Commissioners for HM Revenue and Customs v Accountant in Bankruptcy

JurisdictionScotland
CourtSheriff Appeal Court
JudgeSheriff Principal CD Turnbull,Sheriff AM Cubie,Sheriff N McFadyen CBE
Judgment Date16 Mar 2020
Docket NumberNo 1

[2020] SAC (Civ) 5

Sheriff Principal CD Turnbull, Sheriff AM Cubie and Sheriff N McFadyen CBE

No 1
Commissioners for HM Revenue and Customs
and
Accountant in Bankruptcy
Cases referred to:

Madras Electric Supply Corp Ltd v Boarland (Inspector of Taxes) [1955] AC 667; [1955] 2 WLR 632; [1955] 1 All ER 753; 48 R & IT 189; 35 TC 612; 34 ATC 53; [1955] TR 57

Bankruptcy — Sequestration — Recall of sequestration — Application for recall of sequestration on basis that debtor had repaid debts in full — Whether “debts” included statutory interest from date of sequestration — Bankruptcy (Scotland) Act 1985 (cap 66), sec 17(1)(a)

Words and phrases — “debts” — Whether “debts” included statutory interest from date of sequestration — Bankruptcy (Scotland) Act 1985 (cap 66), sec 17(1)(a)

The Accountant in Bankruptcy remitted an application for recall of an award of sequestration to the sheriff in terms of sec 17F of the Bankruptcy (Scotland) Act 1985. The Commissioners lodged answers to the application. The cause called before the sheriff (WH Holligan) for a hearing on the application and answers. At advising, on 4 April 2019, the sheriff put the cause out by order to determine further procedure (Accountant in Bankruptcy, Applicant[2019] SC EDIN 30; 2019 SLT (Sh Ct) 235). The sheriff subsequently granted the application and recalled the award of sequestration. The Commissioners appealed to the Sheriff Appeal Court.

Section 17(1)(a) of the Bankruptcy (Scotland) Act 1985 (cap 66) provides, “The sheriff may recall an award of sequestration if he is satisfied that in all the circumstances of the case (including those arising after the date of the award of sequestration) it is appropriate to do so and, without prejudice to the foregoing generality, may recall the award if he is satisfied that– (a) the debtor has paid his debts in full”. Section 17(4) provides, “the effect of the recall of an award of sequestration shall be, so far as practicable, to restore the debtor and any other person affected by the sequestration to the position he would have been in if the sequestration had not been awarded.” Section 51(1) provides, “The funds of the debtor's estate shall be distributed by the trustee to meet the following debts in the order in which they are mentioned– … (g) interest … on– (i) the ordinary preferred debts; (ia) the secondary preferred debts; (ii) the ordinary debts, between the date of sequestration and the date of payment of the debt”. Paragraph (1) of sch 1 provides, “Subject to the provisions of this Schedule, the amount in respect of which a creditor shall be entitled to claim shall be the accumulated sum of principal and any interest which is due on the debt as at the date of sequestration.”

A debtor was sequestrated on the petition of the Commissioners of Her Majesty's Revenue and Customs (‘the Commissioners’). The debtor applied to the Accountant in Bankruptcy (‘the AIB’) under sec 17A of the 1985 Act for recall of the award of sequestration on the ground that he was able to pay his debts in full. The debtor paid the debt due to the Commissioners. The Commissioners objected to the application for recall on the ground that the debtor had not paid, and had no intention of paying, interest on that debt for the period after the date of sequestration (‘statutory interest’) which the Commissioners claimed was due in terms of sec 51(1)(g) of the Act. The debtor's trustee in sequestration submitted a statement to the AIB in accordance with sec 17B of the Act intimating that the debtor had paid his debts in full. The AIB remitted the application for recall to the sheriff in terms of sec 17F of the Act. The Commissioners lodged answers to the application. The sheriff held that the word “debts” in sec 17(1)(a) of the Act did not include statutory interest which could only arise on a distribution of funds by a trustee in sequestration under sec 51 and that the debtor, therefore, had paid his debts in full. The sheriff recalled the award of sequestration. The Commissioners appealed.

