Forgive us our debts

by Mark Higgins

The main features of the current Scottish Executive proposals for bankruptcy and diligence reform, and a few points of concern

The Journal, September 2004, page 16

Those of us involved in debt recovery, on either side of the fence, have had a lot of reading to do over the last few years. The debt arrangement scheme, major changes to the summary cause and small claim rules, the Mortgage Rights (Scotland) Act 2001 and FSA regulation have all contrived to make a visit to the optician a probability for me in the not-too-distant future.

The latest significant publication in the area is the recently-issued consultation paper and draft bill from the Scottish Executive titled “Modernising Bankruptcy and Diligence in Scotland”. It is impossible to condense this 228 page document into a few pages, but this article seeks to highlight the main areas where reform is likely during the next 12 months.

While many issues of drafting and some of policy remain to be determined, the inclusion of many of the provisions below in a draft Bill (which enjoys widespread support) makes it fairly likely that the majority will see the statute book.

Bankruptcy: more flexibility

The standard period of bankruptcy will be reduced to one year, bringing Scots law back into line with England and Wales following the Enterprise Act 2002. The Executive believes this strikes the correct balance between reducing the stigma of bankruptcy and protecting the public and businesses from culpable debtors. The trustee can still seek to defer the debtor’s discharge if appropriate. Payment by the debtor of contributions for up to three years may be ordered, to continue notwithstanding discharge.

A debtor’s interest in his house will revert to him if the trustee has not started dealing with its disposal within three years of the date of the bankruptcy order (or date of discovery of the property if later).

Bankruptcy Restriction Orders (BROs) and Undertakings (BRUs) will be used to impose restrictions after discharge to protect the public from culpable debtors.

Bankruptcy proceedings will be consolidated in the sheriff court, though the Court of Session will retain its supervisory jurisdiction for reduction and suspension.

The qualifying credit level will remain at £1,500 for creditors’ and debtors’ bankruptcy petitions.

The roles of interim and permanent trustee will be amalgamated into that of “trustee”. On the making of a bankruptcy order, the trustee will be able immediately to take all the actions an interim or permanent trustee can currently take.

Student loans will be exempt from being written off on discharge from bankruptcy.

Diligence on the dependence

Sheriffs will be given power to grant warrant for inhibition on the dependence, which will become competent in summary causes and small claims.

A general presumption will be created that a pursuer who obtains a warrant for diligence on the dependence will be entitled to the expenses of executing that diligence.

A new diligence of “interim attachment” will be introduced, permitting the attachment of moveable property in a defender’s possession on the dependence of a payment action.

Earnings arrestments: more info

Employers will require to advise debtors of the date and amount of the first deduction to be made from their salary; to send information to creditors specifying a debtor’s net earnings; to inform creditors when a debtor’s employment has terminated; and to provide, where known, details of the new employment. Failure to comply with this duty will be equated to the current sanction for non-deduction, namely that the creditor will be able to look to the employer for payment.

Debtors will be placed under a duty to notify creditors when their employment status changes – a good idea, if somewhat unlikely in reality.

Non-fisherman seamen’s wages will be treated as earnings, meaning that earnings arrestments will then be capable of being used against merchant seamen in respect of all debts due by them.

Arrestees beware

The amount of property attached by an arrestment in execution will be restricted to whichever is the lesser of:

an amount equivalent to the debt due by the arrestee (e.g. the bank) to the debtor; or
the total of the stated principal sum, plus the expenses of executing the arrestment; a sum to cover the expenses of a subsequent court action; and a calculation for interest. Therefore it will no longer be possible to arrest a much higher sum than that probably due.

Basic subsistence level sums will be preserved within bank and other accounts which have been arrested. Debtors will be entitled to a minimum level of income which will not be eroded by further enforcement.

A legal obligation will be placed on arrestees to disclose to an arresting creditor the existence or extent of assets attached by an arrestment within 14 days of the date of service of the arrestment. Arrestees will not be entitled to make charges to the arrester for such disclosure.

The sanction for non-disclosure currently proposed is that the arrestee will be penalised, possibly to the full extent of the sum owed to the creditor by the debtor, which could, of course, be very substantial indeed.

This seems excessive particularly when one considers that many arrestees may face difficulty in complying with a relatively tight deadline: banks receive thousands of arrestments every month; construction companies may have difficulty in readily establishing the extent of the obligation to account (for example, a valuation may be required); and smaller companies may face issues during holidays or other periods requiring a high level of management activity elsewhere.

Perhaps more than any other area in the paper, it is felt that this should be the subject of further consideration by the Executive.

The Executive has noted that banks receiving an arrestment sometimes apply a “set off” rule by looking at what the debtor owes to them as well as their obligation to account to the debtor. The Executive wishes to stop this by providing that, on the day of the arrestment (unless there are arrears and the security has been called up) the common debtor’s obligation to account to the bank for a mortgage is the amount due that month if it happens to be the day when it becomes payable.

The draft provision would disable banks from relying on the express terms of agreements with customers (many thousands of which already exist) to allow the net position between the bank and its customer to be determined. If a customer had two accounts, one heavily overdrawn (perhaps to seven or more figures) and the other significantly in credit, the new provision could force the bank to release the funds in credit to the arrester with no ability to cover itself for the account in debit.

As a result, this too is a potential reform of extremely wide significance to the banking industry and the provision of credit generally in Scotland and may require further consideration.

Inhibitions: no preference

Warrant for execution in extract decrees (including sheriff court decrees) or extract registered writs will authorise inhibitions.

