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Notes for Guidance - Bankruptcy (Scotland) Act 2016 (as amended)

This guidance describes the general functions of Accountant in Bankruptcy, interim trustees, trustees and commissioners in relation to their responsibilities regarding bankruptcies which started on or after 30 November 2016.

12.7 Distribution

Any monies gathered into the debtor’s estate must be distributed in accordance with section 129 of the Act.

12.7.1 Money received by the trustee

The trustee must deposit all funds received by them in an interest bearing account in the name of the bankruptcy and in an appropriate bank or institution, as defined by section 228 of the Act.

Trustees should ensure they comply with their recognised professional body’s money regulations.

A trustee is able to retain in their hands only such sums as may be prescribed under section 111 of the Act. This amount is currently £200 and may be amended by regulations made by Scottish ministers.

If such funds are placed on the trustee’s firm’s general client bankruptcy account and this account is interest bearing the problem arises of the apportionment of the interest earned.

Given that various sums will be lodged and withdrawn at different times for different cases it would be extremely difficult and time-consuming to split any interest earned.

The monies do not however belong to the firm, therefore, the only practical solution is for any interest received in such circumstances to be periodically consigned in the name of The Accountant as an unapplied balance, under section 148(1)(a) of the Act.

In accordance with the decision in Freyd’s Trustee (1864, 2M 1293), trustees must not withdraw funds from the bank for the purpose of paying a dividend or dividends until such time as that dividend or dividends can actually be paid.

Similarly, funds in a bank earmarked for specific purposes may not be withdrawn from the bank until payment under the purpose is actually to be made.

Funds withdrawn but not paid out will be regarded as cash in the hands of the trustee for the purpose of determining whether there has been contravention of the duty to not retain a sum in excess of the prescribed amount.

Unless the interest is credited net of tax, the trustee will be liable to make an annual return to the HMRC in respect of interest earned. The funds which give rise to the interest are vested in the trustee and are therefore sufficient to make a single or composite annual tax return in respect of interest earned on all funds banked in the name of the trustee to the tax district for the trustee’s office, i.e. it is not necessary to make individual tax returns to the tax district office appropriate to the debtor. Trustees are however advised to confirm this advice with their own district office.

Failure in these duties will be reported to the court by the Accountant and may result in removal from office, censure, or such other order as the court sees fit to make.

12.7.2 Payment of funeral expenses

Section 129(1)(c) of the Act does not expressly distinguish between a debtor who has died prior to, or after, the date of their bankruptcy and prior to the distribution of the debtor’s estate by the trustee.

It is considered that funeral expenses and administration costs take precedence over claims of other creditors in the order of distribution prescribed in Section 129 of the Act.

A claim form under Section 122 of the Act for these costs is not required and therefore no adjudication is necessary under section 126(1).

The trustee should record in the distribution section of the account what they have considered are reasonably incurred funeral expenses and administration costs and provide the relevant vouching.

12.7.3 Personal liability and rights of relief

The order of distribution for trustee outlays and fees is set out at section 129(1) of the Act and cannot be amended.

129 Priority of distribution

  • the funds of the debtor’s estate must be distributed by the trustee in the sequestration to meet the following debt in the order in which they are mentioned 
    • the outlays and remuneration of an interim trustee in the administration of the debtor’s estate
    • the outlays and remuneration of the trustee in the sequestration in the administration of the debtor’s estate

Any expenses incurred by either trustee which are payable to a third party should be paid irrespective of whether funds are available in the estate.

This also applies to statutory fees and charges due to the Accountant as prescribed in the Fees Order.

Where funds are ingathered an interim trustee has a right of relief against the trustee; the trustee has a right of relief against the estate. Both rights of relief are limited to the funds available.

Therefore, if an interim trustee is appointed their outlays and fees, as determined by the Accountant, are payable before those of the trustee. These funds would only become payable, if or when, monies are ingathered into the estate.

Similarly, when a replacement trustee is elected, or appointed. the original trustee would be entitled to payment of any determined fees and outlays prior to payment to the replacement trustee.

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