Insolvency: Solicitor debts: sue the judicial factor?

It is often overlooked that the appointment of a judicial factor (“JF”) to the estate of a firm of solicitors under the Solicitors (Scotland) Act 1980 also entails the factor’s appointment to the estates of the individual partners of the firm.

Whilst a judicial factory has similarity to bankruptcy, it is not the same. In the context of a firm of solicitors, the question might arise as to the position of creditors of the individual partners (as opposed to those of the firm). Can such creditors continue to be the pursuer of individual partners in their personal capacity, or does the JF’s appointment over their estates now require a claim to be made to or against the JF instead?

It is not a point that is commonly encountered. However, it was considered in Cabot Financial UK Ltd v MacLennan [2021] SC ABE 6, a judgment dating from September 2018 which has only recently been published.

The pursuers were assignees of a debt due by the solicitor defender under a credit card. There was no suggestion that the credit card was for business purposes and the case proceeded on the basis that it was personal to the defender. The pursuers raised proceedings against the defender seeking payment. In due course, the defender averred that she was subject to the appointment of a JF in respect of a law firm in which she had been a partner and she sought to convene the JF as a third party. Her case against the JF was, in short, that her personal estate vested in the JF and that it was accordingly to the JF that a claim must be made.

The JF entered appearance in the action and resisted liability on the grounds that her function, whilst covering both the firm and the individual partners’ personal estates, was to deal with creditors and clients of the law firm only. It remained for the individual partners to deal with their personal creditors.

JF’s special position

It was established by Ross v Gordon’s JF 1973 SLT (Notes) 91 that a creditor of the firm had the ability to sue the JF for payment, provided they did so in the court at which the JF was appointed (which in terms of the 1980 Act would be the Inner House of the Court of Session). The question of whether creditors of the partners personally had that right was considered by Lord Hodge in Macadam v Grandison [2008] CSOH 53, where it was commented that:

“It is not clear to me that creditors of a solicitor can recover debts due by him in his private capacity by suing the judicial factor appointed under s 41 of the 1980 Act. This is because the role of such a judicial factor is to settle the solicitor’s liability to clients and others incurred in connection with his practice. While the judicial factor may make provision from the factory estate to allow the ward to meet his obligations in the interest of preserving that estate, it is not clear that creditors of the ward may sue the judicial factor in respect of the ward’s obligations, which have not arisen from his practice as a solicitor. They may sue the ward and, if their debts are not paid, seek sequestration of his estates under the Bankruptcy (Scotland) Act 1985.”

In MacLennan, the court noted that the pursuer had made no positive case against the JF, and the JF strongly argued in favour of the principle set out in Lord Hodge’s dictum.

The court agreed with the JF and held that the position set out by Lord Hodge represented the legal position. A JF appointed to a legal firm is appointed for the specific purpose of winding that firm up for the benefit of its clients and creditors. That is an important distinction between a JF appointed under the 1980 Act and JF appointments more widely. The JF therefore has no liability to make payment of the personal debts of an individual partner and no decree could be granted in favour of a creditor for them.

The creditor’s remedy was instead to sue the individual partner. In the event of non-payment, the creditor might then sequestrate the estate of the partner. If that happened, the trustee in sequestration would inherit not the estate as a whole, but rather a right to an accounting from the JF and to the reversion from the individual’s estate once the JF had completed her work.