welcome to our latest insolvency and recovery bulletin
In this issue we cover debtors and the concealment of assets, repossession sales, and the HMRC announcement regarding new arrangements for collecting tax.
Devious Debtors and the Concealment of Assets
Repossession, Sales and Other Creditors
HMRC: New Arrangement to Collect Tax
Devious Debtors and the Concealment of Assets
In our experience, most Trustees in sequestration have concerns at some point about whether or not a particular Debtor is being entirely candid about his or her assets and liabilities. Unfortunately, in some cases, their suspicions will be valid and they will discover that the debtor has indeed attempted to conceal assets. Heritable property is almost always the major asset in a Debtor’s estate and a popular Debtor ruse is to buy property in the name of a third party such as a relative, family friend or, on occasion, a famous fictional character!
In such cases the Trustee will require to raise a court action for declarator that the property is actually owned by the Debtor and that the recorded owner is a pretended owner.
However, as you will all be aware, court actions take time and even where undefended, take a minimum of 6 weeks and often much longer. During this period the property in question remains owned by the pretended third party. In these situations there is always a risk that the third party will attempt to sell the property on to an innocent buyer and abscond with the funds leaving the Trustee and the creditors without the benefit of a major asset.
To prevent such a situation, it is possible to register a legal notice over the property called a “Notice of Litigiousity”. Notices of Litigiousity are enabled by Section 8 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985. The function of the Notice is to warn potential buyers that there is a live court action concerning a particular property.
Before registering a Notice of Litigiousity, the Trustee must first initiate the necessary court action for declarator. This requires the Court’s prior authority for service or citation of the court action.
Once this has been done, the Trustee then requires to send the Notice of Litigiousity to the Keeper of the Register of Inhibitions and Adjudications. It must be stated in this Notice the names and designations of the parties to the court action and the date when authority for service or citation was granted. The Keeper charges a fee of £15 to register the Notice and, once registered, the Notice of Litigiousity will remain in place for a period of five years.
It is standard practice for the Register of Inhibitions and Adjudications to be checked before any property is sold and although the disclosure of a Notice of Litigiousity will not automatically halt any transfer of the property, it would, in our experience, be an unusual buyer who would wish to purchase a property which is subject to a court action.
We have recently completed a court action for declarator in these circumstances. In this particular case the court action was raised, Decree granted and the property sold in under 6 months which was a welcome result for both the Trustee and the creditors.
Back to topRepossession, Sales and Other Creditors
Clear title or not?
This article relates to a current issue conveyancers are experiencing in dealing with a repossession sale where a heritable creditor has called up their security, as opposed to a sale by a Trustee or Administrator. It may be of interest to Trustees appointed under a Trust Deed, for example, where there is a possibility of surplus funds finding their way back to the Trustee, to be aware of potential issues surrounding a repossession sale which could be delayed or the property may prove difficult to sell on.
Background
Historically, the general practice for conveyancers acting for a heritable creditor who was calling up their standard security over a property was to obtain a decree under s24 of the Conveyancing & Feudal Reform (Scotland) Act 1970. This was deemed to be the most cost effective and swiftest route for a heritable creditor to take possession of a property. Once a deed was registered in the property register where the seller was the heritable creditor in possession, the Registers of Scotland automatically removed from that title all other pari passu (equal ranking) and postponed ranking securities under s26 of the 1970 Act.
RBS-v- Wilson
Following the judgement on the Royal Bank of Scotland plc –v- Wilson case the validity of the s24 route to obtain possession was thrown into doubt. The judgement was lengthy but basically stated that the power of sale was contained only in a Calling up Notice served under s19 of the Act and not by the s24 route. Following this case, the Registers made a decision to qualify the indemnity of any title that was being presented for registering in the Land Register where the calling up procedures were based solely on the s24 route and where no Calling up notice had been served. After much discussion on the issue, it was determined that the most practical way forward in order to allow repossession sales to settle and for the purchasers to receive title to the subjects was either 1) to revisit the whole calling up procedure and serve a calling up notice and wait for the two month period to expire (not a favoured option due to the continued delays, increased costs and practical difficulties in locating the original debtors) or 2) to obtain a title indemnity policy.
