Lender Services Winter Bulletin

Happy new year to everyone and welcome to the Aberdein Considine Lender Services Winter Bulletin.

For those new to our bulletin, we aim to provide quarterly updates to all our clients which we hope will provide an insight into our team and provide an update on some key developments both in Scotland and generally throughout the United Kingdom.

Last year was a very busy year for our Lender Services Practice Group (LSPG). We enjoyed a period of significant growth and development throughout our team and continued to provide advice in relation to consumer debt recovery, business and commercial debt recovery, secured mortgage repossessions, asset recovery, and professional negligence.

We are delighted to note that Aberdein Considine has been named as the ‘Best Law Firm’ in the UK at the Mortgage Finance Gazette Awards ceremony in London. The Mortgage Finance Gazette Awards celebrate the best of the British banking and financial services sector and we are thrilled that we have been recognised with this award. In addition to this award, the Legal 500 guide named Aberdein Considine as a ‘Top Tier’ firm in the field of Debt Recovery for the third consecutive year.

Supporting some of the best known names in financial services, as well as those who are more recent entrants to the market is extremely rewarding, and this is fantastic recognition for our hard working teams across the country.

The end of the year also saw the Lender Services Practice Group building on its expertise with the appointment of banking veteran Colin Soulsby in a newly-created relationship management role.

Colin joined the firm after a four-decade career at RBS, much of it specialising in the field of Debt Management, with a particular focus on managing legal suppliers. Given the nature of the firm’s multi-jurisdictional operations his appointment will be an incredibly valuable addition to the team and clients.

In January, our Banking Litigation team in Glasgow moved to a new office on Waterloo Street. Whilst still getting ‘settled in’, the new office is perfect for accommodating our ever expanding department and we hope to see you in our new premises when the office is fully furnished.

As a firm, we look to support a nominated charity every year. During 2019, the firm supported My Name’5 Doddie Foundation, a charity committed to improving the lives of those affected by Motor Neuron Disease. Recent fund raising efforts have involved a sleep out, along with those participating in ‘dry January’.

In 2020, the firm has chosen Alzheimer Scotland as its national charity. In addition to working with our nominated charity, we also look to support our local charities wherever possible. We recently donated food to our local food bank in an effort to support those less fortunate..

Article

Restraint orders in Scotland and what this means for lenders

If an individual is suspected of benefiting from proceeds of crime, the Crown can step in and utilise powers given to them under the Proceeds of Crime Act 2002. One of the most common powers we see is that of a Restraint Order.

What is a restraint Order?

A Restraint Order is an order granted by the courts that prohibits a person from dealing with any heritable property owned by them. More often than not, the Restraint Order also prohibits an individual from accessing funds held in particular bank accounts.

In Scotland, when the Crown wish to place a Restraint Order on an individual, they will need to raise proceedings in the local Sheriff Courts. Once granted, the Restraint Order has immediate effect.

What does this mean for lender clients?

In Scotland, a court can only grant Decree (a court order) for repossession if they are satisfied it is reasonable to do so. Section 24 of the Conveyancing and Feudal Reform (Scotland) Act 1970 highlights the various matters that need to be considered in determining whether it is reasonable for Decree to be granted.

One of these matters to be considered by the Court is the ability of the defender to fulfil within a reasonable time the obligations under the security.

Whilst a ‘reasonable time’ is a subjective timescale, a Restraint order prohibits a customer from dealing with the secured property. The customer cannot sell the property and is completely prohibited from dealing with the property at all (and therefore clearing the arrears).

Our experience in Scotland is that Courts take a view that whilst a Restraint Order may be frustrating for customers, the lender should not be adversely affected by waiting an indefinite period of time to take possession of a property to await a Restraint Order being lifted. This is not feasible or reasonable on lenders. Therefore our experience so far is that the courts are willing to grant Decree when a Restraint Order has been placed on an individual.

