Insolvency

Question 1

What type of relationship is involved in cautionary obligations?

Answer 1

Triangle: 3 parties

1. Principal Debtor.
2. Creditor.
3. Cautioner.

Question 2

What is required by the creditor according to Smith v Bank of Scotland 1997 S.L.T. 1061 and what is needed to satisfy this?

Answer 2

Good faith is needed by the creditor.

WHAT IS REQUIRED:

“warn the potential cautioner of the consequences of entering into the proposed cautionary obligation and advise him or her to take independent advice”

Question 3

When is the principal of good faith relaxed?

Answer 3

When the cautioner has an interest in the principal contract.

Question 4

What is a cautionary obligation?

Answer 4

When a third party promises to pay the creditor when the principal debtor fails to pay a certain sum.

Question 5

What is a good way of distinguishing a cautionary obligations from other obligations as supported by City of Glasgow District Council v Excess Insurance Co Ltd?

Answer 5

A cautionary obligation is an accessory obligation and only operates on the failure of the principal debtor therefore, it is not an independent legal obligation.

Question 6

How do we distinguish indemnity from cautionary cases using Sutton & Co v Grey [1894] 1 Q.B. 285?

Answer 6

[observed] If an individual is unconnected from the contract except to pay in the case of default, this is a grantee [cautionary].

Whereas, if there is not total disconnection but they derive a benefit, it is indemnity.

Question 7

What form should a cautionary obligation take generally?

Answer 7

A general offer, when acted upon. But where a group of co-cautioners are intended, only when all agree.

Question 8

When does a cautionary obligation need to be in writing?

Answer 8

Requirements of Writing (Scotland) Act 1995 s.1(2)(a)(ii) where it is a gratuitous unilateral obligation undertaken otherwise than in a course of business.

Question 9

Does the fact a cautionary obligation not conform to legal requirements to writing effect it’s validity?

Answer 9

Not if the creditor acted or refrained from acting on reliance of the obligation with the knowledge of acquiescence of the cautioner, if they have been effected to a material extent or will be if its invalid.

Requirement of Writing (Scotland) Act 1995 s.1(3)-(5).

Question 10

What is a proper cautionary?

Answer 10

Where the cautioner is bound by the deed and that is clear from the face of the deed.

Question 11

What is an improper cautionary?

Answer 11

This is where the principal debtor and cautioner appear to be joint debtors but the true relationship can be seen from a closer reading of the deed or where the creditor knows one party acts as the cautioner.

Question 12

What happens if a cautionary obligation is undertaken due to a misrepresentation by the creditor?

Answer 12

The contract is voidable.

Question 13

What makes a misrepresentation actionable under Royal Bank of Scotland v Ranken (1844) 6 D. 1418?

Answer 13

Where it is material and induces the cautioner to enter the obligation?

Question 14

What happens if the misrepresentation is made by the debtor according to Young v Clydesdale Bank (1889) 17 R. 231?

Answer 14

Generally, the validity is not effected, however this is not an absolute rule, where there is fraud the creditor cannot enforce the obligation unless money has been lent to the debtor.

[Smith v Bank of Scotland 1997 S.L.T. 1061]

Question 15

What happens if a creditor is not in good faith?

Answer 15

Cautioner must prove a breach of good faith and an actionable wrong by the debtor before the obligation is disregarded.

Question 16

When does the duty of good faith in cautionary agreements not apply according to Wilson v Bank of Scotland, 2004 S.C. 153?

Answer 16

Where the cautioner doesn’t undertake the obligation gratuitously.

[i.e. interest in the transaction].

Question 17

What cases does good faith extend to roughly according to Barclays Bank Plc v O’Brien [1994] 1 A.C.?

Answer 17

“where there is an emotional relationship between cohabitees” or wherever the “surety reposes trust and confidence in the principal debtor in relation to his financial affairs”

Question 18

What interpretation is taken when there is ambiguity in a cautionary obligation?

Answer 18

It is interpreted contra proferentem i.e. against the person who drafted it.

But generally, read in favour of the cautioner.

Question 19

What is the general liability of cautioners Struthers v Dykes (1847) 9 D 1437?

Answer 19

The principal debt (unless limit is placed), Interest and Expenses.

Question 20

What are some general rights of a cautioner?

Answer 20

1. To call on principal debtor to relieve them of liability. (prescribed to 5 years).
2. Assignation when price paid in full.
3. Share in securities granted by the debtor to a co-cautioner.

Question 21

Generally what are the ways to terminate a cautionary obligation?

Answer 21

1. Discharge of principal debtor
2. Material alteration
3. By agreement
4. Revocation by cautioner
5. Prescription
6. Death
7. Insolvency

Question 22

What happens if circumstances come to the attention of a creditor that would materially affect the risk undertaken by a cautioner?

[Britannia Steamship Insurance Association Ltd v Duff, 1909 2 S.L.T. 193]

Answer 22

The creditor is bound to communicate such a risk.

Question 23

What does an improper cautionary entail?

