6. Diligence

Question 1

What is diligence? (very broadly speaking)

Answer 1

If you get a court order for payment - this is simply an order to make payment, but it does not entitle you to go and take their stuff away. If they ignore that court order then you need something else. So to get the money out of the debtor you need to do diligence.

Diligence is the means of executing a judgement against the debtor to realise the court order. It is authorisation by the court to go and seize assets of the debtor. It is a means by which an unsecured creditor can convert their personal right into a right in security without the agreement of the debtor.

“Decreets would be of no effect, but as bees without stings, if the law did not fix the kinds and forms of the execution thereof”. - Stair 4, 47, 1. So diligence is the sting, it is the thing which has the impact upon the debtor.

Question 2

When does diligence arise?

Answer 2

The standard case is where there is an obligation.
The debtor may not pay, but if not then the creditor will attempt to make them pay.
If the debtor still won’t pay then this may lead to a court action (this can persuade the debtor to pay).
Once there is a decree (an order specifying that a particular payment is due) the debtor may pay. Although a court order of itself does not make the debtor pay.

Question 3

But if the debtor still refuses to pay or doesn’t have the money then what do you do?

Answer 3

You can:
⁃ 1) Wait until the debtor has enough money (the decree will not prescribe).
⁃ 2) Self help - send the heavies in (bad idea!)
⁃ 3) Insolvency
⁃ This is a collective debt enforcement procedure where the sellers get together and realise the assets of the debtor and the creditors all get something from it. It is a procedure whereby the debtor initiates formal court process which involves a third party being brought in.
- When you initiate an insolvency process the cost is lower.
- But because insolvency is individualistic it rewards those who act first.
⁃ 4) Diligence
⁃ Diligence is an individualistic process whereby an individual creditor can seize the assets of the debtor for their own benefit and they don’t need to worry about any other creditor. [ These are essentially the two options available.]

Question 4

What is diligence? (more specifically)

Answer 4

Diligence is the legal procedure by which a creditor attaches the property of his debtor with the object of forcing him to implement a judgment which has already been pronounced.

This is the general definition but there are caveats.

Question 5

What areas of law is diligence concerned with?

Answer 5

⁃ Partly based upon court procedure
⁃ Partly tied into our law of insolvency
⁃ It is also tied into our law of security since it is about giving a judicially authorised right in security to a particular creditor.

NB must know property law side of things as required by diligence. It creates a judicial right in security where the creditor is getting a priority which will allow them to be paid first in the insolvency of the debtor.

Also introduced are Money attachments (Part 8 of the 2007 Act) – a special form of diligence to attach cash which leads to a payment order (effective transfer of cash from debtor to creditor).

Question 6

What is the 2007 act due to abolish?

Answer 6

The 2007 Act was due to abolish adjudications under s 79 and replace with “land attachments” – Part 4 of the 2007 Act. The Scottish Government has given a commitment to consult on whether these provisions should be brought into force at all. Note, the political controversy here (eg see s 127)).as adjudications are not yet abolished their replacement for assets that are not otherwise caught by diligence residual Attachments (Part 4 ch 3 of the 2007 Act) have not yet been brought into force either.

Question 7

Who carries out diligence?

Answer 7

Court officers: sheriff officers or messengers at arms.
Who pays the fees of officers of court?

A legislative footnote:

Judicial Officers were to be introduced by the 2007 Act, s 57. They were to replace sheriff officers and messengers at arms, and a new statutory regime was set up to regulate them under Part 3 of the 2007 Act. This was never implemented.

Question 8

What is the effect of diligence?

Answer 8

Except inhibition, diligence gives creditor real right of security. Where insufficiency of assets, priority is not by date of debt, nor by date of decree, but by priority in diligence. (Prior tempore, potior jure.) “It is ….. the priority of the diligence used upon the debt …. which alone entitles the creditor to a preference”. (Erskine 3,6,1)

Question 9

What is the impact of property law upon diligence?

Answer 9

One must be clear on the distinction between heritable and moveable property and corporeal and incorporeal property.

⁃ Heritable property can only be affected by adjudication and inhibition.
⁃ Attachment only affects corporeal moveable property.
⁃ Arrestment affects incorporeal moveables - it also potentially seizes some personal rights which will lead to the implement of sale contracts (e.g. if someone is under an obligation to pay a price to buy missives under a property then that right to payment would be heritable but it could be arrested)

One must also be clear about who owns the property. Diligence can only be carried out on assets that are owned by the debtor.

