Notes for Guidance - Bankruptcy (Scotland) Act 2016 (as amended)

It is the responsibility of the trustee to try and realise the maximum amount from a debtor’s estate for the interest of creditors.

The trustee must consider all available options for realising the equity to ensure the most cost effective means of realising the maximum return from the estate.

The trustee should be aware of sections 114 and 115 of the Act when a debtor’s estate includes a matrimonial home.

The Accountant expects a decision is made and action started against any heritable property within the first year of the debtor’s bankruptcy.

The Accountant recommends the trustee should not wait for heritable property to appreciate in value unless there is no co-operation from the debtor, spouse or co-owner.

If the trustee has not concluded action before the end of three years, beginning with the date of bankruptcy, the trustee may send a renewal memorandum within three months before the expiry to the Keeper of the Register of Inhibitions and Adjudications under section 26(6) of the Act.

This will renew the trustee’s interest in a property for a further three years to ensure the property is not lost as an asset of the estate. The memorandum should be renewed every three years until the property is disposed of.

The following two cases should be noted:

• Tewnion’s Trustee, Noter 2000 SLT (Sh Ct) Page 37
• Roy’s Trustee, Noter 2000 SLT (Sh Ct) Page 77

The respective sheriffs were unable to grant an order permitting the trustee to renew out with the time period prescribed under section 26(6) of the Act.

It should be noted failure to renew the inhibition may only reinvest ‘a family home’ to the debtor (see section 10.2.7). All other heritable estate will remain vested in the trustee. Therefore, to protect the estate’s interest in the family home it is essential that the entry is renewed timeously.

The trustee may also be liable for the reimbursement of funds lost to the estate when a property has been sold following failure to renew the inhibition.

The Accountant’s advice is the trustee should not normally rely on renewing the inhibition at three yearly intervals and on every occasion they do so, they should also write to the debtor and the other interested party, or parties, advising them of the action taken and the implications and indicating willingness to consider an offer for the equity according to the current valuation or to arrange an open market sale by agreement.

If the trustee fails, without reasonable cause, to renew the inhibition within the three year time limit and it is necessary for them to take notice of title to the property, they will be liable for this cost. However, anyone adopting this course should be aware of the possibility they may incur personal liability for any burdens falling on the property. The trustee would have a right of relief against the estate but it is not certain that any personal liability would be limited to the value of that estate.

Trustees who nevertheless adopt this course, should also notify the debtor (and the other interested party or parties) of the intended action and of its potential consequences should they wish to enter into any transaction involving the property at any future time.

If, having taken notice of title, the trustee should for any reason be unable to act, it would be necessary for a court to appoint a replacement trustee and assign the notice of title to the replacement trustee. This process is likely to be expensive and the estate would not be liable for this cost.

When a trustee has taken Notice of Title to a property and it has not been realised the trustee must arrange to transfer the property back to the debtor before seeking their discharge.

If a trustee takes notice of title on a property containing tenants paying rent, the trustee must be aware of their requirement to register as a landlord with the appropriate local authority (see section 10.2.4).

10.2.1 Searches of the property registers

Searches of the Land Register will reveal properties presently owned by the debtor and not properties which they may have conveyed to other parties.

Only if a trustee has reason to believe the debtor may have conveyed property to another, e.g. to their spouse, should a search against the name of the person(s) to whom the property might have been conveyed and against the property itself be undertaken.

As regards the Sasines Register, full indices of past and present owners are maintained, although these are organised in 32 counties (pre-regionalisation) making a blanket search impracticable.

Requests for searches should therefore be confined to the county or counties in which the trustee has reason to believe the debtor may have property, or have had property during the relevant period.

10.2.2 Special destination

Heritage held in joint names subject to special destination, i.e. held in joint names under survivorship destination, such as debtor and spouse or other party or survivor, may present a possible problem.

The debtor’s share vests in the trustee and may be sold for the benefit of the creditors to the co-proprietor or, with the co-proprietor’s consent, the whole property may be exposed for sale on the open market. Should the co-proprietor not co-operate in the disposal it may be appropriate to proceed by way of an action of division and sale.

If the debtor dies before the trustee registers a conveyance following sale in the Land Registry the debtor’s interest passes direct to the survivor. However, the Extra Division of the Inner House of the Court of Session held that in such circumstances the debtor’s interest passes to the survivor burdened by the debtor’s debts.

Consequently the trustee is entitled to take action to ensure the survivor takes no greater right than the debtor had had for the purpose of restoring to the trust estate the value of the property which is equivalent to the value of the debts by which it is burdened.

Accordingly the trustee is entitled to look to the survivor to recover either the value of the property transferred or the amount of the debtor’s debts, whichever is the lesser.

10.2.3 Council tax

The trustee is not liable for council tax in respect of a heritable asset in a bankruptcy.

