Court of Session takes different view on effectiveness of security assigned as part of bulk debt purchase

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david-menzies By David Menzies, Director of Insolvency

1 June 2017

The Court of Session has considered whether a standard security assigned as part of a bulk debt purchase arrangement is effective. The decision of Lord Bannatyne contradicts that of an earlier Sheriff Court decision. 

David Menzies looks at the most recent developments and considers the impact for lenders and office holders in insolvency proceedings.

The decision of Sheriff Mann in the case of Onesavings Bank plc v Burns & Burns caused significant turmoil for the bulk debt purchase sector. The decision cast doubt on the effectiveness of standard securities assigned as part of bulk debt purchase arrangements involving residential properties.

Given the significant number of loan book transactions in recent years this could have been potentially problematic for those purchasers where the loan is defaulted on or where the borrower become bankrupt.

The decision caused significant unease amongst many in the legal profession. Lord Bannatyne has however given some relief in the case of Shear v Clipper Holdings. 

Case facts

This case involved a request for an interim interdict against Clipper Holdings who were pursuing a calling up notice, relying on OneSavings and contending that Clipper did not have title to enforce the security. Lord Bannatyne refused to grant the requested interim interdict.

Lord Bannatyne delivered his opinion from the bench and this is expected to be written up and published shortly. The basic argument put forward by the pursuer was that the failure to use the exact wording in Note 2 to Form A of the Conveyancing and Feudal Reform (Scotland) Act 1970 (the 1970 Act) resulted in the security being invalid.

Lord Bannatyne considered that the argument did not take account of modern developments in the law regarding mandatory / directory dichotomy. In this respect, failure to follow statutory procedure does not automatically result in invalidity.

Instead the court should look to the statute to see if the scheme of the Act is such that invalidity should follow. In doing so it should strive to be fair and exercise commercial sense (Newbold and others v Coal Authority [2014] 1 WLR 1288; CTB v White [2015] UKPC 39).

The court should consider the seriousness of any breach. He concluded that in this case there there was no serious breach, and it would be a grave injustice to rule in favour of invalidity.

Lord Bannatyne also considered that moreover, the court should look at the underlying purpose of the legislation when interpreting it. The statutory purpose in this case is seen in s.14 of the 1970 Act, which says that an assignation of a security will, on registration, mean that the security “shall be vested in the assignee as effectually as if the security or the part had been granted in his favour”.

On the pursuer’s argument, that result is not obtained as by stipulating the amount outstanding against which the security is assigned as part of the documentation this would convert an “all sums due” security to be converted into a fixed sum security. It will no longer be an “all sums due” security, and will thus not be “vested in the assignee as effectually as” if he had been the original grantee.

Lord Bannatyne noted that Sheriff Mann had not been favoured with the detailed argument that he had been presented with. Lord Bannatyne disagreed with the approach of Sheriff Mann in Onesavings Bank plc v Burns & Burns.

He concluded that no prima facie case had been demonstrated and that even if prima facie case had been demonstrated, the motion would have been refused on the basis of the balance of convenience.

He concluded that the wholly technical argument advanced by the pursuer was used as a delaying tactic only, and would not be countenanced by the court.

Comment

The decision of Lord Bannatyne contrasts directly with that of Sheriff Mann. It is believed that an appeal has been lodged in the case of Onesavings Bank plc v Burns & Burns.

If an appeal is heard then it is likely that reference will be made to the decision of Lord Bannatyne. It is therefore likely that in due course there will be additional clarity given in this area of law.

In the meantime, it may be expected that lenders and creditors such as debt purchasers will rely on the outcome of Shear v Clipper Holdings.

Office holders should still carefully consider if a debt purchaser has the benefit of a standard security over any residential property given the conflicting outcomes of the two cases. Legal advice should be sought where appropriate.

Topics

  • Insolvency

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