If the customer is in arrears, and you intend to begin repossession proceedings, the customer may try and defend any action for repossession by arguing that they are prohibited by the Crown in dealing with the property and therefore it is not ‘reasonable’ for a court order for repossession to be granted.

In Scotland, a court can only grant Decree (a court order) for repossession if they are satisfied it is reasonable to do so, There are a variety of points that need to be considered in determining if it is reasonable, but one of those is the ability of the defender to fulfil within a reasonable time the obligations under the security. If a Restraint Order has been granted, then the customer is unable to fulfil the obligations under the security within a reasonable time.

In order to advice you on this more clearly, we would look to determine the terms of the Restraint Order and thereafter provide you with advice on how to proceed. Should an action become defended, we will look to put forward the argument that it is reasonable for decree to be granted.

Reassurance for Lenders about raising a repossession action and Action for Payment

The Scottish Appeal Court has considered the competency of a lender seeking a Possession Order and a Money Judgement in different courts at the same time.

In the decision of Promontoria (Chestnut) Limited v the Firm of Ballantyne Property Services and others, it was discussed whether it was competent for the Claimant to raise:

• A commercial action in the Court of Session (Appeal Court) to seek a Money Judgement in respect of their debt of over £1,000,000; and
• Raise a repossession action to seek a possession order in the High Court in respect of the six properties over which their debt was secured.

The Defendants had challenged the competency of the lender doing this, based on the principle that if two different courts heard the same question, it is possible they could reach inconsistent decisions.

In assessing whether the same “question” was being asked, the Judge considered the nature of each action and the remedies sought. The Judge considered it was competent for the lender to raise both actions as they had different legal bases and the respective judgments would contain different remedies. The Judge also commented that the actions had different effects.

The Judge said the commercial action in the Court of Session was to establish the Claimant’s position as creditor and provide a Money Judgement, which would be enforced against the Defendants’ assets. The repossession action was intended to confer certain powers on the Claimant based on the standard security (mortgage deed) that had been granted in their favour. The Judge concluded it was not correct to describe the repossession action as a separate action which was considering the debt – it is an action intended to realise the lender’s rights based on their standard security.

The decision will give lenders comfort about the options available to recover or protect their debt. Whilst a repossession action may seem the obvious strategy for lenders who hold a security in respect of their customer’s debt, when facing issues of limitation they will be able to consider a separate action for payment if they wish to protect their position.

Civil Restraint Orders: an overview (England and Wales)

A civil restraint order (CRO) is a court order preventing a person from making a claim or application to court without first obtaining the court’s permission. There are three types of CRO:

• a limited civil restraint order restrains a party from making any further applications in existing proceedings. It usually remains in effect for the duration of the proceedings;
• an extended civil restraint order restrains a party from issuing certain claims or making certain applications (usually relating to the proceedings in which the order is made) in specified courts. It lasts for 2 years but can be renewed for a further 2 years;
• a general civil restraint order restrains a party from issuing any claim or making any application in specified courts. It also lasts for 2 years but can be renewed.

The court maintains an online list of general and extended CROs currently in force.

How is a civil restraint order made?

A CRO can be made of the court’s own volition or on the application of a party to the litigation.

If the court strikes out a claim, defence or application which it considers to be totally without merit, the court’s order must record that fact and the court must consider whether it is appropriate to make a civil restraint order. There is no statutory definition of “totally without merit”, but the Court of Appeal has ruled that it simply means “bound to fail”.

There are threshold requirements that must be met before the court can make a CRO. A limited CRO may only be made when a party has made 2 or more applications that are totally without merit. Unsurprisingly, the threshold is higher for extended CROs (at least 3 such claims or applications) and higher still for general CROs.

A party to the proceedings can also apply for a CRO, though at a minimum they should be able to demonstrate that the relevant threshold has been reached.

What is the effect of a civil restraint order?