If the property is occupied, it is the occupier, and not the trustee, who assumes responsibility for council tax. The occupier, not the trustee, would require to contact the local authority to ascertain whether any discounts would be appropriate in terms of Section 79 of the Local Government Finance Act 1992.

If the property is vacant, it may qualify for (unlimited) exemption in terms of The Council Tax (Exempt Dwellings) (Scotland) Order 1997.

The exemption applies to the property and not the person. To satisfy the exemption the property must:

• not be the sole or main residence of any person (i.e. be vacant)
• be vested in a Trustee by virtue of Sections 78 or 86 of the Act
• the trustee is the only qualifying person (i.e. there is no joint/several liability)

The trustee should notify the local authority to advise them of the bankruptcy and the status of the property vesting with the trustee.

This will allow the local authority to update their records regarding any council tax liability and to commence any investigations they deem necessary.

10.2.4 Registering as a landlord

When a multi-tenanted property is currently vested in a trustee, the trustee is obliged to be registered as a landlord with the appropriate local authority, in accordance with Part 8 of the Antisocial Behaviour etc. (Scotland) Act 2004.

10.2.5 Points to consider

The trustee should consider:

• is there any equity in the property? A professional valuation should be done as early as possible. A chartered surveyor or other suitably qualified third party should complete the valuation. The valuation should detail the maximum market value. The valuation should be specified as the current Royal Institution of Chartered Surveyors (RICs), Red Book equivalent of open market, and not impose other restrictions such as a forced sale or the sale price expected for a transaction concluded within a truncated period
• are there arrears and, if so, has the secured creditor taken steps to repossess the property?
• if there is little or no equity, can the property be abandoned for a nominal sum?
• is the non-debtor spouse or a third party willing to buy out the trustee’s interest?
• will the property require to be sold, either on the open market or by private bargain?
• if it is a family home, will the relevant consent in terms of Section 113(1)(a) be given?
• trustees should consider if the Scottish Government sponsored Mortgage to Rent scheme should be recommended to the debtor for consideration. However, trustees must be aware of the maximum amount of funds which can be released to a trustee under the terms of this scheme and assess if it will be in the best interests of creditors to accept an offer on a property under the terms of the Mortgage to Rent scheme. See Home Owner's Support Fund : guidance for trustees for further information
• if the trustee decides to sell the property has formal intimation been given to the secured creditor of their intention to do so?
• if property is to be sold on the open market has the secured creditor agreed to underwrite the costs in the event of the sale price being insufficient to cover the secured loan?
• has the market been fully tested
• if the negotiations to transfer title are likely to extend beyond the three years the inhibition been renewed?
• if the purchase offer is not enough to settle the secured debt has the consent of all secured creditors been obtained to acceptance of the offer?
• if the trustee has exhausted all attempts at disposing of the interest in the property has the debtor been formally notified of the potential consequences should it be sold at a later date?

10.2.6 Family home

A trustee must take additional steps when the heritable property is considered a family home under sections 112 and 113 of the Act.

It should be noted if the trustee becomes aware of a family home from a date after three months from the date of bankruptcy, the three year period will commence from the date the trustee became aware of the debtor’s right or interest under section 112(5) of the Act.

The trustee must ensure the debtor is fully informed about any action being taken against their property and the implications for the debtor and their family if the action is successful.

If it is expected the outcome of action will be that the debtor is removed from their home, the debtor should be informed where they can seek support and information in the event they will become homeless. The trustee must give notice of the proceedings to the local authority, in whose area the home is situated. This must be done using a Form 22 of The Regulations.

If, at the end of a three year period beginning from the date of bankruptcy, the trustee has failed to take any of the required action(s) against the family home the rights and interests of the debtor’s family home shall be reinvested in the debtor. Therefore, a trustee must also ensure they have an administration process in place which will prevent the automatic default of the family home to the debtor.

The actions a trustee can take to prevent the family home reinvesting in the debtor after three years are:

• disposal or realisation of the debtors interest/right in the home
• conclude missives for sale of the right or interest
• send a memorandum to the Keeper of the Register of Inhibitions, as described under Section 26(6) of the Act
• take notice of title in relation to the debtor’s right or interest of the property
• commence proceedings:
  • to sell or dispose of the debtor’s right or interest
  • for an action for division of sale of the family home; or
  • for an action to obtain vacant possession of the family home
• reach an agreement with the debtor under which:
  • the family home will cease to form part of the debtor’s sequestrated estate
  • the property is reinvested in the debtor, without need for any conveyancing, disposition or other transfer

The trustee may make an application to the sheriff to amend the three year period to a longer period in circumstances as the sheriff thinks appropriate.

