Insolvency: Creditors lose interest

In a judgment dated 16 March 2020, but published on 6 August, the Sheriff Appeal Court has upheld the decision of the sheriff at first instance and refused HMRC’s appeal in the sequestration of VCY. The judgment is a potentially significant one for creditors in cases where the debtor seeks to recall their sequestration on the ground that they have repaid their debts in full, as it clarifies the circumstances in which statutory interest may be claimed.

Background

The debtor, referred to by the initials VCY, was sequestrated by HMRC in March 2016. VCY’s application for recall in July 2018 represented his third attempt at a recall, and on this occasion he relied on the ground of being in a position to repay his debts in full.

HMRC received notice of the application in accordance with the rules and took the position that payment of VCY’s debts in full could only be achieved if this included statutory interest from the date of sequestration up to the date of payment. The principal sum due to HMRC and interest to the date of sequestration were paid. HMRC objected to recall on the grounds that statutory interest had not been paid and therefore the debt had not been paid in full.

Sheriff’s decision

At first instance Sheriff Holligan held that the debts had been paid in full and allowed the award of sequestration to be recalled.

Noting that the sheriff was afforded discretion in the matter and that “recall” is broader than an “appeal”, he went on to consider the meaning of a debtor having “paid his debts in full”.

The sheriff identified that the Bankruptcy (Scotland) Acts do not define the word “debts”. The definition of “ordinary debt” was held not to assist with interpretation, as it makes no mention of interest. However, where the Act set out what a creditor can claim in a sequestration, it does appear to differentiate between “debt” and “interest”. Moreover, where the Act sets out the order in which funds ingathered by a trustee should be distributed, it can be seen that statutory interest is payable only after payment in full of other debts set out in that section. Again, it is therefore clear that the Act makes a distinction between “debt” and “interest”.

In light of the foregoing, the sheriff was content to hold that the debts had been repaid in full and that recall could proceed. Creditors were accordingly not entitled to statutory interest in these circumstances.

The appeal

The Sheriff Appeal Court upheld the sheriff’s judgment. The court agreed with the general principle that a word used in a statute should be given a consistent meaning throughout the statute, and that “interest” appeared to be regarded as a debt in certain provisions of the Act; however the court went on to explain that the Act clearly treats interest separately from the various classes of debt.

As per the sheriff’s judgment, the court pointed to the fact that under the relevant provisions of the Act, statutory interest was only payable after various other classes of debt had been paid in full and that the overall scheme of the provision made clear that “debts” were distinct from “interest payable thereon”.

Whilst that finding would have been sufficient to dispose of the appeal, the court also pointed out that the purpose of recall was stated in the Act as being to restore the debtor and any other person affected by the sequestration to the position they would have been in had sequestration not been awarded. The court took the view that awarding interest up to the date of sequestration achieves that. The application of statutory interest post-sequestration in addition to pre-sequestration interest would place the debtor in a less advantageous position than if sequestration had not been awarded.

Comment

As a result, a creditor faced with an application for recall on the ground that a debtor can repay their debts in full will be unable to claim post-sequestration interest.

While this result was not entirely unexpected following the well reasoned opinion of the sheriff at first instance, the binding nature of a Sheriff Appeal Court judgment now puts the question broadly beyond doubt.

For debtors, it is positive news and will help set the bar for any recall application they may wish to make. For creditors, the case will help inform whether they go to the time, trouble and expense of objecting to recall applications in the future.