RBS v Wilson: light in the tunnel?

As one whose firm counts all the major clearing banks and the UK’s biggest building society amongst its clients, it is a rare occasion indeed when I can say that the activities of the Govan Law Centre fill me with anything other than a sense of foreboding. However, I am for once grateful to Mr Dailly and his colleagues, for providing me with the opportunity to put down in black and white something which those with whom I work have had to listen to me talking about on a regular basis since the decision in RBS v Wilson [2010] UKSC 50 was issued by the Supreme Court in November 2010.

In February, Sheriff Deutsch found in the defenders’ favour in two repossessions, Northern Rock Asset Management plc v Millar; Royal Bank of Scotland plc v McConnell), and in so doing, has finally prompted lenders to seek an authoritative decision from the Court of Session on the procedures to be followed in repossession cases. To me, what is interesting about these decisions is not so much the outcome, but the opportunity they present for the Inner House to consider Wilson in its practical context, and perhaps in a rather different light from what has been the case hitherto.

I should be clear at the outset that I have no issue with the Wilson decision – the court undoubtedly reached the right conclusion on the facts of the case. However, what I do question is the way in which it has been interpreted.

Cause of panic

Since the decision in Wilson, there has been widespread panic amongst lenders, and confusion amongst their solicitors and, dare I say it, on the shrieval bench as to where it sits in the repossession landscape. The coincidental timing of the commencement of the Homeowner and Debtor Protection (Scotland) Act 2010 a matter of weeks earlier did nothing to clarify the situation.

The timing of the decision was such that as lenders and their agents were just making some headway in their struggle to come to terms with the considerably more complex requirements of the 2010 Act, only fully promulgated very shortly before they came into force, they were hit with a decision which appeared to say that the only way a creditor could take a property into possession was by starting the procedure by issuing calling up notices.

This conclusion was reached as something of a kneejerk reaction to what Lord Hope said at para 73 of the judgment. He considers the meaning of “debt” as defined in s 9(8)(c) of the Conveyancing and Feudal Reform (Scotland) Act 1970, compares it to the use of the phrase “the whole amount due” in s 18, and concludes that where the lender requires the discharge of any debt secured, a calling-up notice must be issued. I would not presume to disagree with that, because Lord Hope is undeniably correct in his analysis, but what I would argue is that although Wilson can have that result, it does not necessarily in all cases. The recent Glasgow cases I hope may serve to open the door to further discussion of the true nature of the default in what we might classify as “arrears” cases, as opposed to cases such as Wilson where the object of the exercise is to procure repayment of the entire facility.

It seems to me that the problem Wilson has caused is generated by a lack of analysis of the nature of the default of which the borrowers in a typical arrears repossession have been guilty, compounded by how lenders perceive of the problem and the expectations they have as to how it will be resolved.

Nature of the default

When a repossession action is raised because the borrower has allowed arrears to accumulate, lenders universally appear to take the view that clearing the arrears is what they are trying to achieve, and once that happens, the borrower is deemed no longer to be in default.

While that may get the lender back into a position where the mortgage account is returned to a “performing” status, that is treating the symptom, not curing the disease, because properly construed, the default that the borrower has committed is the failure to implement their contractual obligation. The default is only remedied when the borrower once again fulfils that obligation, and that does not necessarily mean the arrears will be cleared.

Now, I appreciate that this appears to be at odds with what Lord Hope has said, as he has taken the view that any sum secured by the standard security falls within the definition of “debt” in s 9, and therefore any request for payment of it requires to be requisitioned by way of calling-up notices. In looking at s 18, Lord Hope was making the point that the 1970 Act draws a distinction between “debt” and “the whole amount due”, as the latter phrase is specifically defined in that section; but s 18 then draws a further distinction between “the debt to which the security relates”, and “any other sums due thereunder by way of interest or otherwise” (my emphasis).