Question 10

Mitchells v Fergusson 1781

Answer 10

⁃ Owner of property conveyed the property to a third party and received the price. But the transferee did not complete the real right of ownership by going through the necessary procedural steps. The transferor owed money to a creditor.
⁃ The creditor went to court and raised an action of adjudication. The creditor gets decree and registers the adjudication before the buyer registers the conveyance of the property.
- They had not completed transfer of ownership.
⁃ The court held that the adjudger (the creditor) wins because they received the real right while their debtor (the transferor of the property) was still the owner of the property, the adjudication affected that property - thus when the buyer finally completed the real right of ownership, they received the property subject to the adjudication.
- Who takes priority in this case?
- At the time the adjudication is made a real right and the time the diligence is affected it was still owned by the adjudgers debtor. The adjudication therefore took priority over any competing personal right. When the third party ultimately acquired ownership of the land subject to an adjudication in favour of the adjudged.
⁃ [So in competition between a personal right[ Similarly after assignation but before intimation if diligence occurs then the diligence takes priority.] and diligence, the diligence wins.]

Question 11

Burnett’s Trustee v Grainger [2004] UKHL8

Answer 11

G bought a property from B, paid price, gets conveyance but doesn’t resigner. B goes bust. Ownership of the property was transferred to the trustees and sequestrations and then the G registered. But they were too late because the creditor protected their position.

NB in the law of sequestration and liquidation, they are deemed diligences in favour of every creditor. It is deemed diligence against land, incorporeal property, attachment of corporeal property. This means that these 18th C cases were relied upon in argument in Burnett’s and were pivotal in the decision being reached.

If you have a creditor who is wanting to do diligence and a transferee from the debtor, it is whoever completes the real right first (adjudication v registration).

Question 12

What happens to third party rights if a real right prevails?

Answer 12

If real rights prevail; if not they do not.

Question 13

How does diligence exercise over common property?

Answer 13

⁃ In relation to common property (each co-owner has an identifiable share which can be dealt with separately), the pro indiviso share of the debtor can be seized but the pro-indiviso shares of the other co-owners cannot be seized. So it is possible to carry out a diligence against that identified share but they cannot touch the other share unless she is party.
- But in joint property there is one title (arises in club ownership or in trustees).
⁃ So e.g. A and B are husband and wife who co-own a house. A owes money to Lloyds bank. If A doesn’t pay the money then Lloyds can seize A’s pro indiviso share but CAN’T TOUCH B’s SHARE OF THE PROPERTY.

Question 14

What is the competition of diligence with real rights?

Answer 14

⁃ The general principal is that if you do diligence and there is a prior existing real right, the prior real right will prevail.
⁃ So any prior real rights which exist at the time of diligence will subsist.
- You can only carry a real right against assets owned by the debtor.
- What happens if the debtor has transferred the assets to someone else?
- If you do diligence and there is a competing real right that real right has priority over the diligence. Or if there is an existing pledge over corporeal movable property and then attachment is carried out, pledge will prevail.
- If there is a lease which is in place before the adjudication is carried out the tenant is unaffected by the adjudication if the lease pre-dates this.

Question 15

How does diligence affect trusts?

Answer 15

⁃ The one personal right which prevails over diligence is where you have a trust. The beneficiary in a trust has a protected personal right which gives them priority over the creditor doing diligence.
⁃ [Need to look this up].

Question 16

Heritable Reversionary Co Ltd v Millar (1892) 19 R (HL) 43

Answer 16

?

Question 17

What happens to the beneficiary’s interest in bankruptcy? On diligence?

Answer 17

?

Question 18

What are the various other diligences?

Answer 18

(most are quite uncommon / abolished)
Also six other processes called diligences you will see referred to in the textbooks.

(1) Civil imprisonment for debt ⁃	Hasn't technically been abolished but only arises in relation to aliment payments in matrimonial disputes. But generally if you don't pay a civil debt you cannot be imprisoned for this.
(2)	Confirmation as executor-creditor ⁃	A form of diligence where if you have an executry and the deceased owes more than they have (bankrupt estate), then a creditor can be appointed as executor to administer the deceased's estate in order to pay off the creditor. 
(3)	Real poinding - abolished
(4) Real adjudication - abolished
(5)	Sequestration for rent  - abolished  ⁃	This was previously used to enforce the landlords hypothec - this was the device whereby the landlord could go into the property and identify assets in the premises to sell in order to pay the unpaid rent. ⁃	It was abolished by the 2007 Act. Now for the landlord to enforce a hypothec they must use attachment.

(6) Maills and duties – to be abolished when land attachments come in (which looks unlikely)
⁃ This still exists. This arises where a tenant is paying rent to a landlord and the landlord is the debtor to a particular creditor. In the event that the landlord does not pay the debt due an action of maills and duties can be raised - this instructs the tenant to pay the rent directly to the creditor.
⁃ [If the 2007 Act comes fully into force this will be abolished - because there is a new provision within the land attachment rules that mirrors this action.]
- Consider the situation where A is landlord and B is tenant and A has owed money to C, C gets a decree. C sees that A is getting regular payments from B the tenant, but it is not incorporeal moveable property so she cannot arrest it but she can carry out an action of maills and dutys which provides that B is now obliged to pay the rent to the creditor.

Question 19

What happens in diligence in comparison to bankruptcy?

Answer 19

In diligence, generally:-
⁃ (1) individual creditors freeze or seize
⁃ (2) individual assets
⁃ (3) on a first come first served basis (prior tempore potior jure) If you snooze you lose.

