Is statutory interest payable on bankruptcy debts where debtor has applied for recall?
Edinburgh Sheriff Court has considered the applicability of statutory interest in the context of an application for recall of a sequestration. Steven Wood looks at the impact of the recent judgment issued by Sheriff Holligan.
Sheriff Holligan has issued a judgment which provides a degree of clarity on the issue of whether statutory interest is payable on liabilities when an application for recall is made on the grounds that the debtor is able to pay his debts in full.
The court was required to consider the proper interpretation of “debts” in the context of a recall of sequestration.
The whole matter was, therefore, one of statutory interpretation and the judgment sets out the stages the court must go through in determining the legal meaning of any statutory provision. It also sets out the contending arguments put forward by both sides.
In December 2015, HMRC lodged a petition for the sequestration of the debtor at Edinburgh Sheriff Court. The debtor was sequestrated in March 2016 and the AiB was appointed as the trustee. The sequestration pre-dates the Bankruptcy (Scotland) Act 2016 and is governed by the Bankruptcy (Scotland) Act 1985 (as amended). All references to “the Act” are therefore references to the 1985 Act.
In June 2016, HMRC submitted their claim in the sum of £17,886 to the trustee. In December 2016 and September 2017 the debtor submitted applications for recall. Both were refused by the AiB on the grounds that they did not receive confirmation that the trustees outlays and remuneration and all debts had been paid.
Following the two failed applications, in July 2018, the debtor again applied to the AiB for recall under section 17A(1) of the Act on the ground that he was able to pay his debts in full. In accordance with section 17A(3) of the Act, the application was intimated on HMRC.
HMRC responded intimating the view that statutory interest must be paid in order to secure a recall of sequestration. HMRC were informed that in the AiB’s view, they did not consider that HMRC were entitled to statutory interest.
Following some issues surrounding evidencing payment to the creditor, on 17 September 2018, a statement in accordance with section 17B of the Act was submitted, confirming that the debt had been paid in full.
On 19 September 2018 the application for recall of the sequestration was remitted by the AIB to the Court in terms of section 17F of the Act.
The issue for consideration by the court was whether statutory interest requires to be paid on debts due in a sequestration if an application for recall of a sequestration is presented on the grounds that the debtor is able to pay his debts in full.
The AIB considers that in terms of sections 17-17G of the Act no statutory interest is payable on any of the debts in the sequestration in those circumstances.
HMRC disagree and consider that a proper interpretation of “debts” in the context of a recall of a sequestration (per sections 17 to 17G of the Act) includes all debts that rank for payment of a dividend where a trustee in sequestration makes a distribution to creditors under section 51 of the Act. Accordingly, “debts” includes a reference to interest payable on ordinary and preferential debts and section 51 applies to section 17.
Sheriff Holligan points out that, in enacting section 17, Parliament made no specific provision for the payment of interest as a condition of recall. He, therefore, agrees with the AIB that express provision could have been made for the issue of interest and that the omission is of some significance. He goes on to state “I am not persuaded that statutory interest is included within the word “debts” as it appears in section 17 and other cognate provisions. Other parts of the statute clearly distinguish between debts and interest”.
He opines that recalling the sequestration may open up a debtor to contractual claims which were suspended by the sequestration and that if there is a contract entitling a creditor to interest which has not been paid since the sequestration began, recalling the sequestration may revive the right and the corresponding liability.
He concludes “I can foresee that there may be circumstances in which recall of the sequestration without some payment of interest might be inequitable quoad the interests of a creditor. For example, a petition for recall may come a long time after commencement of the process which may have particular adverse effects upon a creditor. I reserve my opinion as to whether it would be open to the court, in the exercise of its discretion, to refuse to recall the sequestration in order to avoid such an inequitable outcome.
It follows, that in my opinion, in this case, the debts have been paid in full.”
The judgment is useful in clarifying that that interest will not be automatically payable in recall cases where the debtor has applied for recall of a sequestration on the grounds that the debtor is able to pay their debts in full.
However, Sheriff Holligan has reserved his opinion on whether it would be open to the court to refuse recall in circumstances where non-payment of statutory interest would be particularly inequitable. A further hearing has been scheduled to allow parties to make representations in this regard and we await with interest further developments.
The judgment also indicates that recalling without payment of statutory interest may open a debtor up to contractual claims which were suspended by the sequestration. In other words, notwithstanding that recall is granted, the creditors may be within their rights to pursue the debtor for unpaid contractual interest.
Therefore, advising parties will need to be mindful that the debtor should be alerted to this risk when they are discussing a prospective recall application.