Since changes were made to the Bankruptcy Act 1985 (the “Bankruptcy Act”) in 2008 it has been possible for sheriffs to continue sequestration petitions for up to a maximum of 42 days. This was a change from the previous position whereby sequestration petitions could only be dealt with by the grant of the award or dismissal, and was brought in in recognition of the common practice adopted by many sheriffs. However, in our experience, this has led to the situation whereby it is now not uncommon for successive continuations to be awarded, which exceed the 42 day maximum in total.
The recent case of Lord Wallace of Tankerness Q.C., The Advocate General for Scotland, for and on behalf of the Commissioners for Her Majesty’s Revenue and Customs v King has sought to challenge the granting of excessive continuations and this is discussed below.
A petition for the sequestration of James King was brought in Stranraer Sheriff Court and at the first hearing, on 23 October 2014, the Sheriff allowed a continuation of the maximum of 42 days to allow the debtor time to settle the debt. On the 42nd day (4 December 2014), the case was heard again (this time before a visiting Sheriff) and the court was asked for the debtor to be given until the end of that day to settle the debt. That visiting Sheriff instead suggested that the case be continued until the next civil court day (18 December 2014), and there was no objection from the petitioning creditor to this suggested course of action.
The case next called in front of a different visiting Sheriff who was asked to make an award of sequestration – there being no dispute that the original Sheriff had been satisfied that the required provisions in the Bankruptcy Act had been satisfied. The second visiting Sheriff, however, decided that the granting of a further continuation until 18 December 2014 was incompetent in terms of the Bankruptcy Act and held that an award of sequestration could not be made in a process where the court was acting ultra vires – he dismissed the petition completely.
This decision was appealed by the creditor and was heard before Sheriff Principal Lockhart. He took the view that although the second continuation was incompetent (and therefore of no power or effect), the correct course of action of that second visiting Sheriff should have been to award sequestration at that point (although the continuation had been granted outwith the terms of the Bankruptcy Act), rather than to dismiss the petition in its entirety. Further, the debtor had suffered no prejudice as a result of the second continuation, only a benefit in being given additional time to settle the debt. The dismissal was recalled and sequestration granted.
However, the terms of the Bankruptcy Act also state that the award of sequestration will take effect from the date of the warrant to cite – so, even although the award itself was not made until 20 January 2015, Mr King was sequestrated with effect from 22 September 2014. By the time the trustee was able to take office and get access to the debtor’s estate, the debtor had already effectively been sequestrated for 4 months. A trustee will need to be aware of this as any borrowing incurred, or assets acquired, by the debtor between the date of the warrant to cite and the date when the trustee takes office may require to be investigated by the trustee. In this case the cumulative continuations totalled 56 days and therefore the absence of prejudice to the debtor may have been clear. However, it is not uncommon for cumulative continuations to total many more days, weeks and sometimes months and prejudice to either the debtor or creditor may be more apparent. The door therefore remains open to future challenges along these lines.