INS1113 - Insolvency and Insolvency Practitioners: Judicial factors

Introduction

The Judicial Factors Acts 1849, 1880 and 1889 and the Children (Scotland) Act 1995 govern the appointment of judicial factors.

Judicial factors are appointed by the Court of Session, and supervised by the Accountant of Court, to manage and administer property in a range of different circumstances. The function of a judicial factor is to conserve and manage the estate under their charge. The judicial factor has a judicial duty to manage the estate which does not vest in them.

Lodging HMRC claims

EIS Edinburgh is responsible for lodging HMRC claims in judicial factor cases for both direct and indirect tax debts. EIS Edinburgh is also responsible for corresponding with the judicial factor following their appointment. Where a judicial factor is appointed the case must be reported and the debt transferred to EIS Edinburgh. Throughout this Manual guidance on sequestrations will usually apply if a factor has been appointed.

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Grounds of appointment

A judicial factor will be appointed to manage and administer estates in cases when it is necessary to afford protection against loss or injustice which cannot be prevented by means of the ordinary legal remedies. There is no limit to the circumstances in which a judicial factor may be appointed but the following are instances of when one may be appointed

• trust estates (for example, when there is a total failure of trustees or there has been misconduct on their part)
• intestate estates (on the application of a creditor or a person interested in the succession of the deceased estate)
• insolvent deceased persons’ estates
• partnership estates (either to carry on the business or to wind it up when, for example, there is a serious dispute as to the running of the business)
• estates of defaulting solicitors (for failure to comply with the Solicitor’s Accounts Rules)
• estates of limited companies (to protect the interests of mortgage and debenture holders or on application by an aggrieved shareholder on allegations of illegal and dishonest conduct by controlling directors)
• curator bonis to minors (to manage property until a minor reaches the age of majority)
• curator bonis to incapacitated persons (physical and mental incapacity to protect the property of the person).

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Sequestration of Estate

In addition to appointing a judicial factor, the Court may sequestrate the estate and place the property in the custody of a neutral person accountable to the Court for the preservation and management of the property for the benefit of creditors or other interested parties.

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Procedure for appointment

The appointments are made by petition to the appropriate Court. Anyone with an interest in the property which it is sought to have preserved may petition. Every factor requires to find caution prior to entering into their duties. The Accountant of Court fixes caution. This is the same as the Bond, which an IP has to provide to the Court if they want to take an appointment as a trustee in sequestration.

At the commencement of each case, the Accountant of Court issues to every factor a copy of their Notes for Guidance. These set down how the Accountant requires the factor to proceed. The Accountant will also issue an Inventory of Estate. This must be completed by the factor showing the estate exactly as it existed at the date of the factor’s appointment. In a bankruptcy factory, the inventory must be accompanied by a list of creditors.

Usually a judicial factory comes to a conclusion on the estate being distributed to those entitled to it. In most cases this will involve the judicial factor petitioning the Court of their appointment for a judicial discharge. When such a petition is lodged with the Court, it is served on those with an interest in the estate, in order that they may have an opportunity to object to the factor’s discharge. The Accountant will be required to prepare a report on the factor’s discharge prior to this being granted.

When it has not been possible for the factor to obtain agreement from the beneficiaries as to a division of the estate, the factor can apply for a judicial discharge based on the division of the estate in a certain manner. This enables the beneficiaries to have their objections to the factor being discharged based on the division considered by the Court.

Of course it may arise that the parties who sought the appointment of the judicial factor may reach agreement, and decide that the factor should no longer remain in office. If this is the case, these parties will have to petition the Court for recall of the factory.

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Examples of when a judicial factor may be appointed

A judicial factor may be appointed under section 41 of the 1980 Act if the Council of the Law Society of Scotland investigates the books of a solicitor and are satisfied that there has been a failure to comply with the Solicitors Accounts Rules. This will happen if the Council establishes that the solicitor’s liabilities exceed their assets, or if it is not reasonably practicable to ascertain whether this is the case or not.

The petition requires to be presented to the Inner House of the Court of Session and an interim appointment is always sought. The appointment of a factor will not prevent the subsequent sequestration of the estate. That said, the judicial factor has responsibility for the funds in the client accounts, and these are distributed amongst the clients only and not the creditors of the solicitor.

