Debtor wins in policy decision

Insolvency briefing: the nature of an interest in a life insurance policy for the purposes of the Bankruptcy Acts has, surprisingly but importantly, been considered by the courts for the first time

17th September 2018 | Andrew Foyle

McGleish v Tough & Leslie [2018] SAC (Civ) 19 (31 July 2018) considered, for what appears to be the first time, the question of whether in the context of a sequestration an insurance life policy is moveable property or a non-vested contingent interest.

The point is an important one. If the policy is moveable property it will remain vested in the trustee for the duration of the sequestration. If it is a non-vested contingent interest, then it will revert to the bankrupt after a period of time, provided the contingency does not arise during that period. The period of time will vary depending on which version of the Bankruptcy Acts governs the sequestration. The present term is four years following the date of the debtor’s discharge, under the Bankruptcy (Scotland) Act 2016. Under the 1985 Act (which governed the sequestration at issue in this case), the trustee’s right to a non-vested contingent interest fell away on the debtor’s automatic discharge under the Act (at the relevant time this would have been one year following sequestration).

Consequently, the opinion of the court, delivered by Sheriff Principal D L Murray, has provided the legal community with new case law including, within the context of sequestration, a precise definition of a non-vested contingent interest.

Debtor or creditors?

A debtor appealed against a decision of the sheriff at first instance, which found that a joint life insurance policy held by him and his wife was moveable property. The debtor’s wife had died shortly after the debtor received his automatic discharge under the Bankruptcy (Scotland) Act 1985. The insurance company had paid the proceeds of the life policy directly to the trustee.

The effect of the sheriff’s ruling was that on the wife’s death, the proceeds of the policy, which were paid to the debtor’s trustee in sequestration, were available for distribution to creditors. If the policy were a non-vested contingent interest in terms of the bankruptcy legislation, he would have been entitled to the proceeds and they would not have formed part of the sequestrated estate.

The debtor appealed the sheriff’s decision and the point was argued before the Sheriff Appeal Court, which considered a number of factors. These included the history of the rules around treatment of non-vested contingent interests in Scottish bankruptcy law, including the cases of Trappes v Meredith in 1871 and Reid v Morison in 1893. Both of those cases effectively held that a non-vested contingent interest in succession to an estate could not vest in a trustee in sequestration.

Only a contingency

The court recognised that those decisions led to a change in the law through s 97(4) of the Bankruptcy (Scotland) Act 1913, which originally restricted the rule to rights of succession and rights of property under a will, marriage contract or other deed of an irrevocable nature. This was later modified by the 1985 Act to the wider formulation in force today: “any non-vested contingent interest which the debtor has”.

Amongst points put to the sheriff, it was argued for the trustee that the fact that a policy was capable of being assigned rendered it moveable property. That appears to be an attempt to revert to the law as stated in Trappes v Meredith.

Ultimately the Sheriff Appeal Court overturned the sheriff’s decision. It held that the policy was indeed a non-vested contingent interest and the proceeds ought accordingly to have been paid to the debtor. In doing so the court held that “The fact of assignability is non-determinative”, and noted that “The insurance policy here has no value until any of the specified events occur”. This was accordingly a contingency, and might never be purified during the currency of the sequestration.

In reaching its judgment, the Sheriff Appeal Court has given lawyers in Scotland a case with useful examination of provisions which have seen little judicial scrutiny since they were first enacted in the 1913 Bankruptcy (Scotland) Act.

Though the law has developed over the past 100 years, until now little thought appears to have been given to determining a precise definition of a non-vested contingent interest.

It is worth noting that the court did consider that the position might be different in the case of an insurance policy having a surrender value.