The Bankruptcy and Diligence (Scotland) Act 2007contains a wide range of provisions affecting personal insolvency and various forms of diligence for enforcing civil obligations. Many of the provisions that relate to Inhibitions – which apply to heritable property - will come into force on 22 April 2009. Generally these reforms are to be welcomed.
An inhibition enables a creditor to prevent a debtor from transferring ownership of any of the debtor’s heritable property located in Scotland, or granting a security over it while the debt remains outstanding.
The inhibition must be registered in the Registration of Inhibitions and Adjudications (to be renamed the Register of Inhibitions) to take effect, and affects all heritable property of the debtor in Scotland. It has the effect of "freezing" the debtor's property for a period of five years, meaning that, during that period, the debtor may not deal with the property without the creditor's consent. While an inhibition does not give a creditor any rights to intromit with the property, it is nonetheless a popular tool with creditors as, if the debtor wishes to put his property on the market or refinance for any reason, the creditor has a prospect of repayment of the debt, or at least part of it.
Proposed changes to inhibitions
Part 5 of the Act makes a large number of miscellaneous reforms to the law of inhibition, including procedural reforms, making the process of obtaining an inhibition quicker and easier. It should be noted that part 5 relates only to the type of inhibition that a creditor can obtain once decree has been granted in a court action, or "inhibitions in execution". "Inhibitions on the dependence", which are used by creditors as security pending the outcome of a court action, are dealt with in Part 6 of the Act which is not yet in force. The new provisions will also mean that an inhibition will apply not only to the debtor, affecting his ability to dispose of property, but also now to the actual property itself.
How are interests in property affected?
Court judgements about specific property
Where an inhibition is obtained to enforce a decree that has been granted for the implement of an obligation to convey or grant a real right in a specific heritable property, the inhibition will now be limited to the heritable property to which the decree relates.
It has always been the case that only property already held or acquired by the debtor at the time the inhibition is executed falls within the ambit of the inhibition. Property acquired after the date of the inhibition is not affected by it. However, there has been some doubt about when property is regarded as having been acquired, as while the traditional approach has been that conclusion of missives is the relevant date, there is case law to the effect that the date of the disposition is the effective time. The Act clarifies that doubt by specifying that property is to be regarded as "acquired" on the day the deed transferring the property is delivered. This means that in some circumstances an inhibition executed against a purchaser of property could attach to the property before the person's title is registered. Conversely, where the inhibition is executed before the date of delivery of the deed transferring the property, it will not attach to that property.
Protection for third party purchasers in good faith
The transfer or grant of a right in a property which is affected by an inhibition is a breach of that inhibition, but the Act now clarifies the law and provides protection to someone purchasing in good faith.
A person will be regarded as having acted in good faith if they do not know about the inhibition, and have taken all reasonable steps to find out whether or not an inhibition exists affecting the property in question. It is usual for the solicitors for any purchaser of property to conduct a search in the Register of Inhibitions as a matter of standard practice to ascertain whether or not the seller is affected by any inhibitions. Conducting such a search would be regarded as having taken reasonable steps, and establish good faith if the search did not disclose any inhibition, even if that was in error and an inhibition existed.
A lease granted by an inhibited debtor will now be capable of being reduced, if, at the date of raising an action for reduction, it still has at least 5 years to elapse before the end of its duration. For a lease with less than 5 years still to run to be reduced, the Court of Session would require to be satisfied that is was fair and reasonable to reduce it, in all the circumstances. Previously the granting of a lease was not struck at by an inhibition. This is a useful addition to the creditor's arsenal. The threat of taking action to reduce a lease may be enough to prompt payment from a reluctant debtor. However, creditors will have to ensure that they take steps to monitor properties affected by inhibitions if they are to make full use of this additional tool.
How are insolvency situations affected?
Previously, an inhibiting creditor enjoyed a preferential ranking in relation to the proceeds of sale of any property affected by their inhibition. The ranking was complex and in practice, it rarely resulted in any actual distributions to inhibiting creditors. The Act abolishes this preferential ranking, however, for a transitional period, the preference will be preserved. This is where the inhibition is executed before 22 April 2009, even in situations where the ranking process starts after that date.
Finally, an inhibition which comes into force after the creation of a floating charge will not restrict the power of a receiver to deal with any property which would normally be affected by the inhibition. Previously receivers would have required consent to sell from such a creditor. Similarly, a liquidator in a CVL (Creditors Voluntary Liquidation) will be able to exercise the power to sell property without requiring consent from any inhibiting creditor. This brings liquidators in CVLs into line with liquidators in court winding ups.
Part 5 of the BDSA 2007 provides a package of common sense measures that will clarify and codify this area of the law that is much used in practice.