Sequestration and Judicial Discretion
A recent judgement regarding recall of sequestration offers some welcome observations on judicial discretion in creditors' applications for sequestration and the availability of any subsequent argument for recall.
The facts
In a recent case, the petitioning creditor ("Hynds") obtained decree against the defender ("Ross") in respect of a sum of almost £160,000. On expiry of a charge for payment, Hynds then petitioned for Ross' sequestration. The case called on 30 July 2007 and representations were made by Ross then, and at a further two subsequent hearings. An Award of Sequestration was finally made on 3 September 2007. Ross did not attend this hearing, and sequestration was granted in absence. Ross then raised an action for recall on the basis that:-
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The petitioning creditor had failed to comply with the requirements under the standard security (the document of debt) and so was incapable of petitioning for the debtor's sequestration;
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The sheriff failed to ensure that a fair hearing took place within the meaning of ECHR, Article 6 having failed to continue the petition on hearing the petitioner had been admitted to hospital; and
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There were substantive reasons why sequestration should not have been awarded.
The Statutory Provisions
Section 12 of the Bankruptcy (Scotland) Act 1985 governs when an award of sequestration will be made. S12(3) provides that a creditor's petition for sequestration will be awarded “forthwith” where the sheriff is satisfied:-
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that the statutory requirements have been met: petition presented in accordance with the Act, proper citation of the debtor, intimation to the Accountant in Bankruptcy; and
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that the debtor is apparently insolvent.
At this point it is open to the debtor to show, under sub-section12(3A), cause why sequestration cannot competently be awarded or to make payment, or demonstrate that he is able to pay all of his debts.
Judgement
Morag Wise QC, sitting as a temporary judge, dismissed Ross' petition for recall and held that:-
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while the petitioning creditor may not have complied with the exact terms of the standard security this was irrelevant to the sequestration proceedings. It was open to Hynds to have previously challenged the document of debt and/or the Charge for Payment but in the absence of such a challenge, apparent insolvency had been constituted. Therefore the petition for sequestration was consistent with the statutory requirements; and
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for the deprivation of the right to a fair hearing to be meaningful, it has to be shown that compliance with Article 6 of the ECHR would have been likely to have had some effect. As was the case here, the sheriff has no discretion where no defence is stated under section 12(3A). When the case called the sheriff had to make an award of sequestration “forthwith” where satisfied that the debtor had been properly cited, the debtor was apparently insolvent and the formalities of the 1985 Act had been complied with. In terms of the 1985 Act, the Sheriff’s function at a sequestration hearing is administrative and there is no exercise of judicial discretion; and
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there is no requirement for the debtor to appear when sequestration is being awarded. In this particular case, the judge indicated that even if Hynds had appeared at the hearing on 3 September 2007, this would not have affected the outcome.
The judge also made it clear that in questions of fairness the court will look to the whole circumstances of the case. Where, as in this case, the petitioner was fully represented at every stage but the final hearing, an award is unlikely to be recalled.
Conclusion
This decision makes it clear that the 1985 Act (pre BAD Act 2007 changes) was not intended to afford discretion to Sheriffs at sequestration hearings where all requirements of the Act had been complied with. However, as many of us practising in this area know, some Sheriffs did exercise their discretion in continuing petitions for sequestration (as was the case here) despite the Act providing that either an Award of Sequestration should be made or refused. The BAD Act 2007 changes which are now in place provide for a more "debtor friendly" sequestration process, by widening the Sheriff's discretion to allow sequestration petitions to be continued for a period of 42 days where the debtor undertakes to make payment within this period. Arguably this provision would not have impacted on the present case as, contrary to the legislation in force at the time, Ross had the benefit of two continuations. It will however be interesting to see whether the new provisions will have any substantive bearing on the way that sequestration petitions are dealt with by the Courts.
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