When an English debtor with an interest in heritable property in Scotland is made bankrupt under English law, a crucial question arises: how can the English bankruptcy order be enforced in Scotland? This article explores this issue, highlighting the potential risks for trustees and the solution provided by Section 426 of the Insolvency Act 1986.
The Issue: English Bankruptcy Orders and Scottish Property
Insolvency practitioners may not frequently encounter this scenario, but when it does arise the trustee in bankruptcy will need to be proactive. If an English debtor owns Scottish heritable property, the bankruptcy order issued in England does not automatically prevent the debtor from dealing with that property in Scotland.
In Scotland, personal bankruptcy is known as sequestration. Under Scots law, when a debtor is sequestrated, their estate, including any heritable property, vests in the trustee for the benefit of creditors. The trustee in a Scottish sequestration can automatically prevent the debtor from selling or dealing with their Scottish property by recording the sequestration order in the Register of Inhibitions. This register notifies the public about individuals who cannot competently enter into voluntary property transactions.
However, English bankruptcy orders are not automatically registered in the same way under either the Bankruptcy (Scotland) Act 2016 or the Insolvency Act 1986. This creates a risk for English trustees, as a debtor could attempt to sell their Scottish property without the trustee's knowledge, potentially to the detriment of creditors.
The Risk: Unaware Trustees and Unsuspecting Sales
Without the automatic registration of English bankruptcy orders in Scotland, there is a clear risk that an English trustee might not be aware if a debtor attempts to sell their Scottish property. This could result in the debtor transferring the property to a third party without the trustee’s knowledge or consent, putting creditors at a disadvantage.
Disgruntled creditors, in such cases, could in theory hold the English trustee accountable for the loss. Therefore, it is crucial for trustees to take steps to protect the debtor's Scottish property, ensuring that the bankruptcy order is recognised and enforced in Scotland.
The Solution: Section 426 of the Insolvency Act 1986
The solution to this issue lies in Section 426 of the Insolvency Act 1986, which facilitates cooperation between courts in any part of the United Kingdom with jurisdiction over insolvency cases. Section 426 allows an English trustee to apply to the Scottish courts to have the English bankruptcy order recognised and enforced in Scotland.
How it Works
To enforce the English bankruptcy order, the English trustee can lodge a petition with the Court of Session in Scotland. The petition requests that the English bankruptcy order be treated as if it were a Scottish bankruptcy order, allowing it to be recorded in the Register of Inhibitions.
Once the petition is granted, the English bankruptcy order is recorded in the register, giving the English trustee the same protections as if the bankruptcy order had been granted in Scotland. This prevents the debtor from selling or dealing with their Scottish heritable property without the trustee's knowledge.
Broader Application of Section 426
Section 426 is not restricted to recognition of bankruptcy orders. Its application extends to a variety of cross-border insolvency scenarios, both corporate and personal. The section is a powerful tool for officeholders in certain countries to make a request to the UK courts for assistance, allowing those officeholders to enforce foreign insolvency orders and protect the interests of creditors.
At MFMac, we frequently assist Scottish corporate or personal insolvency practitioners with cross-border insolvency matters. If you would like to discuss this issue further or have any questions, please do not hesitate to contact us.
