Scots insolvency law

Spiralling inflation, and a long-lasting recession forecast by the end of this year, mean it is likely that the number of UK corporate failures will significantly increase. While insolvency regimes north and south of the border have much in common, there are key differences – and failure to deal with them can be disastrous.

Landlord's hypothec

Scottish law gives landlords a unique right – the ‘hypothec’ – a common law security right giving landlords a fixed security over tenants’ moveable property located on the leased property, provided it is owned by the tenant and not subject to a hire purchase agreement or a retention of title clause. The security covers rent arrears for a period of up to 12 months’ rent, but not any other sums due under the lease. It comes about purely by operation of law, so you won’t find it in the lease and it can catch out English insolvency professionals. If a company which operates from Scottish leased premises is subject to an insolvency appointment, the administrator/liquidator should factor it into their deliberations.

Inventories of the moveable property should be taken as soon as possible after appointment. Lawyers acting for a landlord creditor should not assume the administrator/liquidator will be alert to the hypothec, particularly where an English based officeholder has been appointed. It is always sensible for landlords to write to the officeholder shortly after appointment to tell them there are unpaid rent arrears, the landlord wishes to rely on the hypothec – and goods should not be removed from the property without the landlord’s written consent. A final warning on hypothec. As a form of security, it can cause a headache when it comes to Company Voluntary Arrangement (CVA) proposals. There can be issues over voting rights and ranking and it can sometimes be overlooked when the CVA is being drafted, therefore causing problems if the CVA is approved.

Receivers in Scotland

This always takes English lawyers aback. We don’t have Law of Property Act (LPA) receivers in Scotland, nor anything equivalent. The only receiver recognised in Scotland is an administrative receiver under the Insolvency Act 1986. That doesn’t mean fixed charge lenders who have lent against Scottish properties are left without a remedy upon their borrower’s default. They have one in the Conveyancing and Feudal Reform (Scotland) Act 1970 (as amended), which allows fixed charge lenders to ‘call up’ their security following a default by the borrower. Calling up notices are served on the borrower (and other parties), which demand full payment of all sums due – and unless the full sum is paid then the lender can, among other things, enter into possession of the property and/or sell it for best value. The snag? A calling up notice takes two months to expire, so a lender has to wait for following service before they can take any further action. If the charged property is used ‘to any extent’ for residential purposes, a further layer of complexity is added – with court action being mandatory before the lender can take possession or sell the property, and court action comes with a whole swathe of pre-action requirements. Not only that, but a tiny mistake in the notices can render the whole process invalid and mean you need to start again.

The legislation also sets out a prescriptive mechanism for the sale of the property, meaning it must be publicly advertised for sale. There is no room for pre-arranged deals, which can cause real problems in a restructuring process where the purchaser lined up to purchase the other assets hasn’t put forward the best offer for a key piece of land. The calling up process lacks the ruthless efficiency of the LPA receiver regime. Still, it is important that English lawyers advise their clients that the tried-and-tested LPA process is not available in Scotland and the procedure we do have can be frustrating. However, lenders have no ability to sell the charged asset unless the calling up process is followed, so it is critical that it is carried out properly.

Final thoughts

Despite similarities between the Scottish, English and Welsh insolvency regimes, restructuring professionals can’t assume everything is the same. Knowing there are differences and asking Scottish colleagues for their input can be the decisive factor between having a happy and well-advised client – or a less happy one who has gone down a route that isn’t properly competent in Scotland.

Nicola Ross is a partner in Morton Fraser’s litigation and dispute resolution team: morton-fraser.com