Answer 23

That all co-obligants are joint and severally liable. Where one pays, they can claim money back from others.

Question 24

What happens if a creditor makes a positive representation that proves to be materially false?

Answer 24

The cautioner may seek reduction of the obligation.

Ritchie v Glass 1936 SLT 591

Question 25

What happens where there is error in the essentials of the contract? Stair, Institutions 1.10.13.

Answer 25

The contract is void, regardless of actions by either party.

Question 26

What are the defences for the cautionary generally?

Answer 26

1. the right of discussion 2. The right of division 3. Right of relief

Question 27

What is the right of discussion?

Answer 27

The cautioner has the right to expect that the creditor will exhaust all legal means to get the debt from the principal debtor.

Question 28

What does the right of discussion NOT apply to?

Answer 28

It doesn't apply to monetary debts.

Question 29

What is the right of division?

Answer 29

A proper co-cautioner can refuse to pay until all other cautioners are called to pay. Bell, Principles, § 62; SME Vol. 3, para. 927.

Question 30

What is the exception to the right of division?

Answer 30

where one of the joint cautioners is insolvent, then the cautioners each have to increase their share. Erskine, Institute 3.3.63.

Question 31

What is the right of relief?

Answer 31

1. The cautioner has a right to be relieved by the debtor.

Question 32

What is dilligence?

Answer 32

Using the court to enforce a debt.

Question 33

What is the ownership principle of diligence generally under Burnett’s Tr v Grainger 2004 SC (HL) 19?

Answer 33

That diligence is only available on assets the debtor owns i.e. in their patrimony.

Question 34

what does prior tempore, potior iure est mean in diligence proceedings

Answer 34

First in time, first in right i.e. ranked in order of time made.

Question 35

What are the different types of diligence and what do they relate to?

Answer 35

Attachment: Corporeal Moveables Money Attachment: Corporeal money i.e. cash. Arrestment: Incorporeal moveables. Inhibition: Heritable property Adjudication: Real rights in land.

Question 36

What are the 4 sub-types of arrestment?

Answer 36

Arrestment of: 1. Rights owed to the common debtor 2. Goods owned by the debtor in possession of 3rd party 3. Ships and cargo 4. Earnings

Question 37

What are the relevant considerations when deciding what form of diligence to take?

Answer 37

1. What property does the debtor own 2. Is any of the property encumbered by a security right 3. Does the creditor need interim diligence during court proceedings 4. Is the property in possession of a 3rd party?

Question 38

What legislation is relevant to diligence?

Answer 38

1. Adjudication Act 1672 & Diligence Act 1661 2. Debt Arrangement and Attachment (S) Act 2002: Attachment 3. Debtors (Scotland) Act 1987: Arrestment and Earnings Arrestment 4. Bankruptcy and Diligence (Scotland) Act 2007: Money Attachment and Inhibition

Question 39

when is attachment competent?

Answer 39

Debt Arrangement and Attachment (Scotland) Act 2002: s.10(3) 1. Where there has been a charge served on the debtor. 2. The period of time specified in the charge has lapsed without payment 3. Where debtor is an individual, within 12 a debt advice and information package must have been provided.

Question 40

When is arrestment competent under the 1987 act?

Answer 40

Debtors (Scotland) Act 1987 s.73A(2): 1. A charge must have been served 2. The period specified has lapsed without payment.

Question 41

What can be claimed by a creditor during an earnings arrestment

Answer 41

Debtors (Scotland) Act 1987 s.48 1. Any ordinary debts due 2. Interest on those sums 3. Expenses incurred

Question 42

When is an earnings arrestment competent under the 1987 act?

Answer 42

s.90(1) A charge must be served and the time specified must have lapsed.

Question 43

When is a money attachment competent?

Answer 43

Bankruptcy and Diligence etc. (Scotland) Act 2007 s.174(2): 1. Debt is constituted by decree 2. Charge is served on the debtor 3. The period specified in the charge has lapsed with no payment 4. Where the debtor is an individual, the creditor has served a debt advice and information package no earlier than 12 weeks before starting proceedings.

Question 44

What is competent for Inhibition under the 2007 act?

Answer 44

Bankruptcy and Diligence etc. (Scotland) Act 2007 S.146(1): 1. Payment of debt constituted by decree or document of debt that contains; 2. Obligation to do or pay something

Question 45

What is the period that a diligence must follow after within the 1987 act?

Answer 45

S.90(5) 2 years.

Question 46

What is a debt arrangement scheme?

Answer 46

It is an extra-judicial scheme where the debtor can apply to the Accountant in Bankruptcy to approve a proposed debt payment plan. KEY: The debtor needs to obtain money advice and consent of the creditors beforehand.

Question 47

Where is the law concerning Debt Arrangement Schemes?

Answer 47

Debt Arrangement Scheme (Scotland) Regulations 2011 (SSI 2011/141).

Question 48

What is the key consequence of the approval of a debt payment plan?

Answer 48

After it is approved, no more steps can be taken to enforce the debt, this is known as a moratorium and lasts up-to 6 months.