Arrestment

Question 1

What is arrestment mainly used for?

Answer 1

Arrestment is used mainly against incorporeal moveables:

⁃ 1) Arrestment of money and other incorporeal moveable (like debts and shares)
⁃ 2) Arrestment of goods in possession of third party
⁃ 3) Arrest of ships and cargo
⁃ 4) Arrestment of earnings

Usually what is seised are bank accounts (where in credit). So where your account is in credit the bank is under an obligation to pay you. The personal right you have against the bank can be seized.

Question 2

Where are the rules on arrestment codified?

Answer 2

The rules were amended and codified in the BAD Act 2007 inserting part 3A into the Debtor’s (S) Act 1987.
⁃ These rules are set out in s 73A onwards.

Question 3

What can you arrest?

Answer 3

⁃ s 73A identifies what you can arrest:
⁃ “funds due and other moveable property of the debtor”
- Debts owing to the debtor and other incorporeal moveables belonging to the debtor.

Question 4

Does arrestment catch future debts?

Answer 4

The arrestment only catches the assets there at the time of arrestment, so not future debts or after acquired assets.

You can transfer the right to payment subject to the conditions which exist, if the right already exists.

Question 5

How does arrestment work?

Answer 5

⁃ Arrestment (s73E) attaches a fund.

• Example: Creditor and Debtor. Debtor owes money to creditor and creditor gets decree from court to enforce, creditor then looks at what assets D has. C might have various rights against other Debtors the creditor wants to seize these rights to payment. To do this, they carry out a right of arrestment (“in the hands of the debtor’s debtor”). So must serve an arrestment on D’s debtor’s, which says you are no longer holding debt for D but for C. You must individual notify the debtor’s of the debtor to serve each of them separately.
• If there is a creditor who has a right of enforcement against a debtor, this right of enforcement is held in the creditors patrimony - it is an asset of the creditor. The assets held by the creditor can be seized by that individual’s creditors in diligence. Rights to payment can be seized by arrestment.
• “The arrestment will be laid in the hands of the parties who would have been defenders in an action for payment of the sum arrested”.
• Example: if the debtor is a partner in the firm then the partners rights to the profits in the firm are potentially one of the most valuable assets (one you would want to arrest). It is competent to arrest this “in the hands of the firm” because the firm is the entity (partnership is contract), and the firm owes the obligation to the partner. But you cannot get [see Stair Encyclopaedia].

Question 6

What are the three parties in arrestment?

Answer 6

There are three parties in arrestment (Tripartite in nature):
⁃ Creditor (the arrester) - person who carries out the arrestment.
⁃ The debtor (the common debtor) (middle man - person who is the creditor’s debtor but the debtor’s debtor’s creditor).
⁃ The third party owing the obligation to the debtor (the arrestee)

***NB make sure you do a diagram to be clear on the contractual relationships. If you serve arrestment on the wrong person you catch nothing. You can only seize the asset owned by your debtor. This is what diligence is.

Question 7

What is the procedure of arrestment?

Answer 7

⁃ Arrestment can be done in execution[ This is at the end of the action - on decree.] or on dependence[ This is an interim procedure at the beginning of the action - before the court has determined whether the money is due. It is very common - procedure where you initiate court action and apply at that instant for arrestment of the dependents. This is in order to spur the debtor for payment. ].
- Arrestment in execution will follow a decree (s 73A). A schedule of arrestment is to be served (or the decree if arrestment in dependence preceded the arrestment proper) together with debt advice and information in the prescribed form.
⁃ The schedule of arrestment is served by officer of court on the arrestee along with notification being given to the common debtor with a debt information and advice package.
⁃ The officer of the court will also take someone with them to witness the serving of the arrestment.[ The serving must be done in person and witnessed.]
⁃ The officer of the court will then notify the court that this has taken place.
⁃ At this stage the arrestment:
⁃ Stops the common debtor from transferring the right to someone else (it makes the property litigious, so it is partly a freeze diligence)
⁃ The arrestment creates a real right in security over the right to payment.[ This is the one instance in the law at the moment that creates a real right over a personal right.]
⁃ From the perspective of the arrester, what does the real right in security give them?
⁃ What happens is that a judicial assignation takes place - so the arrester receives the right to payment. Thus the arrester becomes the creditor in the obligation.
⁃ [Old law][ [[Up until the 2007 Act the arrester had to raise an action of forthcoming. This action required the creditor to go to the court who would grant it - this completed the judicial assignation and the arrester becomes the creditor in the obligation.]]]
⁃ After the changes in the 2007 Act, after a period of 14 weeks has passed, this right to payment transfers automatically to the creditor (s 73J).

Question 8

What are the rules for arresting banks and building societies?

Answer 8

⁃ Scots law makes it as easy as possible in relation to banks with their Head Office in Scotland.
⁃ If you serve an arrestment of a bank which has its head office in Scotland to the head office then this serves to catch EVERY BRANCH OF THE BANK WITHIN SCOTLAND.
⁃ This means that even if the arrester doesn’t know if the debtor has an account at any particular bank they will go to the head office of RBS, BoS, Clydsedale Bank, Lloyds etc and serve an arrestment at each. This means that if the debtor has an account at any of these banks then it will be caught. If they serve an arrestment at one of these banks and the debtor doesn’t have any account then the arrester has only lost the cost of the arrestment.
- In an arrestment when the creditor gets the court to serve an arrest, they go to the head office of each bank, and this catches all the accounts in Scotland within those individual banks.

