Court considers extent of AiB review of adjudication of claims
By Steven Wood, Practice Support Specialist (Insolvency)
10 June 2021
Steven Wood takes a look at a recent unreported Judgement by the Sheriff at Glasgow concerning the review of an adjudication of creditors’ claims by the Accountant in Bankruptcy (AiB) and that review’s subsequent appeal to the Sheriff Court.
Background
The debtor was sequestrated on 5 March 2018. On 15 October 2020, the trustee adjudicated upon creditor claims. An adjudication schedule was prepared and intimated to interested parties on 15 October 2020.
The petitioning creditor and his wife objected to those adjudications and applied for a review of the trustee’s decisions by the AiB in terms of s127(1) of the Bankruptcy (Scotland) Act 2016 (“the 2016 Act”). The petitioning creditor stated in his application that claims by creditors had been allowed when the claims were not genuine and were made by family and friends of the debtor. He also suggested that the trustee had not ingathered all of the debtor’s estate and gave three examples relating to shares in companies which owned valuable assets and heritable properties.
In relation to the disputed adjudications, these relate to three creditors:
- A loan of £55,000 from Shaheena Akhter (claim A).
- A loan of £110,000 plus interest (total of £196,307.13) from Khalid Masood and KM Investments Corp (claim B).
- A loan of £50,000 from Javed Ali and Kishwar Sultana (claim C).
In relation to claim B and claim C, each of the joint lenders had submitted their own claim for the full amount of the joint lending which the adjudication schedule had included in full.
AiB review
The AiB considered that the questions raised about other assets and transfers to family members were not relevant to the review of the adjudication decisions, advising that its review function only relates to the adjudication decisions. Those matters were therefore not addressed by the AiB.
In respect of all of the claims under review, the AiB stated that, although it was satisfied that the loans were made to the debtor, there was insufficient evidence from which to determine the amounts still due and that the total sums remained unpaid.
In respect of claim B and claim C, the AiB considered that the trustee’s adjudication admitting each creditor’s claim for the full amount gave the creditors an unfair preference over the other creditors in the case. It is understood that the trustee had intended to adjust the actual dividend payment when made such that the dividend in respect of each of the loan amounts would not exceed the debt across the parties to each of claims B and C, although this was not indicated on the adjudications.
The AiB, therefore, revoked the trustee’s decisions on 30 November 2020.
Appeal to the Sheriff
Following the AiB’s review decision, the creditors of claims A, B and C appealed to the Sheriff against the review decisions of the AiB in terms of section 127(5) of the 2016 Act.
The appeals were made on the grounds that:
- the AiB was not entitled to reach the decisions that there was insufficient evidence that the loan remained outstanding because that was not a ground of appeal relied upon by the objectors.
- the matters relied on by the AiB were matters of fact and the AiB was not entitled to revoke the decisions on the basis of inserting its own judgment on matters of fact unless the AiB had concluded that the trustee’s decision on those matters of fact was fundamentally flawed.
- the matters of fact taken into account related to the creditor’s inability to produce evidence of non-payment and evidence of payment being sought. Reliance on the non-production of evidence inverted the burden of proof in relation to creditor claims and indicated that the AiB’s decision depended upon an incorrect reading of section 123 of the 2016 Act. Evidence from the debtor was ignored.
- in considering the nature of the joint obligation the trustee had considered a factor that was not a ground of appeal relied upon by the objectors.
The AiB submitted that the Sheriff could only interfere with the AiB decision if satisfied that one of the grounds identified in MacPhail on Sheriff Court Practice at paragraph 18.111 was made out. The AiB also took issue with the suggestion that it is constrained by the terms of the objections put forward in the application for review.
The AiB further refuted that it had erred in dealing with sufficiency of evidence and considered that concerns about the documentation provided by the appellants did not invert the burden of proof. The AiB contended that it was entitled to take into account that no steps had been taken to pursue or confirm the debt and argued that no error had been made in the treatment of the joint claims or in the conclusion that the appellants could submit a further claim.
Sheriff’s considerations and decision
The Sheriff considered that there was no error made in accepting the objectors’ applications for review, stating that the AiB “is not limited to considering only any representation suggested by the objector or the creditor.
“Having identified a misunderstanding of the material facts in relation to the debts the AiB was entitled to consider all admissible and relevant evidence concerning the claim whether presented to the trustee or not”.
The Sheriff went on to state that the AiB is “entitled to look at matters of fact and to take a view on the sufficiency of the evidence regardless of the trustee’s view.
The AiB did not misinterpret section 123 and seek to invert the burden of proof. In considering sufficiency the AiB did not ignore the debtor’s statement; the statement was considered and deemed insufficient”.
The Sheriff further clarified that the trustee’s treatment of the joint obligations was an error in law and that the AiB was “correct to revoke the decisions on that basis”.
The Sheriff ultimately refused the appeals, finding that the AiB did exercise discretion properly and did not misunderstand or misuse evidence, stating “the matters taken into account were relevant; no relevant factors were ignored and no erroneous assumptions in relation to the law or the facts were made”.
Key points
Some key points from the Sheriff’s decision:
- The AiB was correct to reject representations that did not pertain to the adjudication of claims (surrounding the realisation of the debtor’ estate).
- The Sheriff considers that the review function is one in which the AiB is not constrained by the terms of the application for the review. It has the ability to consider the matter afresh and take into account all of the relevant circumstances of the case.