On appeal, the Commissioners argued that the requirement that a debtor pay his debts in full must properly be viewed as requiring creditors to receive payment in respect of all debts for which they ranked in the sequestration and so the word “debts” in sec 17(1)(a) of the 1985 Act referred to the categories of debts outlined in sec 51 of the Act. The AIB argued that the sheriff's interpretation had been correct.

Held that: (1) sec 17(4) of the 1985 Act expressed Parliament's intention that the effect of the recall of an award of sequestration would be, so far as practicable, to restore the debtor and any other person affected by the sequestration to the position they would have been in if sequestration had not been awarded and requiring payment of interest after the date of sequestration would place a creditor in a significantly better position than they would have been in if sequestration had not been awarded (para 21); (2) accordingly, the word “debts” in sec 17(1)(a) did not include any interest which had accrued after the date of sequestration and the debtor had paid their debts in full (para 22); and appeal refused.

Madras Electrical Supply Corp Ltd v Boarland (Inspector of Taxes) [1955] AC 667 applied.

The cause called before the Sheriff Appeal Court, comprising Sheriff Principal CD Turnbull, Sheriff AM Cubie and Sheriff N McFadyen CBE, for a hearing, on 7 January 2020.

At advising, on 16 March 2020, the opinion of the Court was delivered by Sheriff Principal CD Turnbull—

Opinion of the Court—

Introduction

[1] This appeal arises from an application for recall of a sequestration under the provisions of the Bankruptcy (Scotland) Act 1985 (cap 66) in which a dispute arose between the trustee in the sequestration, the Accountant in Bankruptcy (‘AIB’) and the petitioning creditor (‘HMRC’). The issue in the appeal is the proper interpretation of the word ‘debts’ in the context of sec 17 of the Act and whether that term includes interest.

Facts

[2] The facts which underlie the appeal are set out at length in the sheriff's judgment ([2019] SC EDIN 30]), which is reported as Accountant in Bankruptcy, Applicant. We do not propose to rehearse them at length. The salient matters are set out in the following three paragraphs of this opinion.

[3] VCY was sequestrated at Edinburgh Sheriff Court, on 3 March 2016, on the petition of HMRC. The date of sequestration was 10 December 2015. The AIB was appointed as the trustee in the sequestration. Subsequent to two prior applications, each of which was refused, on 10 July 2018, VCY applied to the AIB under sec 17A(1) of the 1985 Act for recall of the award of sequestration, on the ground that he was able to pay his debts in full.

[4] VCY's application was intimated on HMRC in accordance with sec 17A(3). In response to the application, HMRC's position was that statutory interest must be paid in order to secure a recall of sequestration. The AIB did not consider that HMRC was entitled to statutory interest. That position had previously been encapsulated by a letter which the AIB had sent to all trustees on 4 May 2018.

[5] The sum due to HMRC as at the date of sequestration and the petition expenses were duly paid. Thereafter, the agent acting on behalf of the trustee submitted to the AIB a statement in accordance with sec 17B and confirmed that their position was that the petition debt had been paid. HMRC objected to the recall of the sequestration on the ground that the debtor had not paid and had no intention of paying the statutory interest on the debt that was due to HMRC under sec 51(1)(g) of the Act. The application for recall of the sequestration was then remitted to the sheriff by the AIB in terms of sec 17F(2).

Sheriff's decision

[6] Having heard submissions from the AIB and HMRC (VCY did not participate in the remit), the sheriff concluded that VCY's debts had been paid in full. The award of sequestration was subsequently recalled, in terms of sec 17 of the 1985 Act (see sec 17F(3)). The basis for the sheriff's decision is to be found between paras 21 and 25 of his judgment. The sheriff points out that for the purposes of the Act ‘debt’ is not a defined term. He did not consider that the definition of ‘ordinary debt’ for the purpose of secs 73 and 51(1)(f) (which provides that an ordinary debt is a debt which is neither a secured debt nor a debt mentioned in any other paragraph in sec 51(1)) was helpful in resolving the present issue. The effect of sec 51 was that interest was only payable when all other debts had been paid. The Act was effectively...

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