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Abolition of Adjudication for Debt and the Introduction of Land Attachment

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Abolition of Adjudication for Debt and the Introduction of Land Attachment Abolition of Adjudication for Debt and the introduction of Land Attachment 1. Introduction This paper invites members of the Debt Action Forum to comment on the potential options for dealing with Part 4 of the Bankruptcy and Diligence etc. (Scotland) Act 2007. This part of the Act, which has not so far been commenced, includes provision for the abolition of adjudication for debt and the introduction of land attachment and residual attachment in its stead. Whilst this subject is not strictly a credit crunch issue and therefore not necessarily a matter for the Debt Action Forum, it is clear that there are relationships between bankruptcy and trust deed legislation and the Scottish diligence provisions. Land attachment deals with creditor action against a debtor’s heritable property and it may be desirable to ensure there is the same standard of debtor protection, particularly in respect of dwelling houses, afforded in both insolvency measures and land attachment. Amendments to insolvency measures may make land attachment (or adjudication for debt) a more attractive option for creditors; likewise whatever provisions there are (or are not) for diligence may encourage greater creditor use of bankruptcy. It is hoped that bringing this topic to the Debt Action Forum will bring balanced deliberation to an emotive issue which will facilitate further consultation with a wider audience. There is a potential legislative slot to make provision for land attachment at the end of 2009. 2. Background 2.1 The Scottish Law Commission reported on diligence reform in its ‘Report on Diligence’ issued in May 2001. This report followed many years of discussion and consultation and made a number of recommendations for the future of diligence. Further consultation was undertaken by the Scottish Executive in a consultation on the ‘Enforcement of Civil Obligations in Scotland’. 2.2 As a product of this extensive consideration the Bankruptcy and Diligence etc. (Scotland) Bill was introduced to Parliament on 21 November 2005. The lead committee, the Enterprise and Culture Committee, took evidence and led debate during the passage of the Bill which was passed on 30 November 2006 and received Royal Assent on 15 January 2007. 2.3 The resultant Act - the Bankruptcy and Diligence etc. (Scotland) Act, 2007 - is large, complex and contains many provisions for the reform of diligence. Some of these provisions have already been commenced but work is still required to ensure that some further diligence provisions, not yet commenced, are effective and practical in their operation and continue to be relevant and fair. 2.4 Land attachment is intended, together with Residual Attachment, to replace the very old diligence of adjudication for debt. These two new diligences, together with other provisions in the Act, support a concept of ‘universal attachment’ available to creditors to recover what they are owed. The provisions for abolition of adjudication for debt, land attachment and Residual Attachment comprise the three Chapters of Part 4 of the Act. 2.5 The proposals for land attachment in particular have attracted a great deal of attention since the concept was first mooted and this proposed new diligence remains a concern to many. 2.6 Because the introduction of land attachment is so closely linked to the other provisions in Part 4 of the Act, it cannot be considered in isolation and this document, therefore, considers the whole of this part of the Act. 2. Adjudication for Debt 2.1 Adjudication for debt was first introduced by the Adjudications Act 1672 and remains largely unchanged by statute. It is a powerful diligence which can be used alone or as a follow on process from inhibition. 2.2 Adjudication for debt gives a creditor security over ‘adjudged’ property. This is usually specified land belonging to the debtor but can be other assets such as intellectual property. Adjudication therefore fulfils two roles – it acts as a form of debt enforcement against heritable property and as a residual diligence against moveable property. 2.3 A decree or a document of debt does not authorise adjudication. To use this diligence creditors must apply to the Court of Session for a ‘decree of adjudication’. 2.4 At the commencement of the Court of Session action the creditor will also usually register a ‘notice of summons of adjudication’ in the personal registers which serves as an inhibition against the debtor in respect of the property that the creditor wishes to pursue. 2.5 Once the decree of adjudication has been granted and extracted, it is registered in the property registers to complete the diligence. 