Assigned standard securities

The decision of Sheriff Mann in the case of OneSavings Bank v Burns [2017] SC BAN 20 (30 March 2017) has caused considerable concern for secured lenders, as it has cast doubt on the effectiveness of standard securities that are assigned as part of bulk debt purchase arrangements in relation to residential properties.

In essence Sheriff Mann held that the assignation of an all sums standard security which failed to specify the sums outstanding at the date of the assignation was invalid and did not effectively convey the security. The end result, if Sheriff Mann is correct, is that the debt, albeit due, is no longer secured.

Differing views have been expressed as to whether Sheriff Mann’s decision is correct and, albeit his decision is persuasive and not binding on other sheriffs at first instance, lenders cannot be faulted for being concerned that other sheriffs may well reach the same conclusion.

All hope is not lost, however, as there exists a potential solution in the form of Lord Bannatyne’s decision in Shear v Clipper Holdings, 26 May 2017, unreported. 

Scheme of the Act

In that case the pursuer applied for interim interdict to prevent the creditor from relying on an expired calling-up notice. The creditor had acquired its title by assignation in similar terms to the style used in OneSavings Bank.

The pursuer relied on OneSavings Bank in contending that the creditor did not have title to enforce the security. The issue was considered in the Commercial Court by Lord Bannatyne, who refused the application for interim interdict.

The main points from Lord Bannatyne’s judgment are:

1. The pursuer’s argument was extremely technical in nature. It sought to make the wording of note 2 to form A in sched 4 to the Conveyancing and Feudal Reform (Scotland) Act 1970 mandatory, such that failure to use this wording resulted in invalidity. The argument failed to take account of modern developments in the law regarding the mandatory/directory dichotomy. Failure to follow statutory procedure does not automatically result in invalidity. Rather, the court should consider whether the scheme of the Act is such that invalidity should follow, and in doing so it should strive to be fair and exercise commercial sense. Primary amongst the considerations is the question of the seriousness of the breach. In this respect Lord Bannatyne said the breach “cannot be characterised as serious”. He also determined that it would be unjust to rule in favour of invalidity, expressing the view that if the breach in question led to invalidity, “a sensible result would be wholly frustrated”.
2. Lord Bannatyne also said the court should look for a purposive interpretation. The statutory purpose can be seen in s 14 of the 1970 Act, which says that an assignation of a security will, on registration, mean that the security “shall be vested in the assignee as effectually as if the security or the part had been granted in his favour”. Lord Bannatyne agreed with the defender that on the pursuer’s argument, that result is not obtained. By stating the sum outstanding in the assignation, an “all sums due” security converts into a fixed sum security. This means it will no longer be “vested in the assignee as effectually as if” the security had been granted in his favour, because the form of the security has altered.
3. Sheriff Mann in OneSavings Bank “was not addressed in the same way” as Lord Bannatyne, who said: “I simply do not agree with the decision the sheriff arrived at”.
4. No prima facie case had been demonstrated and, even if it had, Lord Bannatyne said he would have refused the motion as he found that the balance of convenience “quite clearly” favoured the defenders. He concluded that the pursuer was “doing nothing more than to rely on a technicality to delay payment”, and made clear this would not be tolerated by the court.

More persuasive

Lord Bannatyne was sitting alone as a judge at first instance. This means that in a similar way to Sheriff Mann, his decision is persuasive and not binding. That being said, his decision is that of a Lord Ordinary in the Commercial Court of the Court of Session and is likely to be far more persuasive than Sheriff Mann’s decision.

Unless and until an appellate court provides clarity, however, there is likely to be a degree of uncertainty about how courts will deal with similar challenges that arise in the future.