A sequestrated debtor seeking recall of sequestration on the ground that they are able to pay their debts in full, does not have to pay interest for the subsequent period on the sum due as at the date of sequestration, the Sheriff Appeal Court has ruled.

The court gave the decision in refusing an appeal by the Lord Advocate, on behalf of HMRC, against a decision of Sheriff William Holligan on the application of VCY, sequestrated with effect from December 2015 under the pre-2016 Act legislation. HMRC was the petitioning creditor, for a debt of £17,377.58 plus interest.

In July 2018, £17,886.16 was paid to settle HMRC's claim. HMRC intimated an objection to the recall on the ground that VCY had not paid and had no intention of paying the statutory interest on the debt, due in terms of s 51(1)(g) of the Bankruptcy (Scotland) Act 1985. The Accountant in Bankruptcy did not consider HMRC entitled to statutory interest. 

The sheriff considered it significant that s 17 of the Act, the recall provision, made no express provision for inclusion of interest, noted that the power to grant recall was a discretionary one and held that it was only on distribution under s 51 and in particular circumstances that the creditor would receive statutory interest. 

On appeal HMRC argued that “debts” in s 17 referred to the categories of debts in s 51. Since the purpose of recall was to enable a sequestration to be brought to an end where its continuation would serve no useful purpose, a requirement that a debtor make payment of their debts in full had properly to be viewed as requiring creditors to receive payment in respect of all the debts for which they were entitled to rank. That included the payment of interest on ordinary and preferential debts, itself a debt in the sequestration in terms of s 51(1)(g).

Delivering the opinion of the court, Sheriff Principal Craig Turnbull, who sat with Appeal Sheriffs Andrew Cubie and Norman McFadyen, said it was correct that s 51 regarded interest as a debt. The purpose of s 51 was to set out the order in which the available funds of the debtor’s estate were to be distributed by the trustee. However, it was notable that s 51 envisaged that each of the various classes of debt could be paid in full and yet there were no further funds available to permit the payment of interest. 

It followed that s 51 was applicable to a situation quite different to that envisaged by s 17. Moreover, it was self-evident from its terms that the various classes of debt in s 51 were distinct from interest payable thereon.

“Debt” was used in different senses in different provisions in the Act (compare sched 1). In terms of s 17(4), the effect of the recall of sequestration was, so far as practicable, to restore the debtor and any other person affected by the sequestration to the position they would have been in if the sequestration had not been awarded. In the present case, HMRC received payment of the sum due to them as at the date of sequestration, which included interest to that date. To have required the payment of interest to, say, the date on which HMRC received payment of the sum due to them as at the date of sequestration would have placed HMRC in a significantly better position than that they would have been in if the sequestration had not been awarded. “Debts” in s 17(1)(a) therefore did not include any interest accrued from the date of sequestration.

Click here to view the opinion of the court.