Thankfully, title indemnity policies can be obtained fairly swiftly which has allowed affected transactions to settle. The title to the affected properties may have an exclusion of indemnity which will, if unchallenged, be perfected after a period of 10 years. The title indemnity policy covers any challenge by the original debtor on the calling up procedures during that 10 year period.
Sorted…. or so we thought…….
Other Securities
Recently, the Registers have indicated that in a repossession sale affected by the RBS –v- Wilson case, the Registers will not automatically remove all pari passu and postponed securities from the title under s26 of the Act. This then presents a problem for a purchaser, as not only will he receive a Land Certificate with an exclusion of indemnity in relation to the RBS –v- Wilson case (albeit backed up by the title indemnity policy); but the Land Certificate will still also disclose all pari passu and postponed securities. If the purchaser is obtaining finance to assist in the purchase then his lender will not have the benefit of a first ranking security, as it will effectively rank behind any existing postponed securities. This problematic position is under review with the Registers and the Law Society but the general consensus is there are three options to consider to allow the sales of the affected properties to proceed, as follows:
- Go back to square one and begin the calling up process again by the service of new Calling up Notices under s19. There are obviously cost implications and further time delays which may result in any existing interested purchasers withdrawing from the sale. However, if this option was undertaken it would remove the RBS –v- Wilson problems and all postponed securities would automatically be removed. From a purchaser’s point of view this is the preferred route.
- Approach the providers of title indemnity policies to expand the existing policies in relation to the RBS –v- Wilson case to include any claims made by postponed creditors. Approaches have been made to such providers but they are unwilling to provide such indemnity cover as they consider it may open the floodgates for claims. Furthermore, the cover will be required for as long as the postponed securities remain on the title and not necessarily limited to 10 years.
- Obtain a discharge by the pari passu and postponed creditors. This clears the way for any new lenders coming on board. Where it may be possible to obtain a discharge from a pari passu creditor (who will be sharing in the sale proceeds) the problem here is obtaining the discharge from the postponed creditors, in particular where in the majority of cases there may be little or no surplus funds available.
The consequences of the RBS –v- Wilson judgement and the application (or not) of s26 of the Act are still being considered by the profession and the Registers, so watch this space!
Back to topHMRC: New Arrangement to Collect Tax
In an attempt to streamline the collection of tax liabilities, HM Revenue & Customs have announced the appointment of 10 debt collection agencies to collect tax liabilities, collectively amounting to approximately £1 billion. The intention is that the agencies can deal with the smaller, older liabilities to allow HRMC to direct their resources towards chasing larger outstanding liabilities.
Businesses should not be fooled into thinking that HMRC are overlooking these smaller debts. Instead, it is likely that such sums will be pursued far more vigorously when they become the responsibility of the agencies. After all, in all likelihood such agencies will only be paid on collection of the debt. Clearly this will constitute an added pressure for businesses for which they may not be adequately prepared.
HMRC will be providing businesses with a last chance to pay before the agencies are given the power to collect the debts. It would be advisable for businesses to either pay up at this point or at least to agree payment terms with HMRC. The chances are that it will be more fruitful for businesses to negotiate with HMRC at this stage as opposed to the agencies at a later date.
If you would like to discuss any of the issues raised in this Bulletin please contact a member of our team.
If there are any topics which you would like to see covered in our future Bulletins or you require additional copies sent to you by post or email to distribute to your colleagues or clients, please email marketing@lindsays.co.uk
This newsletter has been issued by Lindsays on the basis of publicly available information, internally developed data and other sources. Whilst all reasonable care has been taken to ensure the facts stated and the opinions given are correct, Lindsays does not accept any responsibility for its content and advise that specific advice should be sought regarding the topics covered.
© Lindsays 2012