In the bankruptcy processes:- ⁃	(1) procedure is for all creditors; ⁃	(2) all assets are taken over and ⁃	(3) distribution is (subject to exceptions) on basis of equality.  Paritas creditorum[ This means "parity of creditors" - creditors should be treated equally.] ⁃	(4) in bankruptcy processes debtor's affairs are wound up by trustee/liquidator. No such person in diligence.

Question 20

How does diligence affect sequestration or liquidation?

Answer 20

Diligence may occur, and never be followed by sequestration/ liquidation, or may be sequestration/liquidation without prior diligence, or may be period of diligence culminating in sequestration/liquidation. (Once bankruptcy has begun diligence ceases to be competent.)

Question 21

What are freeze and seize diligences?

Answer 21

There are freeze and seize diligences. They are not technical terms to be encountered in the textbooks, just easier to understand than the official terms (nexus (means seized) litigious means (freeze).
⁃ Freeze diligences are ones which prohibit or make an asset litigious.
⁃ I.e. this stops the debtor from transacting with the property.
⁃ The main freeze diligence is inhibition.
⁃ Seize diligences attach an asset - they create a nexus over the asset.
⁃ Most seize diligences also have a freeze effect (most stop the debtor from dealing with the asset). However the seize diligences are more powerful than freeze diligences.
⁃ Seize diligences entitle the creditor to seize one of the assets of the creditor for the payment of the debt which is due.
⁃ Attachment, arrestment, adjudication and money attachment are all seize diligences.

Question 22

What is the effect of seize diligences?

Answer 22

The effect of seize diligences is that they create a judicial right in security - the court is authorising the establishment of a right in security over the asset which will have priority in insolvency.
⁃ This right in security is a non-possessory security and so the ranking problems which we’ve seen in previous lectures can equally arise where there is a diligence in competition with other securities.
⁃ The broad rule is prior tempore potior jure.
⁃ So if you have a pledge over an asset on day 1 and the asset is attached on day 2 then the pledge will prevail.
⁃ The key point is to identify which real right is created first.
⁃ The one area where there is a problem is where there is a diligence and a floating charge:
NB Schedule 7 is exception to principle of prior tempore potior jure.

Question 23

How does diligence affect floating charge ranking?

Answer 23

⁃ Section 463(1) Companies Act 1985 provides that the floating charge attaches subject to effectually executed diligence. Effectually executed diligence (EED) is undefined in the legislation but has been interpreted by the case of *Lord Advocate v RBS 1970s [this will be covered in the next lecture but here are a few basic facts]:
⁃ In this case it was held that a simple arrestment was not EED.
⁃ A simple poinding was not EED.[ Despite the fact that in a competition with any other security, arrestment would take priority over other securities the moment they take place.]
- It provides that if you have an arrestment or if you have an attachment, that is not of itself effectually executed diligence. You need something extra.
- This case virtually denies the protection for effectually executed diligence from having any meaning.
⁃ Nothing was said about adjudication and inhibition.

NB in problem questions write them in chronological order

Question 24

What is the date of priority for diligence?

Answer 24

The key is when a diligence became a real right. What is this date? Either:
⁃ 1. The day that the diligence is carried out is the important date.
⁃ 2. The date on which the court order announcing Diligence is carried out by officers of court (sheriff officers[ For sheriff court actions.] or messengers at arms[ For court of session actions.] (they are the same person).
- 3. The date at which the diligence is carried out itself (this determines its priority and is the instance at which a real right is created).

Question 25

What are the diligences?

Answer 25

In Scots law there are 5 diligences:

1. Attachment (the diligence formerly known as poinding) Used against corporeal moveables. Leads to sale.
2. Arrestment - Used mainly against incorporeal moveables.
   (a) arrestment of money and other incorporeal moveables;
   (b) arrestment of goods in possession of third party;
   (c) arrest of ships and cargo;
   (d) arrestment of earnings.
3. Inhibition - Against heritage. Has only “freeze” effect.
4. Adjudication - Also against heritage. Gives creditor real right.
5. Money attachment

Question 26

What is money attachment?

Answer 26

Formerly called poinding. This was introduced to say that all assets should in theory be capable of being caught by diligence (e.g. Now cash can be caught).

Attachment is the mechanism to cease corporeal property.

This is a diligence whereby you attach cash (notes and coins). This was introduced by the Bankruptcy and Diligence Act 2007 - prior to this banknotes and coins[ As opposed to sums of money held in the bank (I think).] could not be subject to diligence.

Question 27

What are the rules on money attachment?

Answer 27

The rules mirror those on attachment (e.g. so where cash is in a dwelling house there are special protections - you must go to court in the same way as you would get an exceptional attachment order).

SW: not going to say anything further.

Cash (Notes and coins) has only been able to be seized by diligence since November 2009. The detailed regime is in Part 8 of the BAD Act. The rules are largely similar to those for attachments.

A charge for payment is required and it cannot be carried out against cash in dwellinghouses.