Scottish Sheriff Court Decisions

JUDGEMENT OF SHERIFF PRINCIPAL BA KERR, QC   in the cause   THE ACCOUNTANT IN BANKRUPTCY   Pursuer/Respondent   against   PETER BUTLER   Defender/Appellant     ­­­­­­­­­­­­­­­­­________________

 

 

Act: Mr Campbell, Advocate

(per Messrs John Henderson & Sons, Dumfries)

Alt: Mr Lynch (Messrs McCluskey Browne, Kilmarnock)

 

 

 

KILMARNOCK, 12 January 2007

The Sheriff Principal, having resumed consideration of the cause, Allows the appeal and Recalls the interlocutors of the sheriff dated 3 and 28 November 2005; Sustains the second plea-in-law for the defender and Dismisses the action; Certifies the appeal as suitable for the employment of junior counsel; meantime Reserves all other questions of expenses and appoints a hearing on expenses to take place on a date to be hereafter fixed.

 

 

BA Kerr

 

 

 

NOTE:

Introduction

In this action the pursuer seeks certain declarators designed to cure some difficulties he has encountered as a supposed trustee in bankruptcy in ingathering and dealing with the estate of the defender whom he maintains has been sequestrated by an order of the Sheriff at Kilmarnock. The defender, Peter Butler, carried on business under a trading name of "HB Engineering" which incurred certain debts which were assigned by the creditors therein to The Royal Bank of Scotland Commercial Services Ltd ("the Bank"). The Bank raised an action against HB Engineering for recovery of the debts and obtained decree in absence therein. Having obtained an extract they raised a charge which did not bring forth payment. They then raised a petition for the sequestration of HB Engineering and on 5 May 2004 the Sheriff at Kilmarnock duly awarded sequestration of the estate of HB Engineering in the usual form and appointed the present pursuer to be interim trustee. In the present action the pursuer avers inter alia that the Bank have been asked to obtain an order "clarifying the identity of the bankrupt estate" but have declined to do so thus rendering the action necessary. The writ includes a sixth crave seeking an award against the Bank of the expenses of the action although they do not appear as defenders herein but there is a fourth crave for warrant to intimate the writ to them.

 

Apart from those above mentioned the writ contains three declaratory craves and one seeking expenses against the defender. The declarators sought are, in summary, to the following effects: (i) that Peter Butler as at 5 May 2004 was trading as a sole trader under the business name HB Engineering; (ii) that the estate of Peter Butler belongs to the debtor's creditors following the award of sequestration on 5 May 2004 in the aforesaid petition; and (iii) that the award of sequestration on 5 May 2004 appointed the present pursuer "as interim trustee of Peter Butler". The essential history of the matter as narrated in the preceding paragraph is set forth by the pursuer in his averments and he goes on to aver that the true debtor in respect of the decree on which the sequestration was based was Peter Butler, that Peter Butler and HB Engineering are one and the same and that the estates of Peter Butler have been sequestrated by the award of 5 May 2004. The defender in answer to this admits that HB Engineering was a trading style used by him and that he was the true debtor in respect of the decree on which the sequestration was based. He goes on however to refer to Ordinary Cause Rule 5.7(1) and to state that a decree against HB Engineering would have formed a proper basis for a sequestration petition against himself but that the existing sequestration proceedings are inept and incurable. The pursuer in addition avers that the defender was a sole trader and "the sequestration petition should have run in the name of Peter Butler, trading as HB Engineering", all of which the defender in response admits.

 

The case came to debate before the Sheriff at Kilmarnock on the defender's first two pleas-in-law, which respectively are pleas to the competency and relevancy of the action. The sheriff having taken the matter to avizandum declined to dismiss the action and instead repelled the defender's said preliminary pleas and allowed a proof, awarding the expenses of the debate to the pursuer. In doing so he appears from his note to have proceeded very much in reliance on the extent of the defender's admissions of the factual position set out above. Against this decision the defender has appealed to the sheriff principal.

