Vesting of estate and dealings of debtor
Section 17 -Vesting of estate and dealings of debtor
65.This section amends sections 31 and 32 of the 1985 Act. These changes arise from issues which first came to light in the case of Sharp v Thompson, 1997 SC (HL) 66. Although that case concerned a person who had purchased property from a debtor subject to a floating charge, it highlighted issues relevant to sequestration. The Scottish Law Commission issued a discussion paper (No. 114) in 2001 dealing with these issues and proposing some changes to the law relating to sequestration. Then in 2004 the case of Burnett’s Tr. v Grainger, 2004 SC (HL) 19, which concerned a sequestrated debtor, clarified the position of a purchaser whose title was unregistered and reinforced the need for some of the reforms proposed by the Law Commission. This section makes a number of those proposed changes in light of the decision in Burnett’s Tr.
66.This section does four things (all of which are connected by a general theme of protecting a person who has for value purchased heritable property from a debtor, whether before or after the debtor goes bankrupt).
67.First, it provides that a trustee in sequestration is precluded from registering title to heritable property of a debtor for 28 days after the award of sequestration is itself registered. That enables a third party who has purchased property in good faith from a debtor to complete title by registration provided it is done with expedition (see new section 31(1A) and (1B) of the 1985 Act inserted by subsection (1)(a)).
68.Secondly, it makes clear that heritable property which a debtor has sold or otherwise transferred remains part of the debtor’s estate which is given over to the trustee in sequestration if the person to whom the property is transferred has yet to complete title by registration (this is linked to the first purpose in that a trustee’s rights can be defeated by the other person if that person registers first, and that person has a 28 day head start). This is considered to be the existing position in law but it is considered that this is based on the fact that section 31 of the 1985 Act treats sequestration as if it was an adjudication. The diligence of adjudication is abolished by this Bill so the position needs to be clarified (see new section 31(8)(aa) of the 1985 Act inserted by subsection (1)(b)).
69.Thirdly, this section makes clear that dealings with a debtor after the date of sequestration are void in any question with the trustee where they relate to property which the trustee gets at the date of sequestration and where they relate to property the debtor acquires after sequestration but which is passed to the trustee (the position regarding the latter is currently unclear, this provision resolves that uncertainty) (see the amendment of section 32(8) of the 1985 Act made by subsection (2)(a)).
70.Finally, the amendments make it clear that where a person deals with a debtor after the date of sequestration the dealing is not void if it relates to incorporeal (i.e. intangible) or heritable property, was done in good faith and for an adequate value, was done during the period of 7 days after the sequestration is registered (which allows for the period, sometimes called a “registration gap”, when a sequestration has been granted but there has not been enough time for it to appear in any register) and the person had no knowledge (and ought not to have had knowledge) of the sequestration. This change to the law on dealings with a debtor protects persons who deal with the debtor right around the time a sequestration is awarded and who could not know about the sequestration even if they take all the normal steps (i.e. they search the appropriate registers) (see the amendment of section 32(9) made by, and new section 32(9ZA) inserted by, subsection (2)(b) and (c)).