Lord Armstrong has held in a decision dated the 11th May 2017, that the provisions contained in s34 of the Bankruptcy (Scotland) Act 1985, relating to gratuitous alienations, were ECHR compliant.

The Background

Miss Farrell had married Mr Walker in November 2007 and they were subsequently divorced in August 2010. Mr Walker was sequestrated in April 2009. The Accountant in Bankruptcy was appointed the trustee in his sequestration.

Prior to the sequestration, Mr Walker was the sole owner of a property at 1A Beechwood Avenue, Rutherglen, but in December 2007 the property was sold for £435,000. After the mortgage on the property and the costs of sale were deducted, this left Mr Walker with £178,723.82.

Mr Walker then transferred this sum to Miss Farrell. Miss Farrell then purchased a new property using these funds and funds from the sale of her own home for £866,000.  The purchase was funded by

  1. The funds transferred to her by Mr Walker as a gift;
  2. £313,000 from the sale of her own property; and
  3. A mortgage of £380,000.

The Pursuer's Case

The trustee in sequestration sought to challenge the transfer of the funds from Mr Walker to Miss Farrell as a gratuitous alienation under s34 of the Bankruptcy (Scotland) Act 1985 and raised an action for payment of money.

Arguments for the Defender

Miss Farrell did not dispute that the transfer of funds from Mr Walker was a gratuitous alienation. She instead claimed that the statutory defences available in s34(4) did not take into consideration the circumstances of the alienation, or the reasonability or proportionality of making the order on her personal or financial circumstances. She claimed in this regard s34(4) was incompatible with her rights under Articles, 6,8, 14 and Article 1 of the First Protocol of the European Convention of Human Rights.

Article 6 – The Right to a Fair Trial

The court held that Miss Farrell’s complaint that her right to a fair trial was denied was misconceived. Miss Farrell’s complaint was about the fact that s34(4) did not allow her a stateable defence, not that the process itself was unfair.

Article 8 – Right to Respect for Family life and Home

Miss Farrell argued that the effect of the order sought by the pursuer would be that she would have to sell her home and this would constitute an interference in her family life and that of her children.  This argument, the court held, was also misconceived. The action was one for payment of money, not for the sale of her home, although if successful it may have resulted in Miss Farrell being sequestrated and her trustee looking to sell her home. However, in that event, Miss Farrell would have access to the defences allowed under s113(2) of the Bankruptcy (Scotland) Act 2016 (formerly S40 of the Bankruptcy (Scotland) Act 1985).

Article 14 – Protection Against Discrimination

The defender also argued s34(4) discriminated against her in that it allowed gratuitous alienations, made for the benefit of associates, to be challenged where they occurred within five years of the date of sequestration, rather than for two, where the beneficiary was not an associate.  The court dismissed this argument as although Miss Farrell had argued her family had been discriminated against, she failed to specify the basis of the discrimination under any grounds prohibited by Article 14.

In addition, under the circumstances of the cases, the gratuitous alienation had taken place within two years of the debtor’s sequestration, so would have been challengeable even if Miss Farrell had not been an associate.

Article 1, First Protection – Peaceful Enjoyment of Property

Finally, Miss Farrell argued that the order sought would interfere with her peaceful enjoyment of her property, namely her home. Again the court dismissed this argument, as the order sought was for payment of money, not for the sale of the debtor’s home.

The court also held that aims of S34 of the Bankruptcy (Scotland) Act 1985 were legitimate and did strike the correct balance between the interests of the debtor’s creditors and Miss Farrell. It held they were reasonably proportionate to that aim.

Unjustified Enrichment

Interestingly, the Court also held that Miss Farrell would not be able to claim unjustified enrichment or be able to make a claim in the sequestration, if the order sought was granted and payment made, as the transfer of funds were a gift and unjustified enrichment could not be claimed.

The full case can be read here.