 

Before me at the hearing of the appeal parties were agreed that in the event of my holding the sheriff's decision to have been correct a proof was unnecessary and I should proceed forthwith to grant decree in terms of the three declaratory craves of the writ but that in the event of my holding the sheriff to have reached an incorrect conclusion I should recall his interlocutor and dismiss the action. It was also accepted on both sides that the action was competent in the sense that a declaratory remedy is a competent means of clarifying the meaning of a decree pronounced in another process (such as an award of sequestration): from the sheriff's opinion set out in the note to his interlocutor it appears that the fundamental competency of such a remedy for such a purpose was very much in dispute before him and that much time and attention was devoted to that matter at the debate. Parties before me were however at odds as to whether it was appropriate or proper for the declarators here sought to be granted by the court in the circumstances of the present case and this, which was the chief issue in the appeal, was variously referred to as a matter of competency or as a matter of relevancy. For myself I am inclined to view it as an issue more of relevancy than as one of competency but the distinction has little practical bearing on the result of the appeal.

 

Submissions of Parties

For the defender and appellant it was maintained that it was not possible by declarator to cure a nullity, which in the circumstances was what the present action sought to do since it was not possible to sequestrate a non-entity as the petition for sequestration here had set out to do. The sequestration petition had sought an award of sequestration of the estate of "HB Engineering", an entity which did not exist in that it did not have an existence of its own separately from Peter Butler who was not mentioned in the petition. While it had been competent according to modern practice for the Bank originally to sue for recovery of the outstanding debts using the trade or descriptive name "HB Engineering" alone, as permitted expressly by OCR 5.7(1), it was not permissible to use the decree obtained in that action as a basis whereon to apply for sequestration of "HB Engineering" because sequestration was not a "diligence" within the meaning of OCR 5.7(1) and only a true person can be sequestrated so that any sequestration petition had to run in the name of that person. In support of the various propositions underlying this contention I was referred to a number of authorities including Joel v Gill (1859) 22 D 6; Bankruptcy (Scotland) Act 1985 section 37(1); an article on Diligence by Professors Gretton and Maher in volume 8 of the Stair Memorial Encyclopaedia at para 106 (1992); Barnie v Stevenson 1993 SCLR 318; and McBryde on Bankruptcy (2^nd ed, 1995) at paras 4-37, 4-39, 4-40, 4-42 and 13-28. I was invited to hold the sequestration proceedings which had been followed out here to be a nullity not curable by any number of declarators and accordingly to recall the sheriff's interlocutor, sustain both of the defender's preliminary pleas and dismiss the action.

 

For the pursuer and respondent I was referred to the same authorities and also to Smith v Rischmann (1869) 8 M 100 and to Goudy on Bankruptcy (4^th ed, 1914). The position adopted by counsel was that OCR 5.7 is cast in broad terms and a designation sufficient to raise an action against a defender in reliance on it was sufficient also for the raising of a petition for the same debtor's sequestration. The sequestration proceedings to which the present action relates were accordingly not a nullity since OCR 5.7(1) conferred an entitlement to proceed in the manner which had been here adopted. A designation sufficient for use in a writ or summons was satisfactory for a sequestration petition so long as no creditors were being misled: this was illustrated by the authorities mentioned immediately above. A creditor might well not know any more of his debtor than a trading or a descriptive name and should be entitled to go the whole distance of sequestration using only the name known to him. The passages in Professor McBryde's work on Bankruptcy to which I had been referred by the opposing solicitor were said to beg the question since they failed to take account of the existence of OCR 5.7(1) which was not mentioned by the learned professor who, it was suggested, might not have written some of those passages as he did had account been taken of that rule. Counsel accepted the proposition that if the sequestration petition was fundamentally null then it could not be cured by any declarator but his submission was that it was not a nullity but had instead proceeded in accordance with the provisions of OCR 5.7(1). I was invited on this basis to refuse the appeal and grant the declarators sought in the writ.

