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To grant or not to grant?

19 April 10

Reply to the argument that insolvency practitioners should be comfortable with granting fact and deed warrandice, suggesting great care should be taken when considering any such grant

by Kenneth Ross, Colin McIntosh

The article by Andrew Todd and Rachel Oliphant (Journal, February, 54) was admirably clear in its explanation of exactly what is meant by the various different kinds of warrandice. It appears to us, however, that a degree of care requires to be taken before assuming that insolvency practitioners will be comfortable with granting fact and deed warrandice.

All transactions are different. All insolvency practitioners are different. Negotiating positions will be very different in every transaction. One thing which insolvency practitioners have in common, however, is an absolute avoidance of any suggestion of an acceptance of personal liability.

If acting for an insolvency practitioner, a solicitor must be very careful to ensure that, after full discussion of the facts and the legal position, the insolvency practitioner is comfortable with granting fact and deed warrandice (or any other warrandice) before any suggestion is made that the insolvency practitioner might be willing to do so.

It would also be very unwise for any solicitor acting for a purchaser from an insolvency practitioner to assume that they are likely to obtain fact and deed warrandice. It is far safer to start from a position of assuming that no warrandice whatsoever will be available and to advise the purchasing client on that basis. Any grant of fact and deed warrandice would be better regarded as a pleasant surprise.

A full and complete due diligence exercise, together with specific confirmations obtained from insolvency practitioners, will in almost all cases be more than enough to allow a purchaser to proceed. Although express exclusions of personal liability will always be included in insolvent sale transaction documentation, it is not possible to exclude such liability in the event of misrepresentation or fraud. The purchaser should therefore be able to satisfy itself if appropriate due diligence is undertaken and appropriate questions asked.

Warrandice v warranties

Andrew Todd and Rachel Oliphant’s article states that: “There may even be confusion between warrandice and granting warranties, especially in cross border transactions.” The reality is however that warrandice is a form of warranty – a very special kind of warranty. The wording used in the article is “guarantee” rather than “warranty”, but the terms are broadly equivalent in this context. If an insolvency practitioner is granting any form of warrandice then that insolvency practitioner is granting a specific warranty, and if there is a breach of fact and deed warrandice granted personally by the insolvency practitioner then the insolvency practitioner is personally liable.

As such, the seeking of any form of warrandice from insolvency practitioners may present significant difficulties in agreeing a sale, which may well go to another potential purchaser at a slightly lower price who will not insist on warrandice (whether fact and deed or otherwise) being granted.

Absolute warrandice by the company?

The article indicates that an appropriate clause for the sale of a property by an insolvent seller would include a grant of absolute warrandice by the company. In any consideration of such warrandice the insolvency practitioner would require to think very carefully about the quality of record keeping in that company. Can the insolvency practitioner actually be confident that the company did not in the past grant any deeds which are contradictory to the disposition which is now being granted?

As regards the interest of a purchaser, the purchaser should be very careful about placing any reliance whatsoever on a grant of warrandice by the insolvent company. The insolvent company might have no assets which are not fully secured, and in addition, even if there ever were any such assets, the assets might have been distributed to creditors and the company wound up long before it became clear that any claim was possible. The insolvency practitioner would also require to take great care as regards his or her own interests given that in certain circumstances any claim under such a warrandice clause might rank before his or her remuneration.

Exclusion of indemnity

The article also states: “For purchasers however a lack of warrandice may cause the Keeper to exclude indemnity, making the title unmarketable.”

It appears to us that the Keeper is not entitled to exclude indemnity due to a lack of warrandice. Indemnity is excluded because of a defect in the title. The fact that an insolvency practitioner refuses to grant a warranty of a title does not mean there is a defect in that title.

Section 12(2) of the Land Registration (Scotland) Act 1979 states: “Subject to section 14 of this Act, the Keeper may on registration in respect of an interest in land exclude, in whole or in part, any right to indemnity under this section in respect of anything appearing in, or omitted from, the title sheet of that interest.” (Section 14 is a specialist provision regarding foreshore which need not concern us here.)

It would not be possible for the Keeper to give as the reason for exclusion of indemnity the fact that no warrandice or only limited warrandice has been granted in the disposition in favour of the purchaser. Lack of warrandice or a restriction on warrandice is not of itself a defect in title.

If something other than absolute warrandice has been granted in the disposition, this may attract the Keeper’s attention and may encourage the Keeper to investigate the title more thoroughly than otherwise would be done. It appears to us however that the restriction of warrandice to fact and deed is just as likely to attract the Keeper’s attention as a total exclusion of warrandice.

Whether the Keeper’s attention is particularly attracted to a title because of a restriction in the grant of warrandice or not, the title will in any event be investigated by the Keeper. If there is a defect in the title then indemnity might be excluded in some respect. Any exclusion of indemnity will however flow from a defect in the title and not from a lack of warrandice or a restriction in the level of warrandice granted. A purchasing solicitor wishing to avoid exclusion of indemnity should focus on whether there is any defect in the title and not on the absence or presence of warrandice.

As stressed above, every transaction is unique and in some transactions some insolvency practitioners might be willing to grant fact and deed warrandice. It must be borne in mind however that fact and deed warrandice is still a warranty – and a warranty for which the insolvency practitioner is personally liable. It appears to us that it will remain the case that the majority of insolvency practitioners will not be willing to accept that personal liability in circumstances where alternative means of addressing a purchaser’s concerns are readily available.

  • Kenneth Ross is a partner in the Commercial Property Department of Brodies LLP and an Honorary Professor at the University of Glasgow. Colin McIntosh is head of the Corporate Restructuring and Insolvency Group of Brodies LLP.

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