If a party subject to a CRO makes an application without first obtaining permission of the Judge identified in the order, the application will be automatically dismissed without the other party needing to respond to it.

A person subject to a CRO can apply for it to be varied or discharged, but they must obtain the court’s permission first.

Who can a restraint order be made against?

A CRO can be made against a party who has issued claims or applications which are totally without merit. This can include a person who is not party to the proceedings, provided it can be shown that the non-party is the driving force behind the without merit claims or applications.

Lenders will know that unfortunately some borrowers make repeated applications or claims that are groundless. We often see borrowers adopt ‘freemen of the land’ type arguments or use the ‘common law court’ to assert that their mortgage is void, invalid and/or should be set aside, or that the County Court has no jurisdiction to decide any possession claim.

Aberdein Considine regularly deals with such applications in existing proceedings and also with claims against lenders. We have obtained without merit declarations as well as civil restraint orders against vexatious litigants and can advise on the prospects of successfully applying for a civil restraint order.

The remedy is a draconian one and must only be used where appropriate and proportionate, whilst having regard to a customer’s right to present their case and object to the lender’s action, even if that object lacks legal merit. We work with lenders to help in this decision making process and ensure customers are treated fairly and appropriately, even when difficult litigation is underway.

Case Law

Santander Consumer (UK) Plc v Alan Creighton

We recently reported on the decision in Santander Consumer (UK) Plc v Alan Creighton. This case considered the position where an asset finance lender has asked the court for several remedies, including payment of the balance of the loan and the recovery (or repossession) of the asset (in this case, a vehicle).

The court case was undefended i.e. the party being sued did not contest the proceedings or offer repayment, but the Sheriff took issue with the orders sought by the lender. He considered that the amount to which the lender was entitled might ultimately be less than it was seeking. The lender contended that it was entitled to an order for payment of the balance of the loan upon termination (less the sale price) without having to recover and sell the vehicle. The Sheriff disagreed, taking the view that the amount due to the lender could only be known once the goods were recovered and sold. He considered it premature for the court to grant the order for payment of money and granted the order only for the recovery of the vehicle, keeping the monetary claim on hold until the vehicle was sold.

This decision was appealed and overturned by the Appeal Court earlier this month.

The Appeal Court considered a Sheriff’s entitlement to refuse to grant decree (an order) in a case which is undefended. It took the view that the Sheriff was wrong to consider the question of whether the sum ultimately due to the lender might be less than the amount it was suing for. In an undefended case, the Sheriff may refuse to grant decree only if there is a lack of jurisdiction or the order sought is incompetent. The Sheriff’s approach at first instance of delving into the merits of the case was therefore contrary to existing authority. The Appeal Court ruled on this basis that the Sheriff was not entitled to deny the lender a payment order alongside an order for recovery and sale. These orders were both granted in favour of the lender by the Appeal Court.

This appeal decision will come as a relief to asset finance lenders and should restore a sense of certainty in the strategy normally followed in recovery cases of this kind.

The FCA Duty of Care Bill (England and Wales)

In October 2019 a private members’ bill was introduced into the House of Lords, which would require the Financial Conduct Authority (“FCA”) to introduce rules for firms to owe a duty of care to consumers in carrying out regulated activities under the Financial Services and Markets Act 2000.

The draft bill defines “duty of care” as an obligation to exercise reasonable care and skill when providing a product or service. “Consumer” is defined by reference to the Consumer Rights Act 2015, meaning that it is limited to an individual acting for purposes that are holly or mainly outside their trade, business, craft or profession.

The bill’s passage through parliament was initially halted because of the December 2019 general election, but is now due for a second reading in the House of Lords.

The bill comes after the FCA commenced an industry discussion on a proposed new duty of care in July 2018.

The FCA’s discussion paper culminated in a Feedback Statement published in April 2019, in which the FCA explained that there were very different views on the merits of a new statutory duty of care from industry stakeholders who responded to the consultation.