For a partnership, a judicial factor can be appointed to rule on how the assets of the firm should be disbursed on dissolution. The appointment usually results from a serious dispute between the partners as to the running of the business. The appointment may not arise because of the insolvency of the partnership. The appointment is made either under the common law or the Partnership Act 1980. The duties of the factor are to realise the assets and disburse them to those entitled to them, that is creditors and partners. The factor can carry on the business with a view to selling it as a going concern.

A judicial factor may also be appointed in terms of Section 11A of the Judicial Factors Act 1889. This is generally appropriate when a person has died leaving debts which casts doubt on the solvency of the estate, or when the person has died intestate, and no one is prepared or entitled to be appointed executor.

The petition is only competent if

• the deceased left no settlement appointing Trustees or other parties having power to administer their estate, or
• the Trustee appointed does not act.

Because a judicial factor can be appointed even if the estate is solvent, it might be the appropriate way forward when there is some doubt about the insolvency of the deceased’s estate.

The factor has to advertise their appointment and call for claims to be submitted by the creditors. They must then adjudicate on the claims and lodge a statement of funds and scheme of division with the Accountant before obtaining the approval of the Court to make a dividend to creditors. In terms of adjudicating the claims of creditors, the rules that apply to personal bankruptcies also apply to section 11A of the Judicial Factors Act 1889. The claims must state the extent of the debt at the date of the factor’s appointment and must be vouched. The claims of the creditors will be given one of the following rankings

• secured
• privileged
• preferred
• ordinary
• postponed.

Privileged debts are deathbed and funeral expenses of the deceased.

If there is to be a delay in the realisation of the estate, the factor may decide to make payment of an interim dividend. Once the estate is fully realised, the factor lodges with the Accountant their state of funds and scheme of division. The Accountant will produce a report, which the factor must then intimate to the creditors, allowing them the opportunity to object to the scheme of division. The Court will then approve the scheme of division and the factors will make payment of the final dividend.

The position of judicial factor is very similar to a Permanent Trustee who has been appointed under section 25(2) of the Bankruptcy (Scotland) Act 1985. However, there are some disadvantages to a judicial factor

• the powers of a judicial factor can be less certain than those of a Trustee in Sequestration
• the appointment does not equalise diligence (that is, preference can still be gained by one creditor)
• a judicial factor cannot sell heritable property with a prior inhibition
• a judicial factor cannot obtain examination of the debtor or other person as can the Permanent Trustee.

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Curator bonis

A curator bonis is a person appointed by the Court to look after the affairs of another person (the incapax) who, in the opinion of the Courts, is unable to manage those affairs for themselves, or to give adequate directions to others for their management. Such incapacity may result from mental illness, brain damage or severe physical handicap. Their duty is to preserve the estate until the recovery or death of the incapax, not to alter their rights of succession or otherwise to dissipate the assets.

Largely the Judicial Factors Acts 1849, 1880 and 1889 govern the powers and responsibilities of the curator bonis. A curator bonis is also a trustee for the purposes of the Trusts (Scotland) Acts 1921 and 1961. In the exercise of their functions the curator bonis is accountable to and subject to the supervision of the Accountant of the Court. Following the coming into force of the Adults with Incapacity (Scotland) Act 2000, the Court cannot appoint a curator bonis to a person who has attained 16 years of age.

The appointment of a curator bonis may be sought on petition to the Outer House, supported by two medical certificates certifying the ward’s inability to manage their own affairs or give instructions for their management. The curator bonis has no power over the person of the incapax.

The petition may be presented by anyone disclosing an interest, for example, a relative, the family solicitor, a neighbour, a local authority of the Mental Welfare Commissioner. The criterion that applies is that the person of unsound mind is incapable of managing their own affairs or of giving instructions for their management. The petition should be served on all parties interested in the state of the incapax.

A curator bonis must find caution within one month of the appointment. The amount of any caution will depend in the first place on the inventory prepared by the petitioner. Within six months of their appointment the curator bonis must lodge an inventory with the Accountant of Court. Their duty is to preserve the estate until the recovery or death of the incapax, not to alter their rights of succession or to dissipate the assets.