10.2.7 Need to consult with the Accountant

To comply with section 109(1) of the Act the trustee must complete the heritable assets section of BASYS for any property, prior to commencing any of the actions as described at sections 10.2.9 to 10.2.14 and provide all necessary documentation. See the guidance for more information.

This role is undertaken by AST on behalf of the Accountant.

AST will respond to the request within 20 working days of receipt.

When consent is given to the trustee’s proposal and they are unable to progress the action within one year of the agreement an update should be provided to AST.

10.2.8 No available equity

In some cases the property may not be sold because there is no available equity. If the trustee does not expect this situation to change in the immediate future they should attempt to reach an agreement with the debtor whereby upon payment of a nominal sum the trustee would formally abandon their interest in the property.

The amount of the sum is a matter for the trustee. However, in order to cover costs, which will include the fee to Registers of Scotland for the recording of a Notice of Abandonment, The Accountant will not normally agree to a sum less than £550 and moreover will not agree to any arrangement which results in a further charge to public funds.

An agreement should be in writing and include:

• the value of the agreement
• if applicable, the period over which the payments will be made
• details of the person making the payment(s)
• the outcome for the property following full payment i.e. Notice of Abandonment
• the consequences for the property and the debtor if the agreement is not complied with
• it is recommended the agreement is signed by the debtor, any third party and the trustee

The trustee should provide AST with the following information:

• the action proposed
• the reasons for the action
• a copy of the property search
• a copy of the valuation, or Home Report, carried out by a chartered surveyor
• a copy of the information provided by the secured lender in relation to any outstanding security against the property
• copies of any relevant correspondence i.e. letters to debtors, negotiations with third parties to reach an agreed settlement
• a copy of the proposed agreement
• full details of any fees or costs to be paid to the trustee by a third party

When the action is agreed by AST the trustee must:

• record the agreement in writing
• formally abandon interest in the property using a Form 15 of The Regulations (see section 1.5) at the relevant date, if appropriate 

If no agreement is possible the trustee may either:

• record the reasons for the abandonment on the case file
• formally abandon interest in the property using a Form 15 of The Regulations (see section 1.5) at the relevant date, if appropriate
• consider allowing any inhibition still in place to lapse after the appropriate period

10.2.9 Settlement of trustee’s interest

When the equity is too low to justify marketing the property, or the debtor does not want the property sold, the trustee may be able to come to an agreement with:

• a third party
• the debtor on completion of their DCO

The Accountant does not consider it reasonable for the trustee to take into account any potential saved costs when determining what is an acceptable amount for the property to avoid the need for a sale.

The trustee should try and obtain payment of an amount equal to the equity that has been calculated in the property and only reduce this amount if no person is prepared to pay the full amount of equity, or it would not be cost effective for the equity to be paid through instalments. When the amount agreed has been reduced a full explanation and reasons as to why the offer should be accepted must be provided to the Accountant when submitting the proposal on BASYS.

An agreement should be in writing and include:

• the value of the agreement
• the period over which the payment(s) will be made
• details of the person making the payments
• the outcome for the property following full payment i.e. Notice of Abandonment, disposition (please note when a disposition is to be signed the trustee must ensure the obligations to any secured lender(s) are also met and the debtor has given written consent)
• the consequences for the property and the debtor if the agreement is not complied with
• it is recommended that the agreement is signed by the debtor, any third party and the trustee

The trustee should provide AST with the following information with the proposal:

• the action proposed
• the reasons for the action
• a copy of the property search
• a copy of the valuation, or Home Report, carried out by a chartered surveyor
• a copy of the information provided by the secured lender in relation to any outstanding security against the property
• copies of any relevant correspondence i.e. letters to debtors, negotiations with third parties to reach an agreed settlement
• a copy of the proposed agreement
• if applicable, consent to a disposition by the debtor
• full details of any fees or costs to be paid to the trustee by a third party

When the action is agreed by AST the trustee must record the agreement in writing.

Once the agreement has been completed:

• formally abandon interest in the property using a Form 15 of The Regulations (see section 1.5) at the relevant date, if appropriate 
• sign a Disposition

If the agreement fails the trustee must consider realising the asset as soon as possible.

10.2.10 Marketing

If the trustee decides to sell the heritable property they must ensure it is exposed to the full potential of the open market.

A home report is required under the Housing (Scotland) Act 2006 for any property put onto the market, with the following exceptions:

• new build houses
• newly converted premises
• properties to be demolished
• dual use
• mixed sales

The trustee should provide AST with the following information with the proposal:

• the action proposed
• the reasons for the action
• what alternatives to a sale have been considered and rejected
• a copy of the property search
• a copy of the valuation, or home report, carried out by a chartered surveyor
• a copy of the information provided by the secured lender in relation to any outstanding security against the property
• copies of any relevant correspondence i.e. letters to debtors, agreement with secured creditors to pay fees and outlays of trustee
• consent to sell under Section 113 of the Act if a family home
• full details of any fees or costs to be paid to the trustee by a third party.