 

Opinion of Sheriff Principal

Fundamentally in my opinion it is in the normal case only an individual proper person who can be rendered bankrupt and have his estates sequestrated for the benefit of his creditors. (Other possibilities are provided for in section 6 of the Bankruptcy (Scotland) Act 1985 but it is noteworthy that they are all there described as "entities".) Similarly it is only a corporate persona duly incorporated under the Companies Acts which can be put into liquidation and have its assets taken by that process for redistribution among its creditors. It is not proper or possible for a mere trading or descriptive name, which is not itself an entity, to be sequestrated (or for that matter liquidated) and it follows in my view that a petition for the sequestration of a person must run in the name of that person and not merely in a trading or descriptive name unless there is some recognised rule of practice or procedure which provides an exemption from this logical requirement. For this there is I think sound reason in that a person may well have personal or domestic creditors beyond those of his business who are entitled in theory at least to know that an application is being made by another creditor for the sequestration of their common debtor and if they are unaware of his trading names or descriptions their prospects of discovering that such a process is afoot are remote unless the petition for his sequestration runs in the name of the actual person whose estate it is sought to have sequestrated. In the present case for instance the domestic or personal creditors of Peter Butler, if there are any, are going to hear about his sequestration (assuming they did not know him as "HB Engineering") only when they discover the existence of the present declaratory action, which bears his name, or when the trustee hereafter starts on the procedure of notifying other creditors, calling meetings and so on - in either event long after the actual sequestration of Peter Butler had occurred if the present action is well founded.

 

In the present appeal it is contended that OCR 5.7(1) provides just such an exemption. It certainly provides such an exemption in a straightforward action, eg for recovery of a debt, which otherwise would have to proceed against the actual person as defender naming him as such. It provides moreover such an exemption for the doing of diligence against the person on an extract decree obtained in the action pursued against the trading or descriptive name. But the question in this appeal is whether it provides such an exemption for the raising of sequestration proceedings against the person behind the trading name. For resolution of that issue the question comes to be whether the word "diligence" as it is employed in OCR 5.7(1) is apt to comprehend sequestration proceedings or not.

 

As previously indicated I was referred to a number of authorities and decided cases. The decided cases to which I was referred were for the most part not in point when properly examined. In Joel v Gill (1859) 22 D 6 the question was not whether a descriptive or trading name would suffice in a petition for sequestration but whether a designation of the petitioner as "William Gill ... now residing at Tobermory" was sufficient in a petition presented by a bankrupt for his own sequestration when the majority of his creditors knew him and had dealt with him as a barrister of Lincoln's Inn in London. The designation was held sufficient as the petitioner was still designing himself as a proper person, albeit at a new address in Scotland and without reference to his professional standing. The case was cited to me for dicta of the Lord Justice Clerk to the effect that sequestration is a diligence (page 11 at foot) and to the effect that whatever is a good designation for a summons is equally good in a petition for sequestration (page 13 at top). The first of these pronouncements is in my view very much an obiter dictum and not in accord with modern thinking (see below) while the second remains an observation made in a context of considering not the sufficiency of a trading name but the use of one designation and address in place of another to denote the same proper person using his correct name throughout.

 

Similarly in Smith v Rischmann (1869) 8 M 100 the question was not whether a descriptive or trading name would suffice in a petition for sequestration but whether a person who had traded in England under a name which was not his real name could petition for his own sequestration in Scotland using his proper name. Certain of his English creditors sought recall of the sequestration on the ground that it had proceeded on a misdescription but the court held that an application for sequestration by a person proceeding under his real name could not be impugned and it appeared moreover that the creditors who sought recall had not been misled but had had notice that the applicant was indeed the person with whom they had had business dealings.

 

In the fourth edition of Goudy on Bankruptcy it is stated in the third paragraph on page 128 straightforwardly that the debtor must be properly designed so as not to mislead creditors and that "as a rule" designations sufficient in ordinary summonses will also be sufficient in sequestration petitions. These statements are supported by four cases in a footnote but none of them are examples of cases involving the employment of a trading or descriptive name.

 

Section 37(1) of the Bankruptcy (Scotland) Act 1985 sets out the effect of an award of sequestration on diligence done in respect of any part of the debtor's estate in terms which clearly distinguish between sequestration and diligence.

