Court rules that bulk debt purchaser cannot benefit from standard security
David Menzies looks at a decision in Banff Sheriff Court and its implications for insolvency practitioners.
It has become common for mortgage debt to be bought and sold among lenders but care must be taken with the assignation documentation to ensure that standard securities remain effective.
A decision in Banff Sheriff Court in the case of OneSavings Bank plc v Burns & Burns  SC BAN 20 has considered the ability of a lender to enforce a standard security. The case has potential implications for office holders in both personal and corporate insolvencies where the estate includes residential properties.
While the circumstances of this case did not involve an insolvency situation, the underlying circumstances are increasingly familiar to office holders. The case involved debt which had formed part of a large portfolio sale of mortgage debt. The outcome in this case casts significant doubt on the ability of such a debt purchaser to rank as a secured creditor.
OneSavings Bank plc (OneSavings) claimed to be creditors and have the benefit of a standard security after two successive assignations by previous creditors. The home owners, Mr & Mrs Burns, argued that OneSavings were not able to raise the action as the assignation had not met the requirements of the Conveyancing and Feudal Reform (Scotland) Act 1970 (the 1970 Act).
The assignation to OneSavings transferred a portfolio of debt and associated standard securities details of which had been set out in a schedule to the assignation. The assignation stated that the standard securities being assigned were:
"for all sums due, to the extent of all sums now due or at any time or times hereafter to become due under the respective Standard Securities, the creditor’s interest in which is currently vested in the Transferor.”
It did not detail outstanding balances at the date of assignation.
Mr & Mrs Burns argued that an assignation could only be in terms of one single standard security and, therefore, in terms of the 1970 Act it was not competent to do a bulk transfer. A secondary argument submitted was that the assignation had failed to state the amount due at the time of transfer and accordingly failed to meet the statutory requirements of the 1970 Act.
Sheriff Mann rejected the first argument and considered an assignation could transfer more than one standard security and conform to the legislative requirements.
However, Sheriff Mann found that as the assignation did not state the amount of outstanding debt it did not comply with the appropriate legislation. Accordingly, whilst the various debts had been transferred to OneSavings, they could only be treated as unsecured debts. As a result, he dismissed the repossession action.
Sheriff Mann commented that he had reached his decision reluctantly as Mr & Mrs Burns were aware that OneSavings must be repaid the debt. The repossession decree was avoided on what Sheriff Mann described as ‘a technicality’. The decision may yet be subject to an appeal.
In the meantime, lenders and creditors such as debt purchasers should proceed with caution in any case where they wish to repossess a property where a standard security has been assigned to them.
Office holders should carefully consider if a debt purchaser has the benefit of a standard security over any residential property. Legal advice should be sought where appropriate. Where the standard security has not been assigned in a proper manner, the debt purchaser will rank only as an unsecured creditor in an insolvency.