examination when required is an offencef or which you may be prosecuted [sections 44(3) and 45(4)].

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Discharge from bankruptcy

On the third anniversary of the sequestration, you will be automatically discharged from bankruptcy unless the sheriff grants an order deferring it. Discharge absolves you of personal liability for all the debts that you had at the date of your sequestration. The only exceptions are fines or penalties owing to the Crown and any debt incurred by fraud.

You will be allowed to acquire property again, and the permanent trustee and the creditors will have no further claim on you. But any property or right to property vesting in the permanent trustee before the date of your discharge will not be returned.

In particular your house, insurance policies, and any unapproved pension schemes, if unrealised, remain the property of the trustee. They still have a duty to realise these whenever possible for the creditors' benefit. The creditors are still entitled to repayment of their debts out of any of your estate which remains vested in them permanent trustee.

You are, however, entitled to have restored to you any assets or monies which remain in the trustee's hands after they have paid your creditors in full, plus interest, and has recovered the administrative expenses of the sequestration [section 51(5)].

Your discharge does not affect your continuing duty to co-operate with the permanent trustee but it does affect the vesting of assets. For example, an inheritance received after your discharge could not be claimed by the permanent trustee and any contributions will cease. (But please note paragraph 1 in the section on contributions and income, on page 5, regarding the deferral of your discharge if contributions have not been made when it was possible for you to do so).

It is open to the permanent trustee or to any creditor, not less than 3 months before the date of automatic discharge, to apply to the sheriff to have your discharge deferred. You will be given the opportunity to object to such an application [section 54(4)] but the sheriff may defer your discharge for repeated periods of up to two years. Further applications for deferment can also be made at least 3 months before the (deferred) date of discharge. Whenever you are discharged, whether following a deferment or automatically after 3 years, you may apply to the Accountant in Bankruptcy for a Certificate of Discharge [section 54(2)]. (There is a small fee for providing this certificate.)

You should note, however, that the trustee is not discharged from their responsibilities when you are discharged. They must remain in office until they have carried out all his duties, including, of course, realising any of your assets which vest in him and which remain unsold.

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Composition with creditors

At any time during the sequestration you 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. The creditors 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

When they have made a final distribution of funds, and/or there are no assets left in the estate, and no further functions for them to perform, the trustee will prepare their final account for audit and indicate his 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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Payment of dividends to creditors

If the permanent trustee is able to pay a dividend to your creditors, they will tell you what he intends to do and that you have a right to appeal to the sheriff if you object to his acceptance or rejection of any creditor's claim [section 49(6)].

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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 December 2004