Outer House case in which a trustee in sequestration sought to challenge four securities and three dispositions granted by Mr Fortune.

Background
The trustee was appointed over the sequestrated estate of Mr Fortune in February 2011. As a result, Mr Fortune’s estate vested in the trustee (for the benefit of his creditors) on 24 December 2010.  Mr Fortune owned a number of properties in Edinburgh and attempted to grant a standard security of 4 of the properties and a disposition of 3 of the properties in favour of Medwin Investments (the deeds were registered in April 2014).

Arguments
Medwin argued that, in terms of s44(4)(c) of the Conveyancing (Scotland) Act 1924[1], as 3 years had passed since Mr Fortune had been sequestrated without the trustee having completed title to the properties, the properties subject to the standard securities and dispositions no longer vested in the trustee meaning that the deeds in favour of Medwin were immune from challenge by the trustee.

At the heart of this case was a procedural failure in the recording of a sheriff’s order (pronounced in December 2010). Where a petition for sequestration of the debtor’s estate is presented by a creditor, the sheriff to whom the petition is presented must grant warrant to cite the debtor to appear before him (in order to allow the debtor to show why sequestration should not be awarded). When the sheriff grants the order, the sheriff clerk must send a certified copy of the order to the keeper of the register of inhibitions and adjudications for recording[2]. In this case (for reasons unknown) the certified copy of the sheriff’s order was not recorded.

Decision
Lord Jones agreed with the trustee’s contention that, in terms of the legislation, the three year period leading to immunity from challenge in respect of the deeds granted in favour of Medwin was dependent on the recording the sheriff’s order. As the order had not been recorded, the three year period had not begun to run and therefore could not be said to have expired prior to registration of the deeds in favour of Medwin (meaning that the dispositions and standard securities were not immune from challenge by the trustee).

However, during the case an additional complication emerged in that solicitors acting for the trustee advised the court that the trustee had applied for an order[3] waiving failures to comply with requirements of the legislation and restoring parties to the position that would have occurred were it not for the failure. That application led to the sheriff pronouncing two interlocutors. The first (on 6 February 2014) amended the warrant to cite and ordained the sheriff clerk to intimate the interlocutor and the order of 24 December 2010 to the keeper whilst “reserving to pronounce further”. The sheriff clerk sent a certified copy of the interlocutor to the keeper and it was recorded on 11 February 2014. The second interlocutor authorised the Keeper to record the certified copy of the order of 24 December 2010 and a memorandum of renewal extending the 3 year period and was recorded on 22 May 2014.

Lord Jones found that, although the sheriff may not have intended the certified copy of the order to be recorded until he made the second interlocutor, it had in fact been recorded. The effect of this was to retrospectively trigger the beginning of the three year period (from the date sequestration) meaning that at the time the dispositions and standard securities were granted the three year period had expired (and consequently the deeds may potentially have been immune from challenge).

However, Lord Jones also found that, although the three year period had passed, the Trustee retained the personal right to the properties which had vested in her on 24 December 2010. And, although expiry of the 3 year period prevented the deeds being challenged on the grounds of sequestration, because Medwin was aware that the trustee had a prior personal right to the property when Medwin acquired title to the property, Medwin was acting in bad faith and the deeds could be challenged on the basis of that bad faith. As such the deeds were reduced.  (Essentially, Medwin had fallen foul of what is known as the “offside goals rule” [4] which protects a person with a prior right from a second party who appears later and knows (or ought to have known) of the prior right but nevertheless attempts to obtain rights to the property anyway.)

The full case report is available from Scottish Courts here.

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[1] “No deed… granted… by a person whose estates have been sequestrated under … the Bankruptcy (Scotland) Act 1985,… relative to any land or lease or heritable security belonging to such person at the date of such sequestration or subsequently acquired by him shall be challengeable or denied effect on the ground of such sequestration if such deed… shall have been granted… at a date when the effect of recording… under subsection (1)(a) of section 14 of the Bankruptcy (Scotland) Act 1985 the certified copy of an order shall have expired by virtue of subsection (3) of that section, unless the trustee in such sequestration shall before the recording of such deed… in the appropriate Register of Sasines have completed his title to such land… or heritable security by recording the same in such register…”

[2] In terms of s14(1)(a) of the Bankruptcy (Scotland) Act 1985.

[3] In terms of s63 of the Bankruptcy (Scotland) Act 1985.

[4] The rule is described in Rodger (Builders) Ltd v Fawdry and Others 1950 S C 483.