 

In his article on Diligence contributed to volume 8 of the Stair Memorial Encyclopaedia at paragraph 106 Professor Gretton points out the need to distinguish diligence from sequestration and liquidation, contrasting the former in which an individual creditor acts for his own benefit against a single asset or class of assets on a "first come, first served" basis with the latter in which an independent trustee or liquidator takes over the totality of assets for the benefit of all creditors who generally rank equally.

 

In Barnie v Stevenson 1993 SCLR 318 Sheriff JC McInnes QC (as he then was; later Sheriff Principal of South Strathclyde Dumfries & Galloway) held an application for sequestration not to be a form of diligence in circumstances where a reponing note had been lodged in an effort to stave off the granting of an award of sequestration in reliance on a rule of court stating that "a reponing note ... shall have effect to sist diligence"; sequestration was accordingly awarded. In so deciding the learned sheriff was interpreting "diligence" where it appeared in that part of the sheriff court rules relative to reponing as not including sequestration (the equivalent rule in the present rules of court being OCR 8.1(4)).

 

In chapter 4 of Professor McBryde's work on Bankruptcy a section running from paragraph 4-37 to paragraph 4-47 is devoted to consideration of the effects of applying for sequestration of non-existent or incorrectly named bodies. It is true that the learned professor nowhere mentions or considers the terms and effect of OCR 5.7(1) but I do not accept the suggestion made to me that he might or would have written this part of his textbook differently had he taken account expressly of that rule. The section commences at paragraph 4-37 with the statement that the scheme in the 1985 Act assumes that the body to be sequestrated actually exists and goes on to point out the need for care and accuracy in proceeding to sequestration and especially in not relying simply on the debtor's designation appearing in the decree constituting the debt. At the start of paragraph 4-40 the learned author commits himself to the express statement that the proceedings are null where the body sought to be sequestrated does not exist and gives as an example the sequestration of AB being not a legal entity but the trade name of debtor A. In paragraph 4-42 when dealing with incorrect designation of an admittedly existent organisation sequestration is described as "a collection of diligences" in the context of emphasising the need for a high degree of accuracy in the name of the debtor against whom diligence is to be done or who is to be sequestrated. In a later chapter at paragraph 13-28 the learned professor speaks of sequestration as having the effect of a diligence and then refers immediately to the case of Barnie v Stevenson mentioned above as an authority for the view that sequestration is not a form of diligence.

 

The whole trend of these authorities tends as I read them toward the conclusions (a) that a non-existent entity cannot be sequestrated and a petition for sequestration of an apparent non-entity is accordingly a nullity; and (b) that sequestration is not to be viewed as a mere diligence but is something above and beyond diligence requiring an even greater degree of precision in the identification of the debtor entity whose estate is to be sequestrated rather than merely attached. Nowhere among them is there a statement which expressly or by necessary implication declares the use of a mere trading name to be sufficient in a sequestration petition and the idea that sequestration might be seen merely as a form of diligence is given expression only in an early obiter dictum (of the Lord Justice Clerk in Joel v Gill in 1859) which all later authority seems to be against. I find it difficult or impossible to believe, in light of his pronouncements summarised above in the relevant parts of his work on Bankruptcy, that Professor McBryde would if presented for specific consideration with the terms of OCR 5.7(1) be inclined to treat sequestration as subsumed within the word "diligence" as it is employed in that rule of court.

 