Most of the arguments concerning a statutory duty of care were based on the assumption that individual consumers would have the ability to take court action to recover losses that resulted from a breach of that duty (i.e. be ‘actionable’). The FCA confirmed that most respondents did not support a new statutory duty, whether actionable or not.

The FCA identified options for change that it considers are most likely to address potential deficiencies in consumer protection.

These are:

• reviewing how the FCA applies the regulatory framework – in particular, its application of the Principles in its authorisations, supervisory and enforcement functions, and how transparently it communicates with firms about this;
• new/revised Principles to strengthen and clarify firms’ duties to consumers, including considering a potential private right of action for Principles breaches.
• A further FCA consultation on the topic is expected in the near future.

Royal Bank of Scotland PLC v Donnelly [2019] CSIH 56

The question of “insolvency set off”

The Royal Bank of Scotland PLC (“The Bank”) recently had an appeal rejected in the Inner House of the Court of Session. The Bank sought to off-set a successful Payment Protection Insurance (“PPI”) claim made by Mrs Donnelly (“The Customer”) on two accounts that had been included in a Trust Deed against the unpaid balances.

The Facts

The Customer borrowed money from The Bank during between 1997 and 2003. The Bank sold the Customer PPI in respect of the loans. In August 2006 The Customer became insolvent and entered into a Trust Deed. The Trust Deed became a “Protected Trust Deed” in October 2006. The Bank was one of the creditors included within the Trust Deed.

The Customer’s Estate was not sufficient to repay the outstanding debts due to the creditors in full. The final dividend was paid in December 2013. The Trust Deed was terminated and The Customer was discharged from all of her debts. The final dividend payment left The Bank with an unpaid balance of £21,617.42.

In January 2014 The Customer submitted a complaint to The Bank claiming that the PPI had been mis-sold to her. The Customer’s claims were upheld and a settlement of £11,927.39 to be paid to The Customer was agreed. The Bank made a payment of £1,111.63 to The Customer but then sought to off-set the remaining £10,815.76 against the unpaid balance of £21,617.42 in respect of the two accounts included within the Trust Deed.

The Customer raised an action against The Bank in the Sheriff Court for payment of the outstanding £10,815.76. The Bank sought to defend the action on the basis that the £10,815.76 had been set off against the unpaid balance.

Decision

The Supreme Court decision of Dooneen Ltd v Mond [2018] UKSC 54, 2018 SLT 1255 was applied in this matter. In Dooneen Lord Reed stated that if all the debts had not been discharged then there would have been “serious practical consequences not only for the debtor but also for anyone else doing business with him”.

The Court therefore upheld the Sheriff Appeal Court’s decision that the defence of insolvency set off could not succeed. Lord Glennie explained the basis of the decision was on three points:

1. “If at the moment the trust deed terminated the debtor was not fully discharged from all his debts due to his creditors, in the sense of his liability for those debts being extinguished that would leave him in a state of uncertainty”
2. “If it were open to a creditor to rely by way of set-off upon a debt due from the debtor but discharged only in the limited sense contended for by the bank, it would have consequences for the validity of the final distribution by the trustee under the trust.” If a creditor was to claim for the full balance then seek a later date to set off the balance then this would affect the amount that they were entitled to receive from the final dividend.

The Bank sought to get around the issue of the amount received in the final dividend payment by offering to make a payment to the other creditors of the difference of the amounts that they would have received had the set off been included within the Trust Deed. The Court held that this was “virtually unworkable” in practice.

Implications

The implications of the decision are wide ranging for both Creditors and Debtors alike. Debtors now have the security that once the final dividend has been paid that they have been discharged from their debts and Creditors can no longer take steps to pursue them. The impact for Creditors means that they must ensure that more consideration is taken when dealing with Trustees to ensure any potential to off-set the outstanding balance is considered during the term of the Trust Deed as off-setting after the Trust Deed has been terminated is not an option available to Creditors.