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)). e) the ability to add, remove or vary matters that the sheriff must take into consideration when considering warrant to sell (s98(6).

This is not an exhaustive list.

4. Residual Attachment

4.1 Residual attachment also replaces adjudication for debt. If commenced, it would enable a creditor to attach property (both heritable and moveable) belonging to the debtor that is not attachable by any other diligence and completes the concept of universal attachment.

4.2 The creditor would need to have a decree or document of debt and, after having served a charge for payment and provided a Debt Advice and Information Package, would apply to the court for a residual attachment order. The attachment could be followed by an application for a satisfaction order which would allow the realisation of the value of the attached property.

4.2 The types of property against which residual attachment could be used include intellectual property, interests in trusts and annuities.

4.3 Due to the wide ranging nature of this diligence, the Act incorporates powers to allow Scottish Ministers to specify the description or nature of attachable property.

4.4 As this diligence is conceived to complement land attachment it requires to be considered at the same time.

5. Stakeholders

5.1 Stakeholders raised concerns regarding land attachment during the passage of the Bill and have maintained a keen interest in this diligence since. For this reason careful consideration must be given to the provisions of Part 4 to ensure that any diligence against heritable property balances the interests of the debtor and the creditor and that adequate measures are put in place to protect against the risk of homelessness. 5.2 Concerns included:-

• Unsecured debt, generally attracting higher interest rates than secured debts, would effectively be converted into a secured debt by land attachment.

• Creditors could use this powerful diligence for a relatively small debt.

• Unless appropriate regulations were made, people could be made homeless.

• Debtors whose land has been attached would face stress and uncertainty, not knowing when or if their creditor would seek a warrant to sell their property.

6. Options

6.1 There are potentially a number of options for dealing with Part 4 of the Act. Members of the Debt Action Forum are invited to consider the options included in this document and to make such comment or recommendation as they may consider appropriate.

6.2 It should be noted that the First Minister has made a commitment to exempt the main dwelling house from land attachment and to review what can be done to ensure that people who become bankrupt are not made homeless unnecessarily.

6.3 The Debt Action Forum may also wish to consider that not all creditors are large financial institutions. Smaller creditors may find that their businesses are in jeopardy because of their inability to enforce payment and that there may be unscrupulous debtors with adequate resources who are well able to pay their debts but choose not to do so.

6.4 It is clear no-one wishes vulnerable debtors to be made homeless unnecessarily yet creditors who have lent or provided services in good faith and under fair and reasonable terms should expect to receive what they are owed.

Option 1 – Do not commence Part 4, retain the status quo

6.2 This option would see the retention of adjudication for debt and no action being taken to commence land attachment or residual attachment at all. A decision would be required whether to repeal Part 4 of the Act and make no other provision or to look for alternative solutions to modernise diligence against heritable property perhaps through commissioning further expert research.

6.3 Debtors could still face action to sell their home unless the debt was paid before the expiry 10 years. If measures to protect heritable property in bankruptcy and trust deeds are enhanced there is a real danger that adjudication for debt would be seen as more attractive for creditor

6.4 Small creditors are disadvantaged because of the cost of enforcement through adjudication for debt and the time they would have to wait without payment.

Option 2 – Implement the legislation as passed

6.5 This option would see the implementation of land attachment as passed by Parliament. Ministers would be able to use the regulation making powers provided by the Act to enhance debtor protections including raising the amount of debt for which land attachment was available.

6.6 Raising the level of debt could influence a creditor’s decision on whether or not to use land attachment.

6.6 Land attachment would not be effective if the debtor was already bankrupt or had included the debt in a Protected Trust Deed. A Debt Payment Programme under the Debt Arrangement Scheme or a time to pay direction or order are also diligence stoppers.

6.7 This option does not achieve the First Minister’s commitment regarding exemption of the main dwelling house.

6.8 There is an obligation on Scottish Ministers to provide a report to Parliament within 15 months of commencement on the impact of land attachment on debt recovery and homelessness

Option 3 – Implement land attachment but exclude a dwelling house (or a dwelling house of such description or class as may be specified) from application for sale

6.9 The Act contains a power to allow Scottish Ministers to provide that where attached land, or any part of it is a dwelling house (or a dwelling house of such description or class as may be specified) that application for sale may be made only in relation to such part of the land that is not a dwelling house (s92(2)). 6.10 This power if used could exclude all dwelling houses from warrant to sell attached land although all land including dwelling houses would be attachable. Whilst this represents a protection for vulnerable debtors, there is a potential for abuse by unscrupulous debtors who could channel all their assets into buying an expensive home which could not be touched by the diligence.

6.11 Confining the diligence to commercial property or second homes might defeat the purpose of the diligence as many commercial properties are leased rather than owned and only a small number of debtors would own second homes.

Option 4 – Exclude the sole or main residence from land attachment.

6.12 This option would exclude a dwelling house which was the sole or main residence of the debtor and certain other categories of person (including circumstances where part of the dwelling is used for business purposes) from land attachment and could potentially be achieved by partial commencement.

6.13 There may be practical difficulties in operation because of the difficulty in distinguishing between the sole or main residence and commercial property or second homes.

6.14 Another possible way to achieve the aims of this option would be to introduce an appeal stage at the point of attachment. This would allow creditors to attach land but introduce a mechanism for debtors or third parties to request a judicial decision at an earlier stage upon production of evidence to confirm that the property was a sole or main residence.

6.15 If the sheriff decided that the property was a sole or main residence then the land attachment could cease to have effect as a real right in security but be converted into an inhibition

Option 5 – Enhance the powers of the sheriff when considering warrant for sale of the sole or main residence to allow the sheriff to take such circumstances into account as he sees fit

6.16 This option would extend the matters which the sheriff must take into account when considering warrant for sale and could allow the sheriff to decide whether taking all circumstances into account it was reasonable to grant warrant to sell. The circumstances the sheriff could consider could include the amount of equity available in the property and whether it was proportionate to the amount of debt. 6.17 Provisions could also be developed to prescribe the amount of equity below which warrant for sale would be refused and also allow for only the equity above the prescribed amount to be available for the creditor.

6.18 In practice this could see warrant for sale being granted but free proceeds below the prescribed level being returned to the debtor to enable alternative accommodation to be secured.

Option 6 – As option 5 but allow judicial consideration at the attachment stage

6.19 This option would introduce earlier judicial involvement in land attachment and allow the debtor to produce evidence of why land attachment was not reasonable at the attachment stage.

6.20 If the sheriff was persuaded that land attachment was not reasonable then the attachment could not be followed by application for warrant to sell. It would have the effect of an inhibition.

7. Conclusion

7.1 The options presented in this paper are not intended to be exhaustive but are presented to encourage discussion.

7.2 Members of the Debt Action Forum are asked to consider the options as presented and use these as a stepping stone to full discussion at the Forum’s next meeting on 1 April 2009.

7.3 Members may also have alternative solutions or options.

7.4 Comments in a structured way will facilitate further development of options to allow consultation with a wider audience in a channelled way.

Linda Clark Accountant in Bankruptcy 2 March 2009