welcome to our latest insolvency and recovery bulletin
In this issue we cover Landlords Hypothec, the latest Scottish insolvency figures and the AiB consultation paper report.
Landlords Hypothec
Scottish insolvency figures
AiB consultation paper report
Landlords Hypothec
Landlord’s hypothec is an automatic security in favour of a landlord where a tenant enters into an insolvency process. Landlord’s hypothec was significantly altered when the section 208 to the Bankruptcy and Diligence (Scotland) Act 2007 came into force in April 2008.
The key points to be highlighted in this Section 208 are:
S.208(2)
The landlord's hypothec
(a) continues … as a right in security over corporeal moveable property kept in or on the subjects let; and
(b) ranks accordingly in any (i) sequestration; (ii) insolvency proceedings (being winding up, receivership; administration; and proceedings in relation to a company voluntary arrangement within the meaning of the Insolvency Act 1986 (c.45) (iii) any other process in which there is ranking,
s.208(3)
The landlord's hypothec no longer arises in relation to property which is kept (a) in a dwellinghouse; (b) on agricultural land; or (c) on a croft.
s.208(4)
It no longer arises in relation to property [found within the property] which is owned by a person other than the tenant.
s.208(7)
Where property is owned in common by the tenant and a third party, any right of hypothec arises only to the extent of the tenant's interest in that property.
Currently, landlords who are due pre-appointment rent can take security over any goods owned by a tenant who has entered into an insolvency process and where the goods are stored within the rented property. Any goods subject to retention of title, or which are the property of a third party, do not fall within the hypothec.
One question in this area is where does hypothec rank? Our view is that landlord’s hypothec ranks ahead of a floating charge in relation to pre-appointment rent.
There has been much discussion within the legal profession as to whether or not hypothec covers only goods on the premises at the date of insolvency, or whether it would cover goods subsequently brought onto the premises. Our interpretation is that both can fall within hypothec. Therefore, if an insolvent tenant is still trading, for example in an administration, careful consideration needs to be given to bringing new goods onto the premises as there is a risk these goods would be caught by hypothec.
Another uncertain area is in relation to post-appointment rent. The simple interpretation of the legislation is that hypothec covers all unpaid rent that becomes due. It is therefore possible that landlord’s hypothec will apply in cases of on-going rent (i.e. post-appointment rent). There is no post-April 2008 case law concerning hypothec and therefore a cautious approach should be taken.
Practical tips for Trustees
- Make sure you consider what type of property is involved. Agricultural and crofting tenancies are exempt from landlord’s hypothec.
- If you are aware there is, or you think there might be, unpaid rent take a detailed inventory of goods held on site on day one of the appointment.
- If occupation of the property is to continue and there will be on-going unpaid rent arising post-appointment, take an inventory on the date each rent payment is due to ensure you have a detailed inventory of the goods held on site if the landlord attempts to use their hypothec in relation to pre-appointment or post-appointment rent.
- Accidental preference - be careful not to accidentally prefer the landlord over the other creditors by moving assets stored off site back into the premises and therefore allowing them to fall within the hypothec.
- Accidental removal of assets – make sure you determine the full extent of the tenanted property. It is possible that car parks or external areas are part of the tenanted property and therefore any external assets may also fall within the hypothec.
Scottish Insolvency Figures
Official figures released by Accountant in Bankruptcy (AiB) in July 2012 report an increase in the number of personal insolvencies in Scotland in the first quarter of 2012/13 of 14.9% on the previous quarter and 5.3% per cent increase on the same period in the previous year.
- In Scotland 0.39% of the population was declared bankrupt in the last 12 months compared to 0.24% in England and Wales.
- There were 3,310 awards of sequestration, showing an increase of 26% on the previous quarter and a 12.3% increase on the same period from the previous year.
- The number of 'Protected Trust Deeds' (PTDs) recorded was 2,291 in total which was an increase of 2% on the previous quarter but a decrease of 3.4% on the corresponding quarter of last year.
- Figures for the Debt Arrangement Scheme (DAS) show that the number of 'debt payment programmes' approved under the Scheme was 1,478. This was an increase of 56.9% compared to the previous quarter and an increase of 129.9% compared to the same period of last year.
- AiB received 420 notices of Scottish registered companies becoming insolvent or entering receivership in the first quarter of 2012/13. This was a 9.1% increase on the previous quarter and a 22.4% increase on the same period in the previous year.
Consultation Paper Report
On the 28th of August the AiB released their report summarising the responses they had received in relation to the consultation on bankruptcy reform. The report contains some results which could be regarded as expected and some surprises. Our initial thoughts here at Lindsays are:
There has been very strong opposition to DAS being a default option for all debtors who were felt able to repay their debts, despite this appearing to be strongly advocated by the AIB.
We were gratified to note that there was a majority in support of creditor petitions being dealt with by the Court. The AiB had proposed that they process “non-contentious” creditor petitions. Given the serious impact sequestration has upon debtors, we felt that this should continue to be handled by the court.
Perhaps unsurprisingly given the discontent expressed by creditors, support for both a minimum debt level and a minimum dividend in protected trust deeds was confirmed. However, surprisingly the minimum dividend supported was far lower than we would have expected at only 10p in the £1.
There was very strong support for linking co-operation of debtors to discharge. It is our opinion that there is a strong perception amongst the legal and IP community that willfully non co-operating debtors are allowed to get away with deliberate obstruction and non co-operation with no real penalty. Linking their discharge to co-operation may strengthen the IP’s position when dealing with difficult debtors.
There was support for a moratorium period of six weeks to be introduced in statutory debt relief products and that the moratorium should be available on a public register.
Wrongly, in our opinion, there is support for administrative bankruptcy processes being removed from the Sheriff Court. The types of process they envisage placing into the hands of the AiB is not specified. It is our view that moving any bankruptcy processes outwith the court is a matter which should be given very serious consideration. We agree with the Society of Messenger-at-Arms and Sheriff Officers who stated: "We would consider the involvement and oversight of the Court as an essential part in the process of sequestration, given the judicial nature of insolvency and the effect it has on a debtor's estate".
The final point of interest was that there is support for an Official Receiver in Scotland which could be of assistance where liquidation is required but no funding exists.
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’d like additional copies sent to you by post or email to distribute to your colleagues or clients, please email us.
The full report can be accessed here
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 2013
