Scottish restructuring

Whilst the administration regime is common to England, Wales, Northern Ireland and Scotland, under the Insolvency Act 1986 Scots law takes a fundamentally different approach to asset recovery from that used south of the Hadrian’s Wall.  Statistics show that receivership appointments in England and Wales are increasing as a proportion of total insolvencies, but since the Law of Property Act does not apply in Scotland, receiverships are few and far between north of the border.

It is not possible to appoint a receiver under a fixed charge in Scotland and there are only two ways to enforce a Standard Security (equivalent to a Legal Charge in England and Wales). A creditor can apply to the court for an order that an event of default has occurred. However, this will only be competent where there is a breach of the security itself (such as the statutory obligations to maintain the property in good repair, or obtain creditor’s consent to lettings) and does not refer to breach of the underlying loan agreement.

The principal remedy (and the only permitted remedy where repayment of monies is required) is to issue a “Calling Up” Notice – a statutory demand for repayment of the whole debt, giving the debtor a two month period in which to pay. If the two month period expires without payment, the following remedies are automatically available to the creditor without the need for further action:-

  • The creditor may sell the property on the open market, subject to a statutory duty to advertise the property and obtain the best price possible. This is not equivalent to becoming a mortgagee-in-possession. Maintenance and insurance etc of the property remain the debtor’s responsibility, but their consent is not required and the sale may be effected by the creditor.
  • The creditor may enter into possession of the property, in which case the creditor takes on the liabilities as regards maintenance and insurance etc. If no assignation of rental income has been obtained, this is the only way in which the creditor will become entitled to any rental stream from an investment property.
  • In a worst-case scenario, the creditor may foreclose and take title to the asset, but only where it has not been possible to achieve a sale on the open market.  Given that the power of sale remains live for a period of five years following the expiry of the two month calling-up period, this is a remedy not often used in Scotland.

To exercise these remedies no court application is required, unless the property is residential, or the creditor requires the debtor to be ejected from the property.

Since a fixed charge cannot secure a rental stream in Scotland, any assignation of rental income must be created in a stand-alone document, enforced by serving a notice on the affected tenant, confirming the details of the assignation and specifying new payment details if required.  Strictly speaking, an assignation of rent should be used for recovery of rent only and not VAT, insurance or service charge monies payable by a Tenant – if a creditor requires to collect and disburse these elements, the proper remedy should be to take control of the property by entering possession as outlined above.

The administration regimes in England & Wales and Scotland are similar albeit with some procedural and technical differences.  Given the complexities of real estate enforcement in Scotland it is quite likely that administration might be used as a recovery tool where a more straightforward LPA Receivership might be used in England & Wales.

The liquidation process is also very different in the two jurisdictions. 

Whilst the rules for voluntary (director-led) liquidations are broadly similar, in compulsory (creditor-led) liquidations in Scotland the first hearing of a winding up petition is likely to lead to the appointment of an interim liquidator who will review the company briefly to understand whether or not it is solvent.  If it is solvent, or if there are insufficient assets to fund a liquidation, the interim liquidator will report back to the Court and resign.  Where there are insufficient assets the creditor can fund the liquidation himself or will have no further recourse. However, in Scotland, there is no requirement for any initial payments to the Official Receiver In England & Wales it would be left to the Official Receiver to fund the liquidation, after the initial payments have been made. 

This does not seem to have dampened enthusiasm in Scotland for winding up petitions though; in the last 12 months there have been about 1,400 liquidations of which 1,000 were compulsory.  In England & Wales there have been about 17,000 liquidations but only 5,000 were compulsory.

Where assets are based in both England & Wales and Scotland, it is imperative that clients use legal advisers with a thorough understanding of both jurisdictions who work together to deliver sound advice.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Geoff Stansfield

Partner - Real Estate (Investment)

I have many years’ experience in the real estate investment market in Scotland and specialise in commercial real estate investment, asset management, real estate finance, funding & acquisition and cross-border transactions.