When individuals are made bankrupt in Scotland, the formal term is 'sequestration'. A trustee will be appointed to deal with the sequestration. That trustee will be responsible, amongst other things, for contacting creditors, assessing their claims, ingathering the assets of the debtor and converting them into cash in order to settle the costs of the sequestration and pay dividends to creditors.

In the case of the Trustee in sequestration of Derek Drummond v Derek Drummond, the debtor, Mr Drummond, was first sequestrated in 2007 ("the First Sequestration"). In 2011, the trustee in the First Sequestration ("the First Trustee"), raised an action ('the First Action') for recovery of possession of Mr Drummond's home ('the Property'). The trustee sought recovery of possession of the Property so that it could be sold, and payments made to satisfy creditor's claims from Mr Drummond's creditors. During the First Action, Mr Drummond's mother offered to pay the First Trustee £23,000 in exchange for the First Trustee's interest in the Property. The First Trustee accepted the offer, took no further steps in relation to the Property and dropped the First Action.

Mr Drummond was then sequestrated again at the end of 2011 ("the Second Sequestration"). The trustee in the Second Sequestration ('the Second Trustee'), raised an action for recovery of possession of the Property ('the Second Action').

In response to the Second Action, Mr Drummond argued that the Property was not part of his estate at the point of the Second Sequestration. At first instance, the Sheriff granted an order in favour of the Second Trustee for recovery of possession of the Property. Mr Drummond appealed the decision and the case called before three Appeal Sheriffs in the Sheriff Appeal Court.

On appeal, Mr Drummond argued: -

  • That the First Trustee had given up their rights in the Property to Mr Drummond's mother when she had purchased the First Trustee's interest in it. Mr Drummond argued that this meant the Property was not owned by him at the time of the Second Sequestration and as a result the Property had not 'vested' in the Second Trustee; and
  • Alternatively, that the Property was held by Mr Drummond in trust for his mother.

The Second Trustee's arguments

The Second Trustee argued that the transfer of the First Trustee's interest in the Property to Mr Drummond's mother was not the same as a transfer of ownership of the Property to Mr Drummond's mother. The Second Trustee argued a trustee's interest in a property was just a personal right to take ownership. Further steps would be required for a trustee to take ownership of the property. They argued that the First Trustee had not taken those steps and that as a result the First Trustee had not sold (i.e. transferred legal ownership of) the Property to Mr Drummond's mother. What the First Trustee had, in fact, done was only transfer their 'interest' in the Property. Ownership remained with Mr Drummond.

The Second Trustee also suggested to the court that what would normally be expected when ownership of a property was transferred, was absent in this particular case. In particular, it was argued that:-

  • There was no deed or other document between the First Trustee and Mr Drummond's mother evidencing the transfer of the First Trustee's interest in the Property to Mr Drummond's mother, let alone a transfer of ownership of it.
  • There was no detail about any declarations of trust or supporting documentation between Mr Drummond or his mother which would support the assertion that the Property was now held in trust by Mr Drummond.
  • There was no explanation of how the First Trustee could transfer ownership of the Property to Mr Drummond's mother when the Property was subject to a standard security which included a standard term preventing a transfer of the Property without the consent of the standard security holder.
  • The registered owner of the Property at the date of the Second Sequestration was Mr Drummond. The First Trustee had not converted their interest in the Property to a real right of ownership and because of that Mr Drummond remained the legal, registered owner.

The Law

The Sheriff Appeal Court decided that by virtue of s 31 of the Bankruptcy (Scotland) Act 1985, Mr Drummond's whole estate vested in the Second Trustee for the benefit of Mr Drummond's creditors. The Court relied on the judgment of Lord Justice Clerk Carloway in Joint Liquidators of Scottish Coal v Scottish Environment Protection Agency where he stated that s 31 of the 1985 Act creates a personal right in the trustee to acquire ownership of the property using accepted methods of doing so. This means that in terms of heritable property, the trustee does not own the land, but instead has a personal right to acquire ownership of it which they can elect to enforce or decline to do so. Further, any decision not to complete title is not an abandonment of property but it is a decision not to enforce a personal right.

The Decision

The Sheriff Appeal Court upheld the decision of the Sheriff at first instance and refused Mr Drummond's appeal. The particular issues decided by the Court were: -

  • It was held that the First Trustee at no time acquired a real right in the Property, which remained in Mr Drummond's name at all times.

Accordingly, the First Trustee could not have sold the equity in the Property to Mr Drummond's mother as the First Trustee had no more than a personal right to acquire ownership. The Court determined that Mr Drummond remained the owner of the Property at the date of the Second Sequestration.

The Court then considered Mr Drummond's alternative trust argument.

  • It was held that Mr Drummond's suggestion that the Property was held in trust by his mother, and in particular the legal requirements for the creation of a trust, were not properly set out in the written pleadings.

A transfer of the Property into a trust required to be documented per section 1 (2) (b) of the Requirements of Writing (Scotland) Act 1995 in a trust deed. No such document was produced to the Court, and no reference to its existence was made in the written pleadings.

Key takeaways 

This case highlights the importance of decisions taken by trustees when dealing with property in a sequestrated estate, particularly decisions as to how that property will be disposed of.

The key takeaways are:-

  • A trustee does not take ownership of a debtor's heritable property until they have taken the appropriate steps to transfer legal ownership of that property into their name. This would include the execution of the appropriate deed to transfer and register ownership of the property in the trustee's name.
  • Until a trustee has transferred and registered the legal title to the debtor's heritable property in their name, the trustee only has a personal right to deal with the property for the benefit of the creditors in sequestration.
  • If a third party makes an offer to 'buy out' the trustee in relation to the debtor's heritable property, that third party will only acquire ownership when the appropriate transfer or conveyancing deeds have been entered into and registered.
  • By virtue of being appointed by the Court as trustee, the debtor's estate vests in the trustee. For moveable property that vesting will be sufficient to subsequently transfer ownership, but for heritable property further, formal steps are required.

If you have any queries about personal insolvency from the perspective of trustee, creditor or debtor, please get in touch with your usual Brodies contact.

Contributors

Naomi Davies

Senior Solicitor