The Supreme Court has recently reached a decision which indicates that many banks have been following the wrong procedure when repossessing properties in Scotland.
Royal Bank of Scotland v Wilson concerned an application by RBS to evict debtors (The Wilsons) from their homes following their failure to repay sums due to the bank which had been secured by way of standard securities.
The Wilsons were two couples who had granted securities over their homes in Loanhead to RBS. In both cases the securities were for any sum which the husband or wife might owe to the bank either jointly or as individuals. The husbands were also brothers and had undertaken to repay to the bank certain sums due to the bank by two firms in which they were both involved.
The sums were not repaid and the bank wrote to both of the brothers demanding repayment. The letters were not addressed to the brothers’ wives and, although they advised that the bank would instigate proceedings for recovery of the debt, they did not mention the securities.
The Conveyancing and Feudal Reform (Scotland) Act 1970 makes three procedures available to a creditor before it can exercise any of the remedies available:
- service of a calling up notice (in terms of s19) which involves giving the debtor two months to repay the debt;
- service a notice of default (in terms of s21) which involves giving the debtor 1 month to remedy the defect;
- application to the Court for a warrant to exercise remedies which can be made immediately (in terms of s24).
The bank followed the third option seeking power to sell the Wilsons’ homes and also an order to evict the Wilsons from their homes (in terms of s5 of the Heritable Securities (Scotland) Act 1894). However, in terms of section 5, a creditor cannot be granted such an order unless the failure to pay follows a “formal requisition” for payment. Although the order was initially refused by the Sheriff Court on the basis that there had been no formal requisition, an Extra Division of the Inner House found that the certificate of default which the bank had lodged in court (in terms of s 24) constituted such a requisition and granted the order.
However, following a further appeal by the Wilsons, the Supreme Court took the view that the certificate of default could not constitute a “formal requisition” in terms of s5 of the 1894 Act. The essential requirement of such a requisition is that the proprietor is put on notice before proceedings are brought against him and this requirement was not met by the Schedule 7 Certificate (which in this case had been lodged 8 years after the raising of the actions).
Importantly the Supreme Court went further: finding that in any case where a creditor seeks repayment of a debt, failing which, the sale of the security subjects, it must first serve a calling up notice following the procedure in s19. That requirement is mandatory and not permissive. (The court was influenced by the need for a debtor to be given the opportunity of remedying the default before being dispossessed and, in this case, the wives were denied this opportunity.) The court noted that its decision ran contrary to the way in which the 1970 Act has been interpreted in practice. I.e. until now s19 has been treated as permissive meaning that a creditor seeking sale of the security subjects has the option to follow any of the three procedures noted above.
The decision will mean a change in practice for Banks seeking repossession in that they will now require to follow the calling up procedure. It will probably have the greatest impact on parties to current transactions involving repossessed property where the disposition has not yet been registered and is likely to lead to a need for a title indemnity policy to cover the likelihood of any successful challenge by the debtor.
A full report of the decision is available from the Supreme Court here