Creditor calling:
Enforcing standard securities

A recent Supreme Court ruling calls into question procedures often adopted by secured lenders in repossession proceedings. ALEX INNES discusses the implications.

One of the most common assets to be offered as security to a bank is heritable property. In Scotland, a standard security is the only competent method of obtaining a fixed charge over such property. So a recent Supreme Court ruling on the enforcement of standard securities is very relevant to all lenders relying on Scottish property as part of the security package.

In The Royal Bank of Scotland plc v Wilson last November, the Supreme Court decided that the only way open to a secured creditor whose debtor defaults on repayments and who wants to have the secured debt repaid through entering into possession and selling the secured property, is to use the statutory calling up procedure under Section 19 of the Conveyancing & Feudal Reform Act 1970.

This calls into question certain procedures which have often been adopted by secured lenders in Scottish repossession proceedings (primarily in relation to residential property). This involved raising a writ founding on a “default” in terms of the standard conditions of the 1970 Act, based on a failure to comply with a requirement arising out of the security, and seeking recovery by court order in terms of s 24 of the 1970 Act.

In this case, two married couples granted standard securities over their homes to secure the debt of the business of the husbands. The business debt was due and payable, and the bank demanded repayment of the monies from the husbands (but not the wives). It then served a certificate of default, and obtained an order for possession and sale enabling it to eject the husbands and wives from their respective homes.

The debtors appealed the decision as the bank had not served a formal requisition under Section 5 of the Heritable Securities (Scotland) Act 1894 to enter into possession, which was required where it was their dwelling house.

The analysis is fairly complicated but the Supreme Court decided that the reference in Section 19 of the 1970 Act to “...shall serve calling up notice...” meant that this was the only way to achieve the remedy sought and that use of the notice of default route or a demand for payment coupled with an action for eviction under the 1894 Act could not be used instead (noting that the service of a ‘calling up’ notice would also satisfy the obligation under the 1894 Act). The bank had failed to serve a ‘calling up’ notice, and therefore was not entitled to possession.

Further, formal notice had not been provided to both husbands and wives that monies were due, and therefore the wives were not on notice that there was a danger of ejection from their dwelling houses.

Clearly this is an important point to be borne in mind by banks or anyone interested in enforcement of a standard security. Most would use the ‘calling up’ route anyway, but this makes it clear that, especially in connection with residential property, this is essential.

In addition to complying with the ‘calling up’ procedure outlined above, as from 30 September 2010, a bank seeking to repossess residential property also needs to comply with The Home Owner and Debtor Protection (Scotland) Act 2010, which has introduced various additional protections for debtors. These include ensuring that the relevant debtors are provided with clear information regarding the consequences of the security and are afforded an opportunity to resolve the default (which arguably had not happened in the above case).

The final point to note is that potential purchasers (and their mortgage lenders) of properties that have been repossessed should carefully consider the procedures followed, to ensure that they comply with the above case, and if relevant, the 2010 Act, and if necessary, obtain Title Indemnity Insurance.

Alex Innes is Head of the Banking & Finance Group of Semple Fraser LLP.

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