Advice on Debt and Law

Its recommendations are far reaching. While they are only recommendations, the Commission exercises strong influence and I would hope the majority of its conclusions will be incorporated into a Bill within the next year. There will almost certainly be a hostile reaction, however, from some members of the Scottish Parliament.

All creditors ? secured and unsecured ? should gear up in advance.

New Methods of Enforcement
Three completely new forms of debt enforcement are recommended, namely:

• Land Attachments
• Ordinary Attachments and
• Money Attachments.

In addition, reforms are proposed for Inhibitions (to make them more user friendly) and to various parts of Insolvency law.

The existing enforcement measure of Adjudication ("er, what?" I hear you say) is to be repealed, if the recommendation is followed. Having seen this used once in the last 10 years, I doubt this will be a major hardship. Similarly, the abolition of the Diligence Act 1661 will not be keeping me awake at night.

The possible effect on both unsecured and secured lenders is examined towards the end of this article.

Land Attachments
The only way of explaining a proposed new form of enforcement without you losing the will to live is in a step by step guide, so here goes:

1. Following expiry of a Charge (ie after Decree ? judgment, a court order for payment - and a further document), an unpaid creditor can register a Notice of Land Attachment in the property registers
2. After 14 days of the notice, this will give the creditor a subordinate right, over the property, for payment of the debt
3. For those first 14 days, the notice will have the same effect as an Inhibition restricted to the land in question (ie it may still stop sale by the debtor)
4. After 6 months, the creditor would apply to the Court for authority to sell the land to pay or reduce the debt.
5. This can be done against a debtor?s principal house.
6. There is no limit, high or low, on the size of debt which can give rise to a Notice of Land Attachment; but
7. Authority to sell the land will only be granted by the Court if the debt is £1,500 or more at the time of the application to sell.
8. To justify the granting of authority to sell, the debt must be reduced by the lower of £500 or 10% of the debt.
9. When the application to sell is made, the Court will grant an order requiring any prior security holder to disclose the amount outstanding and an order appointing a surveyor to report on the open market value of the land.
10. Authority to sell can be granted even where the property is jointly owned with another party although the Court may take this into account in deciding whether to grant authority.
11. Once authority to sell is granted, a "suitably independent solicitor" (SIS) is appointed by the Court to market and sell the attached land.
12. On sale, the proceeds are applied as follows:

Attachments
>Still with me? Then, in the immortal words of Magnus Magnusson (a man with imaginative parents), I?ve started so I?ll finish.

The Commission also recommends the ability, by service of an attachment order, to attach all property which is capable of being transferred. This includes moveable property.

Once again, here is a step by step guide to what is proposed:

1. The creditor would apply to the Court for an attachment order
2. After notification to the debtor, he should apply to the court for a satisfaction order in relation to the attached property
3. The Court can issue interim orders that stop the debtor and specified third parties entering into deals over the property sought to be attached.
4. the attachment order would give the creditor a right over the attached property in security of payment of the debt, interest and expenses.
5. The satisfaction order referred to can be for sale of the property and payment of the net proceeds to the creditor; for an income transfer order diverting future payments to the debtor (under an annuity for example) to the creditor; and for an order authorising the creditor to lease or license the property.
6. The proceeds have to be applied in the following order:
   1. to the expenses of the procedure;
   2. to interest on the sum due; and
   3. to any other sum due (including the debt itself)

Money Attachments
You?re doing well. This is the juicy bit.

For too long, it has not been possible to freeze money in the hands of the debtor where the debtor is wise to the possibility and deliberately keeps an account in overdraft (so avoiding arrestments).

Now, this new proposed form of enforcement would allow cash, cheques and various other documents in the hands of the debtor to be attached. Sheriff Officers executing such orders are entitled to assume that money in the possession of the debtor is owned by the debtor but sadly they are not permitted to search debtors or their handbags, wallets or "similar personal receptacles" ? can you imagine the litigation over that phrase? I can hardly wait.

The procedure for Money Attachments should be generally similar to ordinary Attachments but rather than applying for a satisfaction order, the creditor simply seeks an order for payment of the money attached. The order of payment is the same as stated for Attachments.

Effect on Unsecured Lenders
These proposed changes will be welcome news to unsecured lenders who have been faced with a mass of debtor friendly measures pushed forward by the Scottish Parliament.

In particular, there will be relief that some form of alternative diligence is proposed to deal with the abolition of poindings and warrant sales and the general difficulty there can be in pursuing self-employed debtors.

Effect on Secured Lenders
Although as you would expect, there is provision for repayment of prior securities on sale by land attachment, the proposals take some further degree of control away from prior security holders. In addition, those working to tight margins and at the higher end of loan to value ratios will be disturbed by the suggestion that the attaching creditor?s expenses are to be dedicated first before they see the net sale proceeds.

One consequence may be less tolerance of erratic debtors before proceedings are raised for repossession.

Summary
Watch this space for future developments. In the meantime, for further details just ask. For a copy of the full report, see www.scotlawcom.gov.uk.

Written by Mark Higgins
Member of the Diligence Committee of the Law Society of Scotland

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