Sequestration Flashcards
What is sequestration?
It is the process whereby the court appoints an individual to take control of the assets of the debtor and realise them and distribute the proceeds of realising these assets to pay off the creditor.
The administration of sequestration is Scotland is governed by the Accountant in bankruptcy (see website?)
Sequestration is the term used to refer to the procedures available to apply to the courts to recover debts from an insolvent debtor. The procedures involve the court taking control of all of the property of the debtor (with a few exceptions) which is passed to a duly qualified and authorised third party for realisation and distribution to creditors according to clearly defined rules. The name of the third party is the Trustee in Sequestration.
Who can be sequestrated?
This is the default judicial insolvency procedure. The estates of individuals (natural persons), partnerships, unincorporated bodies/associations and trusts can all be sequestrated.
This includes universities.
What is the exception to sequestration?
The notable exception is registered companies and limited liability partnerships.
What is the sequestration procedure?
The general rules are set out in s 5 as amended (p 225-228 Avizandum) [**must read].
How do you initiate a sequestration?
A sequestration is commenced by a petition to a sheriff court or in certain cases to the Accountant in Bankruptcy (Low income low asset debtors).
⁃ Under s 5 1985 Act there are three (three possible routes into the system)
⁃ ***Route 1) Debtor initiates the process (petition by the debtor — used for natural persons primarily)
This is for low income, low asset debtors, governed by s 5 (s2ZA) [See slides****]
What is a low income, low asset debtor?
The first thing you need to do is to look at the common financial tool, which is governed by a Scottish SI. The Common Financial Tool Regulations SSI 290. This is a way to review the debtor’s income, which basically means that if the debtor is on a very low income or on benefits they are assessed as having “zero contribution”. If you are assessed by this then you can use the low income, low asset route (e.g. If you are on benefits).
But you can only use this route if your debts are less than £17,000. You also need to have at least £1,500 of debt to make it worthwhile. You must also have low assets: your total assets are to be worth less than £2000.
What is meant by your “total assets”?
These do not include exempt assets under the Bankruptcy Legislation. These are the essentials of human life which we discussed in relation to attachment (see attachment notes, e.g. Clothing, medical equipment, cooking utensils, tv, computer so long as reasonably required, car up to £3000 value, etc.). These are not taken into account when assessing the £2000 worth of assets.
What is the “one asset exception”?
If your assets are worth less than £2000, you cannot use the rule if one individual asset is worth more than £1000. Also, you cannot own land (obvious since no property will be less than £1000).
What does it mean when we say you must be cash flow insolvent?
e.g. You cannot pay your debts are they are due.
What hurdles are there to sequestration?
(1) If you have been sequestrated in the preceding 5 years you cannot use the process
This is because of discharge upon sequestration which wipes your debts clean. So you can make a “fresh start”. Discharge is a fresh start regime. This is in order to discourage persons running up debt then getting sequestrating and repeating it.
(2) You cannot have used the low income, low asset rules already (dealt with later)
⁃ This can happen either:
⁃ i) Where the debtor has the agreement of a qualified creditor (s 5(4)).
⁃ A qualified creditor is someone who is owed £3000.
⁃ If any qualified creditor agrees then the debtor can petition for their own sequestration.
⁃ or
⁃Route 2 ii) If the debtor has low income or low assets then they can initiate the process themselves (s 5(2B))
⁃ Must have debts of £3000,
⁃ not been sequestrated in the last 5 years
⁃ must be apparently/practically/absolutely insolvent
⁃ weekly income of less than £100
⁃ Total assets less than £1000[ If this is the case the debtor can initiate the procedure with the accountant in Bankruptcy - the person who has general oversight over the insolvency procedures in Scotland.]
This is at least one year for discharge and it is not automatically given.
[See slides]
⁃ Where the debtor initiates the process they apply to the Accountant in Bankruptcy (s 5(4B)).
⁃ Where the petition is made to the AiB, it is the AiB who awards sequestration[ So they have a quasi-judicial role in the process.].
When can a Qualified Creditor apply?
They can petition the sheriff to
A qualified creditor is defined in s 5(4) (look up)
They cannot apply in every case to make you sequestration they still have to go through procedural routes.
(i) The debtor must be “apparently insolvent” (s5(2)(b)(i)) and was in the four months before the petition is presented (s8(1)(b)).
- You must send the debtor a debt information and advice packet (this is so the debtor can consider the debt arrangement scheme).
What happens when the creditor initiates the process?
⁃ If the procedure is initiated by the creditor, they can only initiate it if they are owed a debt of at least £3000 (or if 2 or more creditors get together and between them they are owed at least £3000).
⁃ They can only commence sequestration after serving on the debtor a debt information and advice package (s 5(2D),(2E)).
⁃ Look this up - I think apparent insolvency is necessary for a creditor’s petition within 4 months before the presentation of the petition (s 8(1)).
⁃ Where the creditor initiates the process they apply to the sheriff[ NOT THE COURT OF SESSION.] (s 9) and this has to be notified to the accountant in bankruptcy.
When will a petition be successful?
⁃ Debtor application
⁃ Where a petition is to the Accountant in Bankruptcy by the debtor, the AiB has no discretion provided the debtor satisfies the general threshold requirements (see above). They must grant the application “forthwith” (i.e. Immediately) - s 12(1) 1985 Act.
⁃ Creditor application
⁃ If a creditor or trustee applies the debtor must be given the chance to defend (s 12(3A) - I think)
⁃ If the debtor raises one of these defences the court will either dismiss the case (e.g. if the debts have been paid) or if the debtor is offering to make payment the court will continue the case to give the debtor time to pay.[ So unlike the petition by the debtor to the AiB, the court are not granting an application immediately.]
[See slides*** and lecture 25 mins in]
When sequestration is awarded, what is the date of sequestration?
(see s 12(4))
⁃ The date is relevant because it is the date you count back from for the rules on gratuitous alienations and unfair preferences. Again it depends on whether the petition is made by the creditor or debtor.
⁃ Petition by the debtor:
⁃ The date of sequestration is the date the AiB awards the sequestration (reaches the decision) (s 12(4)(a)) [This is done forthwith - immediately - so there is no delay in the process].
- So the debtor can challenge the creditors justification for raising the action.
⁃ Petition by the creditor
⁃ The award of sequestration is backdated to the date the petition is initiated (the date the petition is cited on the debtor) (not the date the court grants the decree) (s 12(4)(b)).
- The Act talks about the “date of warrant to cite the debtor (i.e. Initiation of action — s12(2) and (4)).
- This is because the debtor could try to hold things up to make sure that transactions are no longer gratuitous alienations, etc.
What happens when sequestration is awarded? [See slide!!]
⁃ Once the award for sequestration is made it is immediately notified to the Keeper of the Registers. The Keeper will Register the award in the Register of Inhibitions (s 14 1985 Act). Under s 14[ So this is analogous to s 37 (where sequestration is a deemed attachment and a deemed arrestment).] a sequestration is a deemed inhibition over the debtor’s property.
⁃ This means the debtor cannot sell their land or grant a security over their land - if they do it will be open to challenge by the Trustee in Sequestration.
- Step 1: Section 14 provides that the award of registration needs to be registered in the register of inhibitions and adjudications. It then has effect as if it is an inhibition or adjudication. [Lecture 30 mins in]
- If it is a debtor application — the accountant in bankruptcy can nominate Trustee or become Trustee herself — s2
- In other debtor applications you can petition the court to have a named …
- However usually a trustee in Sequestration is appointed. [See slides].