When the action is agreed by AST the trustee should proceed to appoint an estate agent/legal agent as appropriate.

The trustee is only required to submit a further proposal when any offer is 10% below market value and the trustee is recommending acceptance.

The trustee should submit:

• a copy of the offer
• an explanation why it should be accepted

If the property fails to sell on the open market, the trustee may consider it more appropriate to pursue a sale through the auction process. An update should be provided to AST together with an estimate of any additional costs.

The trustee should consider the following:

• reasonable endeavours have been undertaken to secure a sale on the open market, for at least nine months
• a viable offer has not been received
• further marketing costs and benefit to the estate
• be satisfied market value will be obtained
• placing a reserve price on the property

10.2.11 Sale by private bargain

If the trustee decides to sell the heritable property by private bargain the trustee should provide AST with the following information with the proposal:

• the action proposed
• the reasons for the action
• a copy of the property search
• a copy of the valuation carried out by a chartered surveyor
• a copy of the information provided by the secured lender in relation to any outstanding security against the property
• copies of any relevant correspondence i.e. letters to debtors, negotiations with third parties to reach an agreed settlement, agreement with secured creditors to pay fees and outlays of trustee
• an explanation why the trustee does not intend to expose the property to the open market and reasons why this should be accepted
• full details of any fees or costs to be paid to the trustee by a third party
• consent to sell under Section 113 of the Act if a family home; or
• debtor’s consent and an explanation if offer is for less than market value

10.2.12 Court action

The trustee should consider if there is enough equity to justify an application to the court for authority to sell and/or evict the occupants of the property, in circumstances when:

• relevant consent to sell is not given
• a co-owner refuses to agree to a sale
• the debtor, and or other occupants, refuse to co-operate and vacate a property

The trustee should provide AST with the following information with the proposal:

• the action proposed
• the reasons for the action
• a copy of the property search
• a copy of the valuation, or home report, carried out by a chartered surveyor
• a copy of the information provided by the secured lender in relation to any outstanding security against the property
• an estimate and breakdown of anticipated costs of the court action
• copies of any relevant correspondence i.e. letters to debtors, negotiations with third parties to reach an agreed settlement, agreement with secured creditors to pay fees and outlays of trustee
• full details of any fees or costs to be paid to the trustee by a third party

When the action is agreed by AST, the trustee should proceed to inform the debtor and all interested parties of the proposed action, inviting a resolution to the situation to avoid court action.

If no resolution can be obtained the trustee should commence the court action within one year of the agreement of AST.

Upon consent of the sheriff the trustee should proceed as directed by the court. No further consultation regarding marketing, or offers, should be directed to the Accountant.

If the result is a sheriff’s refusal of consent the trustee should consider whether there has been any change in the situation which would justify the making of a renewed application to the court. Further consultation with the Accountant would only be required if there is a significant change in the circumstances.

10.2.13 Sale of property on behalf of a third party

Prior to agreeing to sell a property which does not vest in the trustee, e.g. on behalf of a secured lender the trustee must obtain the consent of the Accountant.

The Accountant considers it important for trustees to be fully transparent with regard to notifying the Accountant/Commissioner(s), creditors and debtors, of the terms and conditions that have been agreed with a secured lender, including the financial terms of the agreements.

The requirement for this transparency is set out in Sections 1 to 7 of SIP9 Scotland.

The Accountant considers it important that all interested parties are aware of the background and reason why the trustee is selling a property on behalf of the secured lender, to help inform any decision they may make with regard to applying their legal right to challenge the actions of the trustee.

As a property forms part of the debtor’s estate, regardless if it is in nil or negative equity, the trustee is required, before commencing any action regarding the property, to submit their proposal for the property to AST for consideration, in the relevant section of BASYS.

To allow the Accountant to make an informed decision when making a proposal, the trustee must submit the following supporting information:

• a copy of the agreed terms between the trustee and the secured lender to sell the property
• details of fees and outlays agreed to be paid by the secured lender, including details of the basis for how the fees are to be calculated
• a copy of the agreement of any subsequent secured lender(s), where their security will not be paid in full, that confirms their agreement to the terms between the trustee and the other secured lender
• a professional valuation of the property
• confirmation of the redemption figures for all secured loans
• an explanation of why, in the trustee’s opinion, the proposed sale will comply with the conditions specified in Section 50(9) of the Act

When the action is agreed by AST the trustee should proceed to appoint an estate agent/legal agent as appropriate.

The trustee would not be required to submit a further proposal regarding the acceptance of an offer.

See section 13.12.4 relating to the submission of an account following a sale of this nature.