Adjudication

Question 1

What is adjudication?

Answer 1

This is the lease used diligence. It is the mechanism whereby the creditor can seize the land and building’s of the debt irrespective of the value of the debt.

Adjudication is the mode of diligence whereby the creditor can seize someone’s heritable property (it was supposed to be abolished and replaced by land attachment by the BAD Act 2007 but this hasn’t been implemented yet.

This is the residual diligence that is available - the one which you use if no other diligence can be used.

Question 2

What happens to the assets on adjudication?

Answer 2

With adjudication you cannot sell the asset but if after 10 years they have still not paid the debt, you get ownership of the assets.

Question 3

What property is caught by adjudication?

Answer 3

Various types of property that are not caught by the diligences discussed previously can be caught by adjudication (things like patents, trademarks etc.)
⁃ NB in practice adjudication is hardly used.
You can get adjudication against intellectual property.

Question 4

What type of diligence is adjudication?

Answer 4

Seize diligence against heritable property.

Question 5

What rights do the creditor obtain?

Answer 5

The creditor is the adjudger and obtains a judicial right in security. The creditor cannot sell but has power to remove the debtor and let. If already let, adjudger takes rents by maills and duties.

Question 6

Who remains the owner of adjudicated property?

Answer 6

The debtor remains the owner.

Question 7

Who are the parties in adjudication?

Answer 7

The party carrying out the adjudication is called the adjudger. They carry the adjudication out against assets owned by the debtor.

Question 8

What is the procedure of adjudication?

Answer 8

Must apply to Court of Session action against specific heritable property. The resultant decree is registered in the property register.

⁃ 1) Obtain a decree for payment from Court
⁃ 2) The procedure must be initiated in the Court of Session[ Not the Sheriff Court].
⁃ When looking to adjudge heritable property you must expressly identify the property. If the property is in the Land Register you must use the title number. If the property is not yet in the Land Register (i.e. in the Sasines) then you must use a conveyancing description of the property.
- You identify it by title number if in Land Register or give description of the property if it is registered in the Sasines.
⁃ Adjudication becomes effective when registered in the Land Register / Register of Sasines - at this instant it creates a real right in security.
- The real right is only effective as long as the debtor is the owner of the property. If the debtor has transferred the property on already to a third party then the property cannot be attached.
⁃ Adjudication takes priority over any competing personal rights.

Question 9

Mitchells v Ferguson

Answer 9

⁃ The debtor had agreed to sell property to a third party. This third party had a conveyance of the property but the conveyance had not been completed so the property still was owned by the debtor - the adjudger was able to attach the adjudication to the property.
- They applied to register before the transfer of the property had been registered, this meant that the Mitchell brothers got an effective adjudication.

Question 10

What happens if an advance notice is registered?

Answer 10

However if an advance notice is registered and you register the transaction within 35 days of the advance notice, this is given effect and any encumbrances which arise between the registration and transaction these cease to have an effect. If an adjudicaiton is registered after an advance notice and then a transfer of land was registered, this disposition will transfer ownership and the adjudication will cease to have effect against the property. If there’s an advance notice as a creditor you can check this, so you can do this with the potential that your adjudication will be precarious.

Question 11

What is the effect of adjudication?

Answer 11

Adjudication is a clear example of the attachment theory of diligence - it creates a nexus over the property, a real right in the property. Because it is a judicial security the debtor remains the owner of the property and the adjudger has a jus in re aliena.

The adjudged becomes a secured creditor so if the debtor sells the property to someone else, because they have a secured right the transferee takes the property subject to an adjudication. So the buyer is going to ask the seller to pay off the debt secured by the adjudication before you buy the asset.

With the exception of the floating charge[ where the floating charge holder has no power to sell.] and arrestment[ where the arrester gets the power to have the asset transferred to them.], generally in diligence the creditor gets the power to sell the property. But in adjudication this is not the case. Adjudication gives you a right in security over the property which you cannot realise - you cannot enforce by selling.

Question 12

What can the adjudged do?

Answer 12

Unlike the other diligences so far, the adjudged is somewhat stuck. Unlike attachment were you can apply to sell the asset the adjudger has no power to apply for a sale. They have two potential remedies: see below.

Question 13

So what can the adjudger do to try and get money out of the debtor?

Answer 13

While the adjudication is in place under the Heritable Securities (S) Act 1894 an adjudger is empowered to grant a lease of up to 7 years and the rent is paid directly to the adjudger. Given that the adjudger has the power to grant a lease, the creditor also has the power to eject the debtor from the property (so they can raise an action to recover possession of the property to enable them to lease it to a third party.
⁃ NB if it is a residential property, the debtor is protected by similar rules to those that protect a debtor in residential property subject to a standard security (under the Homeowner and Debtor Protection Act 2010 applies to standard securities and adjudication.)
⁃ If the property is already leased by the debtor then the adjudger can raise an action of maills and duties which obliges the tenant in the property to pay the adjudger rather than the debtor.
- The adjudger has the power to remover the debtor (owner from the property) and the power to lease the property to a tenant for up to 7 years. Once this is done the adjudger gets to pay off the rent.
- If the adjurer is wanting to eject the debtor they have to go through the pre-action requirements that a standard security holder would have to go through if they were wanting to enforce their security.
- So the adjudger may not be entitled to let if it meant the family were going to become homeless. They must then wait for a 10 year period (known as the legal). On expiry of the legal you can apply to the court for a declarator “a declaration of expiry of the legal”.

