Vesting Flashcards
What is vesting?
This is the process whereby the rights and assets are simply transferred to an individual. If a right is said to vest, that is when it is acquired, so on the day a person is sequestrated that is the day that the assets pass to the trustee in sequestration.
Where are the rules for vesting found?
Rules found in ss 31, 32, 33 1985 Act.
⁃ MUST READ THESE.
What happens in cases of vesting?
In broad terms what happens is that the court order appointing the Trustee is a deemed conveyance of the property:
⁃ Section 31 - a general provisions of vesting. The whole estate of the debtor shall by virtue of the trustee’s appointment vest in the trustees as at the date of sequestration[ Which is backdated to the date of award if it is a debtor application or the date warrant to cite for the petition if a creditor application.].
⁃ So in effect the property is transferred to the trustee on a date PRIOR to the award of sequestration due to the backdating of the date of sequestration in creditor applications.
⁃ So under s 31 this transfers all heritable, moveable, corporeal, incorporeal property, subject to some exceptions.
What is the effect of vesting on heritable property?
⁃ In relation to land the Trustee has an unregistered conveyance over all heritable property - the ownership is not transferred automatically - it must be registered:
⁃ Burnett’s Trustee v Grainger
⁃ Burnett’s trustee had an award of sequestration which gave them the power to complete a notice of title over the heritable property. Look up for more detail
⁃ After Burnett’s Trustees two safeguards were put in place so that the Trustee is prevented from being able to Register the conveyance immediately.
⁃ Under s 31(1A) the trustee will not be able to register title for 28 days beginning with the date of registration[ I.e. in the Register of Inhibitions.] of the s 14 notice [this is a handicapped race to the register].
⁃ Additionally, s 32 gives some protection to a purchaser who acquired from a party that was already bankrupt and consequently incapax (although the sequestration had not been registered).[ Doesn’t seem too important.]
What is the effect of vesting on moveables?
⁃ Under s 31(4) on the date of sequestration moveable property (both corporeal and incorporeal) automatically transfers to the Trustee immediately. So the award of sequestration delivers the assets to the trustee.
⁃ In relation to corporeals they are deemed to have been delivered
⁃ In relation to incorporeals they are deemed to be an intimated assignation.
What happens if the debtor acquires an asset after sequestration?
e.g. on inheritance, damages award.
What is acquirenda?
Acquirenda (see: s 32(6) and (10)) (must read)
⁃ This is assets acquired by the debtor after sequestration but before sequestration comes to an end (discharge).
- Any assets acquired in the 4 years from the date of sequestration, belong to the creditors.
⁃ If you acquire an asset after sequestration this asset goes to the Trustee.
⁃ e.g.[ e.g. debtor raised an action of damages for a road accident. Their action was only decided after sequestration awarded. Damages were awarded and because they were received after sequestration but before discharge they went to the Trustee to pay off creditors.]
What are capacity issues?
See slides
What are the exceptions to capacity issues?
This is the situation where, because of the date of sequestration in a creditor application is the date the petition is presented,
If delivery of the disposition or the deed affected land takes place in the 7 days after sequestration, you are protected as a third party acquirer (s32(9)), which allows good faith for value transactions with of incorporeal..
What is excluded from sequestration?
1) Income after sequestration (s 32(1))
⁃ However if your income is excessive the Trustee can apply for an Income Payment Order which lets the Trustee receive a slice of income
- The trustee can apply for a Debtor Contribution Order (s32A) taking into account the common financial tool (can include equivalent of arrestment of earnings). Runs for 48 months (4 years).
⁃ 2) Property which is exempt from diligence (s 33(1))
⁃ E.g. assets held in dwelling house which are essential assets.
- Every asset exempt (see arrestment list e.g. children’s toys etc).
⁃ 3) Property held by the debtor as a trustee for the benefit of a third party s 33(2) [must read s 33]
⁃ The beneficiary’s personal right takes priority.