In my opinion that question posed earlier (namely whether or not "diligence" in OCR 5.7(1) is apt to comprehend sequestration proceedings) is to be answered in the negative. I do not regard sequestration as it is normally understood as being a form of diligence. Diligence, as Professor Gretton broadly puts it in the article under that title contributed by him to the Stair Memorial Encyclopaedia (Volume 8 at paragraph 106), is a procedure whereby the individual creditor follows out the recovery of his individual debt for which he has obtained a decree of the court or other document of debt. Sequestration on the other hand is not confined in its scope to recovering the debt of the individual creditor but has as its object the adjusting of the rights of all the creditors inter se and with the debtor so that all may be satisfied so far as possible out of his sequestered estate. For this purpose the estate or assets are placed in the hands of a trustee or liquidator who is an officer appointed by the court to take account of the interests of all the creditors. It is sometimes said that sequestration is an equalisation of diligences, plainly implying that it is not itself one of those diligences. The wording moreover of OCR 5.7(1) views diligence as something which proceeds on an extract decree obtained in an action of debt or obtained on a document of debt as if it were an extension of that action or document and not a new proceeding with its own process such as a petition for sequestration of the debtor would be. I do not think the progenitors of OCR 5.7(1) can have envisaged that the word "diligence" there employed would be interpreted in the context of the rule as including sequestration so as to allow creditors to apply for sequestration of their debtor without fully identifying him as a proper person. It appears to me entirely sensible and in accord with proper practice that a creditor, while permitted to proceed against his debtor under the trading name initially known to him for the purposes of raising an action and obtaining a decree and then doing normal diligence thereon, must if he wishes to proceed further to the point of sequestrating his debtor then investigate matters more fully in order to ascertain the proper name of the person who is truly his debtor and employ that proper name in applying for that sequestration for the benefit generally of the wider world and in particular of all the debtor's other creditors. There has been a tendency in recent years among some who act for creditors to utilise sequestration or liquidation procedure as a means of applying pressure to a debtor to pay the debt of the one particular creditor for whom they act by raising a petition for sequestration or liquidation, obtaining the appointment of an interim trustee or provisional liquidator and then withdrawing the proceedings when the debtor pays his creditor's debt together with the expenses of the procedure which have been incurred. In so doing they may appear to be using sequestration procedure as an equivalent of doing diligence, but improperly so in my view and I regard this practice as dubious and one which nothing should be done to encourage.

 

The sheriff's opinion as set out in his judgement appears to me to have been much concerned with other matters not argued before me at the appeal hearing but in so far as it dealt with the central issue of whether a petition for sequestration can in reliance on OCR 5.7(1) be raised against a trading or descriptive name without mention of the proper name of the true debtor and answered that question in the affirmative I consider the sheriff's opinion to be incorrect. It follows from what is said above that I regard the sequestration petition in the present case, proceeding as it does on the basis of a trading name only, as incompetent and a nullity together with all that has followed upon it including the appointment as trustee of the present pursuer. A nullity cannot be cured by an action of declarator and the present action should accordingly have been dismissed as irrelevant by the sheriff who should have sustained the defender's second plea-in-law. The present appeal will therefore be allowed and an interlocutor dismissing the action substituted for those of the sheriff.

 

Expenses

A motion was made and not opposed for certification of the appeal as suitable for the employment of junior counsel. I consider it appropriate to grant this motion.

 

Counsel for the pursuer and respondent suggested that all questions of expenses should be reserved for consideration at a further hearing; the solicitor for the defender and appellant was not averse to such a course. I have to say however that in the result I have difficulty in seeing that any questions justifying such reservation can really arise. The appeal has been allowed and the action dismissed, from which the natural consequence would appear to be that the pursuer and respondent should be made liable to the defender and appellant in the whole expenses of both the action and the appeal procedure. The only qualification to this mentioned to me was the possibility of a finding on expenses against the Bank in terms of the sixth crave of the pursuer's writ: that possibility would seem however to be a real one only if the pursuer had been successful in obtaining the declarators sought which he has not. I do not readily see how I can be asked to pronounce in the present process some order requiring the Bank to relieve the pursuer of his liability in expenses to the defender now that he has lost his appeal and had his action dismissed. If the pursuer thought he would have some right of recourse against the Bank in this respect he would I think have to work that out in some separate proceedings raised against the Bank for that purpose. On the merits of such a claim if pursued I make no comment. In any event the Bank are not a full party to the present proceedings and I fail as currently advised to see how a decree or other order can be granted against them in respect of expenses when they have not been made a defender to the action. It may be however that I am failing to perceive arguable matters relating to expenses which require a further hearing and in deference to that possibility I shall refrain in the circumstances from making a finding here and now in expenses and instead put the case out for a hearing on expenses on a date to be shortly fixed. In the event of parties agreeing what finding on expenses should be made and that no further hearing is truly necessary they can communicate their joint intention to the court and a further interlocutor can be pronounced of consent without further ado.

BAK