Survivorship and the insolvent estate

A recent sequestration that I am administering has highlighted the benefits of dealing with a survivorship clause under an insolvency process.

In this case, the level of the debt burden owed by the surviving proprietor was reduced on provisions contained in the Bankruptcy (Scotland) Act 2016 due to an unintended consequence of the provisions.

Background

When individuals purchase a property together, the title may be taken “equally between them and to the survivor of them”, which is triggered automatically in death.

In this case, following the death of the debtor, his surviving wife inherited his share of the property. The deceased’s daughter was later appointed as executor.

The level of debt owed by the deceased was estimated in the sum of £14,000 and the value of the transfer was quantified at £30,000. The daughter took steps to place the estate into bankruptcy, as the estate could not meet the liabilities as they fell due.

Insolvency setting

When an estate is sequestrated, the trustee has a personal right to the debtor’s estate in accordance with the vesting provisions of s 78 of the 2016 Act. The issue of survivorship clauses within an insolvency setting has been tested in court in a number of leading cases.

In Fleming's Trustee v Fleming 2000 SC 206, the debtor died after being declared bankrupt. His half share of the property was automatically triggered to the surviving owner. This prevented the trustee from acquiring the real right to the asset, but it was held that the surviving owner remained liable for the repayment of debts. As an observation, the 2016 Act provides suitable mechanisms to convert the trustee’s personal right into a real right, which would defeat the survivorship clause, but in practice this is rarely used.

In Chalmers (Machin's Trustee) v Machin [2017] SC GLA 29, the deceased died prior to the sequestration of his estate. The defender’s legal agent argued that as the special destination kicked in prior to the trustee’s appointment, and therefore at the date of sequestration the deceased had no rights in the property by virtue of the special destination, the trustee was automatically divested of their share. Sheriff Reid ruled that the surviving party was liable for the debts of the deceased.

Both cases upheld the principle that the debts of a deceased at death rank as a prior charge on their estate before the estate passes to any successors.

120 day rule

Procedurally, in terms of s 122 of the 2016 Act, a creditor must submit a claim in the sequestrated estate within 120 days of being notified to do so. Creditors are permitted to submit a claim outwith this date if there are exceptional circumstances that prevented them from doing so earlier.

In the sequestrated estate in question, the trustee notified creditors and quantified the level of claims at the end of the 120-day period. At that point, the level of claims received was in the sum of £5,000, effectively reducing the liability owed by the surviving party by £9,000, and an agreement was put in place allowing the surviving spouse to pay the required sums over a period.

The above scenario is one which happens in these types of cases, and it illustrates that sequestration can be used as a practical process in dealing with estates, especially when dealing with survivorship clauses. The 120-day rule is a useful one to remember when providing advice to the surviving proprietor in dealing with an insolvency practitioner.