Question 14

What happens if the debt is not paid?

Answer 14

If the debt is not paid after 10 years the creditor can apply to the court for a declarator of expiry of the legal[ The legal is 10 years.]. The declarator of expiry of the legal has the effect of transferring the ownership of the land attached from the debtor to the adjudger (like furthcoming in arrestment).

• In satisfaction for the debt which is then outstanding.
• Example: If the value for the debt was £50 and the value of the house was £5000 the adjudger is making a windfall in that situation. There has been no case that decides whether the adjudger is subject to the rules of unjustified enrichment. [SW thinks it is unlikely that unjustified enrichment would not apply in this situation].

Question 15

What happens if the value of the outstanding debt is worth much less than the value of the house?

Answer 15

We don’t know. There was no case law up until 2011. The theory was that the creditor would obtain a windfall benefit.

Question 16

Hull v Campbell 2011

Answer 16

⁃ It was argued that in this situation the creditor (adjudger) was unjustifiable enriched. The creditor would thus be under an obligation to account for the windfall benefit.
⁃ However the adjudger then withdrew the action in this particular case so we don’t have a final decision. But the likelihood is that this principle would be followed (i.e. that the creator would have to account for any benefit).
- NB the court did not actually have to reach a decision because the application was withdrawn.

Question 17

How does adjudication compete with other rights?

Answer 17

⁃ Adjudication is treated as a real right in security over the property. So if there are any real rights created prior to the adjudication they will prevail over the adjudication. If there are any real right created after the adjudication the adjudication will prevail over them.
⁃ e.g. Standard security granted year 1, adjudication year 3 - the standard security holder will get paid. And vice versa.
⁃ For the purposes of floating charges, adjudication will probably be effectually executed diligence from the point that it is registered in the Land Register / Sasines.

Question 18

What is the equalisation rule?

Answer 18

Where there are competing adjudications there is an antiquated rule from the Diligence Act 1661 which allows equalisation of adjudications granted within 1 year and 1 day of each other. It provides that if you have 2 adjudications over the same piece of land they are equalised as a real right if made within a 1 year and a day of each other. This is important in relation to insolvency as sequestration and liquidation.

1 March 2013 adjudication granted in favour of Alf. 28 February 2014 adjudication granted in favour of Bert. As a result of the 1661 Act, where there are two adjudications[ But i think this applies to all diligences over land.] over land which are made real rights within 1 year and 1 day of each other then those diligences will be equalised. Thus Alf and Bert will be paid as parri pass creditors (before the unsecured creditors.)

Question 19

What is the new law?

Answer 19

[[The new law (which looks like it will never come into force) (hence For information only)

Adjudications may be abolished if the relevant part of the BAD Act is brought into force: s 79, 2007 Act.

They are to be replaced with land attachments and residual attachments.

Question 20

What are land attachments?

Answer 20

Land attachments [ Not saying anything about land attachment as it is unlikely that they will come into force. ]are to be carried out in execution (for a minimum debt of £3,000) and to follow charge for payment. The land attachment will create a judicial right in security over land.

The land attachment is created on expiry of 28 days after registration in the property register of a notice of land attachment (which acts as if an inhibition – see below). The land attachment can attach any attachable land (defined in s 82) which includes heritable property owned by the debtor, but not liferents or long leases which may not be assigned.

If someone has agreed to buy land (with concluded missives) they can register a caveat in the Register of Inhibitions (s 91) which means they are notified if the property is to be sold.

The regime will allow the creditor to sell the land under s 92. The creditor must apply to the court and cannot apply until 6 months after the registration of the notice of land attachment. Applications to sell are intimated to the debtor, those that registered caveats, prior creditors &c. A preliminary hearing is held and if in order the sheriff will fix a date for a full hearing, appoint a valuer to value the property.

At the full hearing the sheriff will taken into account various factors and will refuse applications in certain cases (see s 97 (6)). Where the land attachment covers a dwelling house which is a main residence then s 98 applies and the sheriff can consider various factors affecting the debtor and the debtor’s family before deciding whether or not to grant the application.

If an order for sale is made the creditor can eject the debtor: s 106.

The sale is made in accordance with ss 108 – 116. A person is appointed by the court to administer the sale, and the property will be sold by private bargain or at auction. Sale will disburden the property of any securities, and a report of the sale is to be prepared and sent to the sheriff. The sale proceeds are distributed in accordance with s 116. The expenses are paid first, then any prior creditors, then the attaching creditor, then post-ranking creditors, then the debtor.

If there is no sale foreclosure will take place under ss 117 and 118.

Land attachments are terminated if the debt is paid (the accessory nature of the obligation): s 121. A discharge is then to be prepared.

The land attachment will terminate after 5 years ( s 124) unless an extension is sought.

The land attachment generated huge political controversy and a provision obliging the Executive to review the provisions was introduced at Stage 3 of the parliamentary process: s 127.

Question 21

What are residential attachments?

Answer 21

Adjudications are default diligences at the moment. The provisions in the 2007 Act hive off land attachments form other diligences. Residual attachments govern cases to be prescribed by the Scottish Ministers (which will include intellectual property rights, for example)..

IN relation to land attachments it is not clear if the provisions will ever be implemented as long as the current government remains in power.]]