2.6 Adjudication gives the creditor a judicial security over the adjudged property but does permit the creditor to sell immediately. The creditor can however raise an action to remove the debtor from the property, grant leases of the property and, through the diligence of maills and duties, collect rents from tenants. 2.7 It is only if the debt remains unpaid after 10 years that the creditor can apply to Court of Session for a ‘declarator of expiry of the legal’. If this is granted the creditor becomes the owner and can sell the property. 2.8 There is no provision for sale under authority of the court as an alternative for transferring ownership and, once the creditor has sold the property, there is no requirement for him to account to the debtor for the sale proceeds. 2.9 In its ‘Report on Diligence’ (SLC 183)’ issued in 2001, the SLC found that Adjudication for debt is archaic, outdated and rarely used. They considered the process of adjudication to be potentially disproportionate to the value of the debt. They felt that it was expensive for creditors and that 10 years was too long for a creditor to wait before being paid. They also felt that the process was unduly harsh on debtors and that there was little protection for the debtor’s family home. 2.10 The SLC recommended that adjudication for debt should be abolished and that it should be replaced by land attachment and attachment order (residual attachment). 2.11 The majority of respondents to the Scottish Executive Consultation on Enforcement of Civil Obligations in Scotland issued in April 2002 agreed that adjudication for debt should be abolished. 2.12 There is no clear reason why adjudication has not been used to any great extent although the time a creditor has to wait may have a bearing on this. It is also possible that there is not a good understanding of the diligence and therefore it is not used. 2.13 On the other hand, anecdotal information from Registers of Scotland suggests that there has been a large increase in its use since the 2007 Act was granted Royal Assent which may suggest that creditors are becoming more aware of the availability of this diligence. 3. Land Attachment The diligence 3.1 Like adjudication for debt, land attachment is a two stage diligence. It confers a real right over attached land and secures the amount owed together with interest and expenses. 3.2 Land attachment lasts for 5 years if not terminated by payment, by sale of the land, or by recall. The creditor may extend this period for a further 5 years by registering a notice of extension. The period can be extended than once. 3.3 The Act provides that land attachment is only competent if the debtor has been charged to pay the debt and that the amount of the charge is more than £3,000. This amount can be varied by regulation. The creditor must also provide the debtor with a copy of the Debt Advice and Information Package. The process 3.4 Land attachment is created by the registration of a ‘notice of land attachment’ in both the personal and land registers. Providing a copy of this notice is served on the debtor and a certificate of service is registered within 28 days, the land attachment takes effect. 3.5 After a period of 6 months, if the debt remains unpaid, the creditor can apply to the sheriff for warrant to sell the attached land. The sheriff must give a number of people the opportunity to be heard. These include the debtor, any co-owner, any occupier of the land and any other person that may be prescribed by regulation. Where the application for sale is in respect of a sole or main residence the sheriff must take into consideration the nature and reasons for the debt, the debtor’s ability to pay if warrant were suspended for a period of up to 1 year, any action taken by the creditor to assist the debtor in paying the debt and the ability of those occupying the dwelling house to find reasonable alternative accommodation. 3.6 If warrant is granted the creditor can terminate the debtor’s right to occupy the land. Arrangements for the sale of the land are made by a person appointed by the court. The sale proceeds are used to pay the expenses, any prior ranking security, interest and capital sum due to the creditor, other securities with any surplus reverting to the debtor. Regulation making powers 3.7 The Act as drafted incorporates powers to amend several provisions by regulation. These powers include:- a) the ability to alter the level of debt for which land attachment may be competent (in the Act £3,000) (s83(3)) b) the ability to restrict the creditors right to apply for warrant to sell either all dwelling houses or dwelling houses of a specified kind from the application for warrant to sell (s92(2)) c) the power to prescribe the minimum amount recoverable by land attachment (in the Act £3,000) (s92(3)) d) power to stipulate the net sum likely to be recovered (in the Act - £1,000 plus expenses) below which warrant to sell must be refused (s97(7)).
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