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Preventing bankruptcy & homelessness - GLC guide to opposing creditor petitions
In practice, many local authorities in Scotland are now (much more so since 2005/06) using bankruptcy to recover council tax arrears. Petitions for sequestration are being raised against homeowners with equity in their homes. Factors of tenements are also using bankruptcy to recover their fees and charges. It is not uncommon to see petitions for debts of around £2,000. The creditor's intention is to access the equity in the debtor's home by forcing the sale of the home via bankrutpcy. This is a severe and often disproportionate form of debt recovery for fairly modest debts.
Debtors can prevent bankruptcy by entering into voluntary repayment plans, or formal repayment plans via the Debt Arrangement Scheme (DAS). However, where repayment plans break down or a DAS debt payment plan is revoked, a creditor may present a petition for sequestration to the court. If you are a homeowner, how can you present bankruptcy?
The difficulty is that the current law on bankruptcy does not provide an opportunity for 'time to pay' once a petition calls in court; there is no express provision in the current Bankruptcy (Scotland) Act 1985 (as amended) for a case to be continued to allow the debtor to pay the debt. This is because section section 12(3) of the Bankruptcy (Scotland) Act 1985, provides that the court 'shall award sequestration forthwith' unless certain limited conditions apply. Many sheriffs take the view that they are not entitled to continue a case, standing the mandatory and directive terms of section 12(3).
However, a debtor can avoid being declared bankrupt at a first calling if he or she can satisfy the court that section 12(3A) of the 1985 Act applies. Section 12(3A) provides as follows:
Sequestration shall not be awarded in pursuance of subsection (3)
(a) cause is shown why sequestration cannot competently be awarded; or
(b) the debtor forthwith pays or satisfies, or produces written evidence of the payment or satisfaction of, or gives or shows that there is sufficient security for the payment of.
(i) the debt in respect of which he became apparently insolvent; and
(ii) any other debt due by him to the petitioner and any creditor concurring in the petition.
Thus a debtor should be able to avoid sequestration if he or she offers to secure the debt due over their home pending raising finance to pay off that debt, either by re-mortgaging or through other finance.
In practice, some local authorities are content for a debtor to sign a personal bond in favour of the council (for the debt due) and arrange for their conveyancing solicitor to provide an irrevocable mandate so that remorgaged funds are paid over to the local authority. In these circumstances, many local authorities may be willing to dismiss the petition.
However, where this is not possible (or where such an arrangement has broken down) the only option open to debtors may be to lodge 'Answers' (the equivalent of 'Defences') to the creditor's petition.
Such Answers may set out two lines of defence:
(1) Firstly, that section 12(3A) of the 1985 Act applies and therefore sequestration shall not be awarded this is a mixed question of fact and law. From the recent House of Lords case of Henderson v. Nova Scotia Ltd it is clear that where there are disputed issues of fact to be resolved this should be done by a judge at a proof. For section 12(3A) to apply you will need to show that there is sufficient security for payment of the debt: for example, show proof of the value of the house, offer to secure the debt pending raising of finance via remortgaging (which is usually the cheapest way to borrow money).
(2) Secondly, in interfering with the respondents property law rights, the court is on the face of it interfering with Article 1 of the First Protocol of the ECHR (schedule 1 of the Human Rights Act 1998) this can only be done to enforce laws deemed necessary to control the use of property and such enforcement must be proportionate. The debtor (the 'respondent') contends that bankruptcy would not be proportionate in this case - that position is also a mixed question of fact and law which requires an evidential hearing: see Agosi v. UK.
Thus the debtor
can move that the case be continued for a short period for settlement
and repayment, which failing an evidential hearing be fixed on the
petition and answers as lodged.
the court will not continue the case?
Section 12(3) provides that the court must grant sequestration forthwith unless subsection (3A) applies. The debtor can argue that subsection 3A applies, although the court and the petitioners are entitled to proof (e.g. that there is equity, that the debtor can grant a standard security, and is credit worthy for re-financing etc.,). Those matters require evidence to be led; however, if the court accepts on the pleadings that on a prima facie basis section 12(3) is disengaged, then the common law discretion of the court to sist or continue is available. There is nothing in the ACT OF SEDERUNT (SHERIFF COURT BANKRUPTCY RULES) 1996/2507 over-riding the courts power to sist: see also McPhail (Sheriff Court Practice) para 13.73 (at page 434) where it is noted that the onus is on party moving for a sist to satisfy the court that it is in the interests of justice that the proceedings should not be allowed to continue. If the court is not willing to continue a case, the debtor will have to consider whether they have grounds to lodge Answers and defend the case at a diet of proof (as discussed above).
If you are a homeowner facing bankruptcy you should consult a solicitor experienced in this field of law. The Law Society of Scotland may be able to provide details of firms who can undertake this field of work.
Please note that Govan Law Centre can only act for clients within Glasgow; and in practice due to our limited resources that often means clients within the South West of Glasgow only.