- If there are joint creditors, they should submit either one joint claim for the whole amount or separate claims for their respective shares. It is not competent to submit separate claims for the full amount.
- The Sheriff provides some commentary on the possibility of further claims being submitted by creditors if further information became available. This suggests at a very strict interpretation of section 122 of the 2016 Act, and the ability of trustees to exercise discretion to allow late claims.
Commentary
The Sheriff’s view on the general approach of either having a joint claim or separate claims for respective shares of a joint debt makes sense. While the treatment of ‘joint and several’ liabilities is clearly understood in a scenario where a single creditor has a liability owed by multiple individuals, care clearly needs to be taken not to adopt the same procedures where a single liability is owed to multiple creditors.
However, there are some concerning aspects to this decision. This is an unpublished Sheriff Court case so clearly isn’t binding. However, as a case directly impacting the AiB and its procedures, it is not unreasonable to assume that the AiB will take its lead from it when assessing future adjudication reviews.
In revoking the claims at its review, the AiB essentially inserted its own judgement that, while it agreed that the loans were made to the debtor, the creditors’ inability to produce evidence of non-payment and evidence of payment being sought had essentially meant that the claims were not proved to its satisfaction.
It is stated in the Judgement that in the decision letter the AiB comments that it was not unreasonable to expect the creditors to have provided the debtor with periodic statements or other correspondence referencing the debt owed, the amount which remained outstanding and the amount of interest that had accrued, stating that this is usual practice when a loan remains outstanding for any length of time.
However, there is no legal requirement to send out such reminders and statements and, while the usual practice being cited is certainly correct for credit institutions and commercial creditors, it is probably far less so for liabilities due to families or friends.
The AiB agreed with the trustee that the loans were made to the debtor. The trustee would presumably have had access to financial records of the debtor which would have evidenced any repayments being made. On the basis that the loan was evidenced, no repayment identified and the creditor had signed a statement of claim form which narrates the criminality of making a false claim, it does not seem unreasonable that the trustee concluded that there was prima facie evidence of the debt, as required by s122 of the 2016 Act.
Setting aside the issue of the amounts claimed, the claims were ultimately disallowed on the basis that the creditors couldn’t prove that they hadn’t received payment – evidence that for obvious reasons does not exist. While recognising the issues and perceptions around claims from family or friends, this seems to raise a number of questions about what constitutes appropriate evidence of a liability and what steps a trustee should be taking to be satisfied that claims are valid.
The trustee in this instance had exercised a level of discretion in relation to the matter and there appears to be no evidence that a manifest error was made in relation to the underlying validity of the claims. It could not be claimed to be a decision that no reasonable trustee would take in knowledge of the circumstances and, as such, it is very surprising that the AiB disregarded the professional judgement of the trustee and considered it appropriate to revoke the original decision.
BADAS
The AiB’s review function was introduced by the amendments to the Bankruptcy (Scotland) Act 1985 Act made by the Bankruptcy and Debt Advice (Scotland) Act 2014 (BADAS) (and subsequently consolidated in the 2016 Act).
The changes made by BADAS were never intended to introduce additional scope to the appeals process, they simply transferred responsibility for an existing function from the Court to the AiB. The terminology of a ‘review’ was to differentiate that process from a subsequent appeal to the Sheriff Court (as in this case), which was introduced as a safeguard following concerns about a judicial function being taken on by an administrative body. The extent of the AiB review process is discussed by the Sheriff in paras 13 – 15 of the Judgement.
There are now two Sheriff Court decisions (Sheriff Napier re sequestration of Nicola Hutcheon and this one) where the extent of the AiB’s review process has been considered. In both of these cases, the view appears to have been taken that the AiB’s review can have a wider scope than the normal rules of ‘judicial discretion’. Sheriff Swanson considered that otherwise “the review function is a review without substance.”
These of course take the AiB’s review process beyond that of the policy which was set out to be adopted in BADAS.
The ‘judicial discretion’ principles would of course, correctly, have resulted in the adjudication of claims B and C being rescinded. Of more concern is that in arriving at that decision there seems to have been a complete strip-out of the original review and re-adjudication of claims, based on prima facie evidence as set out in legislation, with the professional judgement of an experienced and qualified IP being overridden.
Consideration
These days there is significant use of technology to administer cases, including the recording of creditor claims and production of adjudication schedules. While it is not known whether any part of the issues relating to the adjudication of claims B and C may be attributed to the use of case management technology, careful consideration needs to be given to how the more unusual circumstances, such as joint creditors, are dealt with via case management systems.
While a claim from co-operating couples, for instance, may be readily dealt with following the receipt of a single claim form with both parties named as the creditor, this can easily be contrasted with two parties who have, in the intervening period, had a disagreement and each want to submit their own claim, with little or no documentation to support how a joint loan should correctly be split.
Notwithstanding your views on the decision reached in this case, it is always worth bearing in mind that creditor claims, and potential issues arising from them, should always be on a trustee’s radar. Although the procedural side of acknowledging, inputting and possibly even adjudicating on claims may not generally be dealt with at a senior level, there should always be senior oversight and consideration to where possible issues may arise.
This is particularly true in respect of cases where there is a dividend anticipated and some claims are of a contentious or out of the ordinary nature. Dealing with these matters at an earlier point in the process can head off issues further down the line.
Subscribe to the ICAS Insolvency Technical Update.