Blog: Debtor the winner in judicial scrutiny of bankruptcy case law



Andrew Foyle

Andrew Foyle, a solicitor advocate and litigation partner in the Edinburgh office of Shoosmiths examines a recent decision of the Sheriff Appeal Court in McGleish – v - Tough & Leslie

 

The case has considered, for what appears to be the first time, the question of whether in the context of a sequestration an insurance life policy is moveable property or a non-vested contingent interest.

The point is an important one.  If the policy is moveable property it will remain vested in the trustee for the duration of the sequestration.  If it is a non-vested contingent interest, then it will revert to the bankrupt after a period of time, provided the contingency doesn’t arise during that period. The period of time will vary depending upon which version of the Bankruptcy Acts governs the sequestration.

Consequently, the opinion of the Court, delivered by Sheriff Principal D L Murray on 31 July 2018 has provided the legal community with new case law, including within the context of sequestration, a precise definition of a non-vested contingent interest.

Facts of the case

A debtor appealed against a decision of the sheriff at First Instance, which found that a joint life insurance policy held by he and his wife was moveable property.  The debtor’s wife had died shortly after the debtor received his automatic discharge under the Bankruptcy (Scotland) Act 1985. The insurance company had paid the proceeds of the life policy directly to the trustee.

The effect of the sheriff’s ruling was that upon his wife’s death, the proceeds of the policy which were paid to his trustee in sequestration, were available for distribution to creditors.  If the policy were a non-vested contingent interest in terms of the bankruptcy legislation, he would have been entitled to the proceeds and they would not have formed part of the sequestrated estate.

The Appeal

The debtor appealed the sheriff’s decision and the point was argued before the Sheriff Appeal Court that considered a number of factors. This included the history of the rules around treatment of non-vested contingent interests in Scottish bankruptcy law.  Amongst points put to the sheriff, it was argued for the trustee that the fact a policy was capable of being assigned, rendered it moveable property.

Ultimately the Sheriff Appeal Court overturned the sheriff’s decision. It held that the policy was indeed a non-vested contingent interest and the proceeds ought accordingly to have been paid to the debtor.  In doing so the Sheriff Appeal Court held that the “fact of assignability is non-determinative” and noted that the “policy here has no value until any of the specified events occur”.  This was accordingly a contingency, and might never be purified during the currency of the sequestration.

In reaching its judgment, the Sheriff Appeal Court has given lawyers in Scotland a case with useful examination of provisions which have seen little judicial scrutiny since they were first enacted in the 1913 Bankruptcy (Scotland) Act.  Though the law has developed over the past 100 years, until now little thought appears to have been given to determining a precise definition of a non-vested contingent interest.

In reaching its decision, it is worth noting that the Sheriff Appeal Court did consider that the position may be different in the case of an insurance policy having a surrender value.