Biggart Baillie Solicitors

The New Diligences

Thursday, October 23, 2008

by Lindsay Ogunyemi

The Bankruptcy & Diligence etc (Scotland) Act 2007 (the “BAD” Act) will radically reform the law of bankruptcy and diligence as it is implemented in phases over the course of 2008 and 2009. This article looks at the three key new diligences introduced by the Act and the impact they are likely to have on both creditors and debtors.

The objective of the BAD Act is to modernise the laws of personal bankruptcy and diligence, to strike a better balance between the rights of creditors and debtors, and to support business risk. The Act, so far as it relates to diligence, is based on the Scottish Law Commission’s proposals to systematise and codify the law. Its objective is to make all types of assets susceptible to diligence. The Act itself is substantial, extending to 17 Parts and 6 Schedules. Despite its volume, much of the mechanics of the Act will be set out in secondary legislation. It is hoped that the Act will create a fair, effective and, crucially, unified system of debt recovery.

Not surprisingly, the content of the Act has been the subject of much debate and speculation, most of which has centred on the provisions in relation to bankruptcy. However, this article focuses on the Act’s provisions in relation to diligence and specifically, the three new diligences: Land Attachment, Money Attachment and Residual Attachment.   

Land Attachment
Land attachment is the most controversial of the new diligences, as it allows creditors effectively to force the sale of a debtor’s land, including his principal dwelling house, in order to recover a debt of £3,000 or more. The Act provides certain safeguards for debtors, however, and a Sheriff will not sanction this course of action if he considers it would be “unduly harsh” to do so. Nonetheless, it is potentially a very useful debt recovery tool for creditors.

Essentially, Land Attachment is a two-stage process - attachment of the land followed by a Court process to secure the sale of the land.

The first step for the creditor is to register a Notice of Land Attachment in both the relevant land register and register of inhibitions as soon as a Charge for Payment for a sum of £3,000 or more has expired without payment. The Land Attachment comes into effect 28 days after it has been registered. At that stage, the Land Attachment operates in the same way as Letters of Inhibition, that is, the debtor is effectively prevented from selling his land, as he will not be able to exhibit a clear title. Six months after the Land Attachment has been created, the creditor may apply to the Court for a warrant for sale of the land. If the debt is settled at any time up until the grant of a warrant for sale, the Land Attachment can be terminated. If the debt is not settled, a Warrant for Sale may be granted by a Sheriff in respect of all or part of the debtor’s land. If granted, the debtor’s right to occupy the land is terminated and a designated person, likely to be a local solicitor, will be appointed to sell the land. After the sale has been completed, the creditor is paid the principal sum plus expenses and outlays from the proceeds of the sale. Any balance will be paid to the debtor.

There has been heavy criticism of Land Attachment by certain factions who fear that it will operate in a similar fashion to the old diligence of poinding. Undoubtedly, creditors will readily use the threat of Land Attachment to pressurise debtors into making payment. However, the number of sales of land that actually proceed following Land Attachment remains to be seen. Certainly, Land Attachment will be an attractive alternative to sequestration (bankruptcy) for many creditors. It is anticipated, however, that many debtors who find their property subject to a Land Attachment will simply petition for their own sequestration.

Land Attachment is due to be implemented in 2009. Despite the wording of the Act, Alex Salmond has recently advised that Land Attachment will not apply to dwelling houses in Scotland. If this is the case, the Act will need to be amended. The possible exclusion of dwelling houses from the scope of Land Attachment will seriously weaken its appeal to creditors. It is anticipated that creditors will continue to seek to sequestrate debtors, as the cost of doing so is likely to be less than the cost involved in the Land Attachment process. There is therefore a degree of uncertainty about when, and indeed if, Land Attachment will be implemented.

Money Attachment
As with Land Attachment, the introduction of Money Attachment will significantly extend the rights of creditors to take positive action to recover outstanding sums from debtors. If a Charge for Payment has expired without payment, the Act provides that Sheriff Officers may enter a debtor’s premises and attach money held on the premises. For the purposes of the Act, there is a presumption that any money held on the premises is owned by the debtor.

The Act contains various provisions regarding the reporting and the release of attached money. The Sheriff will consider any objections to the money being released to the creditor. Such objections are most likely to be from persons who seek to rebut the presumption that the cash belongs to the debtor. As with Land Attachment, ultimately, the Sheriff must consider whether or not the attachment is unduly harsh in all the circumstances.

There are restrictions on the use of Money Attachment by creditors. It is not competent in relation to money kept in a dwelling house, nor is it competent to attach money on a Sunday or a public holiday. Money Attachment must not be effected before 8am or after 8pm. It is not competent to attach money capable of being arrested, for example, funds held in a bank account. If money that has been attached has been released to the debtor for any reason, that money cannot be re-attached in relation to the same debt. Notwithstanding these restrictions, for creditors who deal with cash rich debtors such as nightclubs or public houses, Money Attachment will no doubt be a welcome introduction. In reality, however, one wonders how often Sheriff Officers are likely to find substantial quantities of cash.

Money Attachment is due to be introduced in April/May 2009.

Residual Attachment
Residual Attachment covers assets that are transferable and which cannot be attached by any other diligence, such as intellectual property rights and property owned in common by the debtor and a third party. Essentially, it is a “catch-all” diligence, designed to afford creditors a remedy where previously there was none. The operation of Residual Attachment is similar to Land Attachment. After the attachment has been made, the creditor may apply to the Sheriff for a Satisfaction Order which may authorise the sale or transfer of the property, or payment of any income generated by it, to the creditor. A Residual Attachment remains in effect for 5 years, although the Sheriff can extend this period.

As with Land and Money Attachment, the Act provides various safeguard for debtors. It is unlikely that this diligence will be used as often as other forms of attachment. While it does represent a significant extension of the remedies open to creditors, it may be of limited value in practice.

The introduction of Residual Attachment is provisionally planned for autumn 2009.

It is hoped that the BAD Act will update Scotland’s system of judgement and enforcement, bringing it into line with the English system and making it fairer and more efficient. Whether the Act will achieve its objectives remains to be seen. Many commentators believe that, in practice, very few creditors will actually opt to use the new diligences and will, for most purposes, view threatening sequestration as the most effective way of getting money out of a debtor. At the moment, it is a case of watch this space.

Lindsay Ogunyemi is a solicitor at Biggart Baillie LLP who specialises in civil and commercial dispute management and insolvency related matters.