A right to payment under a policy of life assurance, which became payable after a bankrupt's discharge, was a "non-vested contingent interest" which re-vested in the bankrupt on his discharge, rather than moveable property which remained with his trustee, the Sheriff Appeal Court has ruled.

Sheriff Principal Duncan Murray, Appeal Sheriff Andrew Cubie and Appeal Sheriff Norman McFadyen allowed an appeal by John McGleish from a decision of the sheriff at Paisley dismissing his action for payment.

In 2001 Mr McGleish and his wife took out a joint level life assurance policy with critical illness cover, with an 18 year term. Both were sequestrated in July 2008. Mr McGleish was automatically discharged in July 2009. His wife died in February 2010. The proceeds of the policy were paid to his trustee.

Mr McGleish contended that at the date of his sequestration his right under the policy was a non-vested contingent interest which vested in his trustee in terms of s 31(5), and on his discharge was reinvested in him under s 31(5A), of the Bankruptcy (Scotland) Act 1985 as amended. His trustee maintained that his right was moveable property which was covered by s 31(45) of the Act.

The sheriff held that as the right could be assigned, it constituted moveable property within s 31(4). The trustee further argued that the right had been vested in the debtor at the date of sequestration, and it was contrary to Parliament's intention to treat the policy as separate from moveable property.

Giving the opinion of the court, Sheriff Principal Murray said it seemed surprising that the application of s 31 to such an insurance policy had not been authoritatively decided, but there appeared to be no case directly in point. It was an error to say that because the interest was assignable, it could not be a non-vested contingent interest, as a right such as an expectation of succession could be assigned. The "direction of travel" of the bankruptcy legislation had been to bring more elements under the control of the trustee, but policy considerations had also sought to control the period until the bankrupt's rights were returned.

The court's conclusion was that the phrase “non-vested contingent interest” should not be given a restricted interpretation. The history of the legislation suggested a more expansive definition; and "Current policy considerations seek to balance the rights of the creditors to have access to the bankrupt’s estate to make recovery with the objective that after a suitable period that rights should return to the bankrupt. There is logic to a life policy being treated in a similar manner: namely, that if the contingency occurred during the period when the trustee is administering the assets of the debtor, the right to the policy proceeds should form part of the sequestrated estate, but if the contingency occurs after the debtor is discharged from the sequestration or at some later date determined by statute, the debtor should be free to benefit from the proceeds."

The court noted that legislation now provided for such interests to remain vested in the trustee until four years from the date of sequestration. It also observed that while the insurance policy in this case had no value until any of the specified events occurred, "The position may well be different for a policy which has a surrender value."

Further points are still to be argued in the case.

Click here to view the opinion of the court.