The significance of that for the present argument comes in the application of the Heritable Securities (Scotland) Act 1894, s 5 of which provides the authority for a creditor to take summary proceedings to eject a proprietor in possession of a secured property. While the 1970 Act provides various remedies for the creditor, it is only the 1894 Act which enables the debtor to be ejected.

Dealing with arrears

Section 5(1) of the 1894 Act gives the creditor authority to raise summary proceedings in two situations – the debtor is in default (a) in the punctual payment of interest due under the security, or (b) in due payment of the principal after formal requisition. In Wilson, the lender required repayment of the entire facility, and the problem in which RBS found itself was that at no time had a formal requisition been made for payment of the principal due. In essence, that is all the case is about – where repayment of the principal sum is required, a formal requisition must be issued. In terms of the 1970 Act, that formal requisition takes the form of a calling-up notice, served in terms of s 19, and failure to comply with the calling-up notice is a default within standard condition 9(1)(a). Section 20 allows the creditor to sell the property, but without the powers contained in the 1894 Act, it cannot eject the debtor.

However, notwithstanding Lord Hope’s view, both the 1970 Act and the 1894 Act do seem to distinguish between the repayment of capital and the payment of interest. Section 18 of the 1970 Act clearly implies that “the whole amount due” is comprised of “the debt to which the security relates”, and “any other sums due thereunder by way of interest or otherwise”; and s 5(1) of the 1894 Act makes a similar distinction where a failure to pay interest punctually is treated as a separate matter from a failure to repay capital when asked to do so. By viewing interest and capital as qualitatively different things (and in my submission, both these Acts support that approach), it is perhaps possible to lift what we think of as “arrears” repossessions out of Wilson territory altogether, and for creditors to revert to issuing default notices.

Notwithstanding lenders’ focus on the clearance of arrears as a remedy of the default, if one characterises the default as being the failure to make regular payments, including of interest (which is merely evidenced by the accumulation of arrears), then that brings the case closer to a default in complying with, say, standard condition 5 which deals with insuring obligations, than it does to standard condition 9(1)(a). As I understand Wilson, there is no suggestion that a lender must resort to issuing a calling-up notice in order to force compliance with that condition, despite the fact that remedying the default could include the need to make a payment to the lender, so arguably, failing to make contractual payments is a default falling within standard condition 9(1)(b), a “failure to comply with any other requirement arising out of the security”. If the default is one to which 9(1)(b) applies, and is remediable, s 21 allows the creditor to proceed by way of a default notice.

Thereafter, by a somewhat tortuous route through the provisions of ss 23 and 24 of the 1970 Act, we end up being able to exercise the same remedies which would be open to a creditor on the expiry of a calling-up notice, but instead of having to satisfy the “formal requisition” requirement of s 5(1) of the 1894 Act, the default is brought within the ambit of the first leg of s 5(1) because all conventional mortgage contracts require the punctual payment of interest (and may or may not require repayment of an element of the capital at the same time).

Take a closer look

The recent Glasgow cases seem to be an inevitable consequence of the current interpretation of Wilson when combined with the requirements of the 2010 Act. As all arrears repossessions now proceed by way of a calling-up notice, the only way in which a default can be demonstrated is through the application of standard condition 9(1)(a). If we assume that “default” as used in the 2010 Act is to be construed in the same way as in the 1970 Act, then clearly the pre-action protocol can only commence when the calling-up notices expire. That, to my mind, produces quite an absurd result – when a debtor falls into arrears, a lender’s only option is to demand that they repay their entire indebtedness, and only when they fail to do so is the creditor required to try and assist them to remedy their default which, short of selling or remortgaging, is now an impossible task.

One is tempted to wonder why the Scottish Government has declined to amend the legislation, but it may be that it has concluded, as have I, that the problem lies not with the legislation but with the misunderstanding of the true impact of RBS v Wilson.

I quietly hope that whoever the lenders choose to instruct in their appeals to the Inner House will take the opportunity to explore the implications of Wilson in a more considered manner than has been the case hitherto.