Section 39A of the Bankruptcy (Scotland) Act 1985 came into effect with the various BAD Act changes on 1 April 2008. However it is only now that its implications are felt as the three year anniversary of those changes comes around.

Section 39A applies to all sequestrations granted on or after 1 April 2008. It provides that where heritable property is owned by a debtor at the date of sequestration, and where that property is a ‘family home’ as defined by section 40, the property will cease to form part of sequestrated estate three years after the date of sequestration. At that time the property will reinvest in the debtor. Therefore 1 April 2011 was the first date on which such properties will have reinvested in debtors.

However, the property will not reinvest in the debtor if the trustee has taken one of a number of steps:

• the trustee disposes or otherwise realises the right or interest in the property;
• the trustee concludes missives for sale of the right or interest;
• the trustee sends a memorandum to the keeper of the register of inhibitions under section 14(4);
• the trustee registers a notice of title to the property;
• the trustee commences proceedings (ie lodges a writ or summons at the sheriff court) to obtain section 40 consent and/or a division and sale action and / or an action for vacant possession;
• the trustee and debtor enter into an agreement that the debtor shall incur a specified liability to his estate in exchange for which the heritable property will cease to form part of the sequestrated estate.

Unless one of these steps has been taken, the property is reinvested in the debtor three years after the date of sequestration – without any need for a disposition, assignation or other transfer.

This new provision forces trustees to make a positive decision on how to deal with a family home within this three year window. Failure to act at all will result in the property reinvesting in the debtor which could potentially lead to complaints or even claims by disgruntled creditors against any trustees who have simply let the three year period slip by.

Extensions to the three year rule

There is an exception to the rule that the three year period commences at the date of sequestration and that is if the debtor conceals the existence of the heritage from the trustee and the trustee does not discover the property until at least three months after the date of sequestration.

Further, the three year period can be extended by making an application to the sheriff to extend the period. It is at the sheriff’s discretion whether to grant such a request.

Practical implications

The slow property market: Clearly if the trustee sells the property within the three year period section 39A is of no consequence. If however a property sitting on the market for sale and the three year period is looming ever closer, the trustee would be advised to register a notice of title or memorandum on the register of inhibitions to ensure that the property does not reinvest before a sale is achieved.

Settlements to avoid sale: If, as is often the case, the trustee has agreed to accept instalment payments to the value of the trustee’s interest in the property, to avoid the family home being sold, such agreements should be formalised. The general practice to date is to reach agreement with the threat that if the payments are missed the trustee may seek a court order to allow the sale of the property. This is often the most effective way to encourage payment.

The trustee should now decide, when reaching such settlements, whether they would prefer to be able to press on with the sale of the property or whether they would wish to be able to enforce payment, perhaps by way of earnings arrestment, if settlement payments were missed. If the former, the trustee should raise the threatened court action and sist (pause) the action to monitor payments. If the latter, the trustee should formalise the agreement as provided for in section 39A(5).

If the interest in the family home is not particularly valuable when considered against the costs of obtaining section 40 consent from the court and the marketing and sale costs, then often the threat of a court action may prove to be an empty one. Reaching an agreement in terms of section 39A(5) that the debtor incurs a liability to avoid the sale is likely to be an attractive option in such cases as the trustee could then enforce payment by way of an earnings arrestment for example. This would avoid the cost and uncertainty of a section 40 consent action and attempting to sell on today’s property market. Conversely, if the trustee’s interest in the property is significant, the ability to sell the property should be retained by the raising and sisting of the required court action or the registration of a memorandum.

The alternative for the trustee is to register a notice of title however if settlement is then achieved as planned, the cost of a conveyance back to the debtor is incurred.

Pre 1 April 2008 sequestration

In respect of any pre 1 April 2008 sequestrations, section 39A is of no effect and the position is accordingly that any heritable property (whether or not a family home) owned by the debtor vested in the trustee at the date of sequestration subject to no legal reversion (Section 31). Accordingly there is no time limit which the trustee has to act before to realise that asset, albeit it is best practice to renew the inhibition.

Further information

For further information please contact Sara Grewar, Andrew Foyle or your usual contact within the Dispute Resolution Team.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.