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Difficulties in enforcing heritable securities

"One thing is clear, and that is that it will be much more difficult for secured creditors to obtain Decrees, and even if they do it is likely to be after a lengthy process if there is no voluntary surrender" (Robert Rennie, "The enforcement of heritable securities", Edin. L.R. 2011, 15(3), 510-511). 

Never were truer words spoken when referring to the home owner and Debtor Protection (Scotland) Act 2010 on the enforcement of heritable securities.

In the last 18 months alone, I have come across a number of instances where heritable creditors have encountered difficulties enforcing securities where the proprietor is a dissolved limited company.

Whilst there is a statutory mechanism in place for the service of a Calling Up Notice on the Lord Advocate where a company is dissolved, there is regrettably no such provision for the service of a Summary Application. This means the heritable creditor has no alternative but to have the company restored to the register before raising the Summary Application. This is both a costly and time consuming exercise which, more often that not, has a number of negative implications for borrowers and creditors alike.  Among these is the accrual of interest on the sums owed, delays in the repossession and sale of the property and, dare I say it, a lesser recovery if the value of the property is lower than that owed to the lender.

Surely a more cost and time effective measure would be to introduce statutory provisions that allow for service of the Summary Application on the Lord Advocate? This is also arguably a more sensible approach where the debtor, being a dissolved limited company which no longer has a legal identity, is clearly incapable of purging its default, and/or where those who were controlling the limited company prior to its dissolution show little or no interest in purging the default.

Perhaps an even more practical approach would be to dispense with the requirement of raising a Summary Application and obtaining Decree altogether thereby allowing the heritable creditor to rely upon an expired Calling Up Notice for the purposes of taking possession of and selling the property? After all it's not as if a dissolved limited company has the locus to defend an action and certainly in my experience those who controlled the limited company prior to its dissolution have never attempted to do so. It is also unlikely the Lord Advocate will enter appearance. 

This raises the issue of compliance by the heritable creditor of the pre-action requirements where the property is residential but as was held in Westfoot Investments Limited v European Property Holdings Incorporated 2015 SCEDIN 58, a limited company is not a natural person and is therefore, not entitled to the protection afforded to debtors under the Conveyancing & Feudal Reform (Scotland) Act 1970.  Concerns can arise where the property is occupied by a tenant. It was, however, also pointed out in the aforementioned case that tenants who are occupiers under an assured tenancy within the meaning of the Housing (Scotland) Act 1988, are separately protected from ejection and so a Decree against the heritable proprietor could not avail against such a tenant.

The normal practice, irrespective of whether or not the heritable proprietor is a limited company or a natural person, is to raise an action for recovery of heritable property against the Occupiers. This is done irrespective of whether or not there is an assured tenancy in place. In other words, those who occupy a property as the tenant of a now dissolved limited company would be entitled to defend an action for their removal and, as such, would have the opportunity to persuade a court that it is unreasonable to grant a Warrant for their ejection.

It is unfortunate but not surprising that when drafting the 2010 Act, the Scottish Government failed to take into consideration the requirement for provisions dealing with the enforcement of heritable securities where the heritable proprietor is a limited company (or a dissolved limited company). I am not one for advocating a piecemeal approach to legislating on any issue, but it is clear that a comprehensive review is required of this ill equipped legislation.  Until then, lenders are left in the unfortunate position of having to spend time and money restoring a company to the Register in order to enforce their rights.

First published by Scottish Legal News on 8 January 2016.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

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