Inhibitions will not confer a preference on inhibiting creditors in sequestrations or liquidations.

The expenses of inhibition will be chargeable against the inhibited debtor.

Ejections: one size fits all

Over the years, as the Scottish Executive rightly points out, the law has diverged in relation to different forms of ejection: ejections by landlords, heritable creditors and others are currently governed by a variety of different procedures.

To make the law more consistent, service of a charge prior to the execution of a warrant for ejection will be required in all cases irrespective of what court the action has been raised in and what type of court procedure used. The period of charge will be 14 days. The bill will also specify times when execution of a warrant of ejection is competent.

Further, the Executive is to make formal provision for the disposal of possessions left in premises from which the occupier has been ejected. The common practice of leaving premises “void and redd” will be prohibited. The bill will provide for the court to give such directions as it considers appropriate for the preservation of the occupier’s goods left in the premises. This may stipulate that the goods should be moved to a place specified by the debtor. Where the goods and effects are to be put in storage, any storage charges will be the responsibility of the debtor.

Time to pay directions

Applications for a time to pay (“TTP”) direction will be changed so that:

there will be automatic receipt by the creditor of any TTP application;
debtors will be able to provide more detailed information about their financial circumstances on TTP application forms;
acceptance by the creditor of a TTP application will require to be notified several days prior to the hearing;
and there will be statutory guidance to specify the factors which ought to be taken into consideration by the sheriff in disposing of applications for both TTP directions and orders.

The new land attachment

The bill includes a new diligence called land attachment. It creates an important enforcement measure which a creditor may use against a debtor’s heritable property.

At the first stage, service of a notice of land attachment in the property registers, after a lead-in period of 14 days during which the notice has the effect of an inhibition against the debtor restricted to that particular property, confers on the creditor a subordinate real right in security for payment of the debt. At the second stage, after a period of six months the creditor would be entitled to apply to the sheriff for warrant of sale of the attached land to extinguish or reduce the debt.

The creditor would be entitled to register a notice of land attachment against the debtor’s principal dwellinghouse. However, in-force time orders under the Consumer Credit Act, and debt payment programmes under the Debt Arrangement and Attachment (Scotland) Act 2002 will limit the steps a creditor can take.

An application for warrant to sell attached land is to be incompetent unless the total amount of the debt owing to the creditor at the date of application is £1,500 (or such other sum as may be prescribed). An exception will allow applications for lesser amounts where the debtor has attachable land in Scotland and the court lacks jurisdiction to award sequestration or make a winding up order. It will not be competent to grant a warrant to sell attached land where the likely net proceeds of sale do not exceed figures to be specified.

The application will be determined by the sheriff using discretionary power. Orders may be made requiring any prior security holder to disclose the amount outstanding on the security, and appointing a surveyor or other qualified person to report on the open market value of the land. The sheriff may refuse the order where it is reasonable to do so in all the circumstances. In assessing what is reasonable the sheriff should have regard to:

the nature of the debt and the reasons for its being incurred;
the debtor’s ability to pay the debt within an extended period;
any action taken by the creditor to assist the debtor to fulfil those obligations;
the ability of those occupying the dwellinghouse as their sole or principal residence to obtain reasonable alternative accommodation; and
the personal circumstances of any such occupiers.

An application for a warrant to sell attached land must be made to a sheriff of the place where any part of the attached land is situated. On granting warrant of sale the sheriff should appoint a suitably independent solicitor (SIS) to market and sell the attached land.

From the date on which the notice takes effect until the land attachment ceases to have effect, the creditor (in place of the debtor) will have the debtor’s rights and obligations as proprietor of the land, including (a) any right of the debtor to receive rent from any tenant, and (b) any lease granted in respect of the land.

The SIS will have authority, by virtue of the sheriff’s warrant, to grant a disposition on behalf of the creditor in favour of the purchaser in implement of the contract of sale.

Don’t confuse your attachments

A new diligence (separate from existing attachments) will be introduced, provisionally called “attachment orders”. A creditor will be entitled to apply to the sheriff court or Court of Session for an attachment order following the expiry of a charge. Any order made will create a real right or preference over the property in favour of the creditor.

It will be possible in principle to attach by this diligence all property which is capable of being transferred, including for example intellectual property rights, with certain specified exceptions designed to prevent hardship.

The existing diligence of attachment will allow money held by a debtor to be attached (provided it is not within a dwellinghouse).

Miscellaneous diligences/issues

The landlord’s hypothec will be abolished in relation to moveables in heritable property which is the subject of a residential lease, or in any part of other lease subjects used wholly or mainly as a dwellinghouse. The hypothec will remain for non-residential leases.

The diligence of sequestration for rent will be abolished, though it is questionable whether, as currently proposed, this should be the subject of wholesale abolition when it is used to enforce the hypothec which is being only partly abolished.

The right of action of maills and duties will be abolished, as will adjudication in security of future or contingent debts.

Saving provisions for each of these diligences will be made in relation to action already underway.

The period for cutting down prior diligences by sequestration will be extended from 60 days to six months.

Although the Executive accepts that there are very few wrongful diligence cases, some reform is proposed here too. In particular, if a pursuer can in future demonstrate negligence in the execution of a diligence, that may suffice. Further, it will be possible to establish joint and several liability in such a case against the creditor, creditor’s agent (you have been warned!) and/or enforcement officer.

I’d like to say that this should be the last major reform in this area for some time, but that would be rash. Now, where did I put those contact lenses…

Mark Higgins, Partner, Golds, Glasgow