- (separate patrimony: Heritable Reversionary v Millar, above)
⁃ 4) Family homes (s 40)
⁃ If the debtor has a family home then the family members must agree to the sale of the property. If they don’t agree then the Trustee must apply to court to authorise the sale.
⁃ So although the Trustee has a judicial conveyance over the family home and they can complete a notice of title over it (transferring it to the Trustee) they need the authority of the court to sell it.
⁃ If they do not get the authority of the court then the property is transferred back to the debtor after 3 years (s39A 1985 Act - but now 4 years).
- So if the Trustee in sequestration wants to sell they must apply to the court early on so that they have the authority to do so.
⁃ The court can only authorise the sale taking into account the financial interests of the family members - the Court won’t make children homeless.
- The Act allows the sale of the family home where it is reasonable.
What are the duties of the trustee in sequestration?
⁃ These are essentially two-fold:
⁃ To recover, manage and realise the debtor’s estate.
⁃ To distribute the estate among the debtor’s creditors according to their respective entitlements See below for the order
- This is governed by the general principles of ranking. The issue with ranking rules is that they are largely common law (not in legisalation)
⁃ The duties of the trustee are set out throughout the 1985 Act (see especially s 3 (on functions), 39 (on management and realisation of assets) and 49 (on adjudication of claims).
What are the “Respective entitlements” of creditors?
This concerns the order of priority:
⁃ 1) Secured creditors and effectually executed diligence diligences
⁃ Remember this must be viewed in relation to each particular assets. So in relation to each individual asset the creditors must be payed in the appropriate order.
⁃ In relation to diligences they must not have been struck down under s 37(4) and not equalised under schedule 7 para 24.
⁃ The handout also mentions the rule in Stewart v Jarvie 1938 - DON’T UNDERSTAND WHAT THIS RULE IS - LOOK UP
⁃ In relation to the securities they must not have been struck down under the unfair preference rules.
- Prior tempore potiur uri applies.
2) Creditors in Diligence What if not proceeded to sale prior to sequestration: see s 37 of the 1985 Act. Note: the striking down rules, and the rule in Stewart v Jarvie 1938 SC 309
3) (Once the above are paid) Other creditors (s 51)
⁃ First: Trustee in sequestration fees (paid before every one else)
⁃ Second: Preferential creditors
⁃ Parri passu within this category
⁃ Third: Ordinary unsecured creditors (this includes the tax authority for unpaid taxes)
⁃ Parri pass within this category
⁃ Fourth: postponed creditors (persons who had a gratuitous alienation which has been struck down (this is a penal element) e.g. Mrs Chung from Short’s Trs).
⁃ Fifth: if there is any money left it goes back to the debtor (this is very uncommon)
NB if the expenses are eaten up, then the others get nothing. So if there is not enough money to make sure the preferred creditors get everything due to them they will rank pari passu.
If inadequate, note pari passu ranking – all rank equally.
Need to look up this bit - it wasn’t lectured on
What is the fresh start policy?
(50 mins in - see slide)
???????
If you have been uncooperative in the sequestration/held up, then you are not discharged as a debtor and you cannot make a fresh start.
What happens if an attachment or arrestment has been carried out but not completed before sequestration?
See s.37(4).
Stewart v Jarvie 1938 SC 309 [arrestment shortly before bankruptcy and sequestration].
R. Gaffney & Son Ltd (in liquidation) v Davidson 1995 SLT (Sh Ct) 36 [similar to above].
What happens if an inhibition has been carried out before sequestration?
See s.37(2). An inhibition against a debtor does not affect the trustee’s right over the property for sequestration purposes, unless obtained 60 days prior to sequestration. But if there are granted post-inhibition debts, the trustee will give effect to the inhibition in ranking.
See, Baird & Brown v Stirrat’s Trustee (1872) 10 M 414.
These issues have been flagged up previously as they apply to sequestration and liquidation.
The amendments are taken into account above and students are referred there.