⁃ If you know that the debtor has an account at a particular branch then you can arrest at that particular branch. If the bank account DOES NOT have its HEAD OFFICE IN SCOTLAND then you would have to go to that individual branch and serve the arrestment there.

• The schedule of arrestment has to be served in person.
• You seize the bank accounts of the debtor at the time that you start the court action provided you comply with the rules of diligence. This acts as an incentive for the debtor to pay.
• NB you only arrest the value of the debt, not the entire value of the account.
• If you do not arrest at the head office you are simply seizing assets at that particular bank.
• Many companies use banks with head offices in England in order to better protect their position.
• Stair, para 272, Vol 8. If need more information.

Question 9

Why does the bank have to be in credit to be arrested?

Answer 9

If the account it is overdrawn then the bank does not owe any money to the common debtor and thus the arrestment cannot arrest anything.
⁃ Thus the arrester would have to wait until the account is in credit.

Question 10

What can be arrested?

Answer 10

Debts and incorporeal moveable property can be arrested.

Question 11

What is Tantum et tale?

Answer 11

This principle applies a bit like the assignatus utitur jury auctoris rule. It means that if there is a defence that the arrestee would have had against the common debtor then this defence will be equally good against the arrestor.

Question 12

What is acquirenda?

Answer 12

⁃ This is rights which are acquired after a particular event takes place.
⁃ When you have a bank account which is in debit (overdrawn) then nothing is caught. If money is then paid into that account, is this caught by the arrestment?
⁃ No - the arrestment seizes what is there at the particular time when arrestment takes place. You must rearrest if you wish to catch something which enters later.
⁃ This rule can create some problems in relation to future rights since, if a right does not yet exist it cannot be arrested.
⁃ So if you know that someone is going to enter into a contract, but there is no contract yet, this right cannot be arrested. But if you have entered into a contract that you will e.g. Pay the price in 10 months, this right to payment CAN be arrested, but it can’t be enforced until the debt falls due.

Question 13

What happens during the arrestment of shares?

Answer 13

⁃ 1) Shares
⁃ If S is a shareholder in A Ltd, the share is a piece of incorporeal moveable property - it is a right to share in the dividends of the company. So if S owes money to a creditor C, then the creditor can arrest the share from A Ltd.
⁃ If the sum due by S to C is not paid in the 14 weeks then C will receive the shares.

⁃ This can ONLY be done if the company is registered in Scotland - if not then the share is an English etc asset which cannot be caught by arrestment.

⁃ Also in many circumstances there is a nominee[ E.g. fund managers etc.] who holds the shares for the shareholder. If you are creditor of S, in these circumstances who do you arrest? Since you arrest in the hands of the debtors debtor, the creditor must arrest the nominee. In this case the creditor would not receive the shares themselves but would receive any obligations to pay dividends which are owed by the nominee to S.

**SEE DIAGRAM

DO DIAGRAMS IN EXAMS TO IDENTIFY THE CORRECT PERSON AS THE ARRESTEE

Question 14

What happens during the arrestment of a partnership?

Answer 14

⁃ The firm is a separate legal entity. Each partner has a right in that firm. So a creditor of an individual partner could arrest in the hands of the firm requiring the firm’s obligation to account for a share of profits owed to the partner to be transferred to the arrester.

Question 15

How much can be arrested?

Answer 15

⁃ Old law[ It used to be the case that arrestment seized the whole account. But this led to the situation where a massive company owed around £300 to a small business in Edinburgh who made various attempts to obtain its money. The small business obtained warrant to arrest on the dependence and seized the company’s bank accounts in ALL THEIR SCOTTISH BANKS - therefore the company had to stop trading and report it to the stock exchange etc.]
⁃ The 2007 Act introduced a new set of rules providing that the amount arrested is the less of the:
⁃ sum due from the arrester to the debtor, or
⁃ the sum due from the debtor to the arrester (plus expenses) [s 73E (I think)]

⁃ So if you have a sum due from the debtor to the arrester of £100,000 and there is a right to payment from the arrestee to the debtor of £1m, the arrester cannot seize the whole £1m - they can only seize £100,000 of it.

⁃ For bank account there is a prescribed minimum that you cannot arrest under s 73F. So you cannot clear the bank account out entirely (this is handy for consumer debt).

Question 16

How does arrestment create competition?

Answer 16

⁃ Arrestment operates to make the property litigious[ Stop the debtor dealing with the property (characteristic of a freeze diligence)] and also creates a right in security over the property[ Characteristic of a seize diligence.].
⁃ The characteristics that make it clear that it is chiefly a seize diligence arise in competition questions.
⁃ An arrester has priority in insolvency over unsecured creditors.
⁃ If there is an assignation which takes place by the common debtor to an assignee and the arrestment takes place before the assignee intimates then the arrestment will prevail.
⁃ There is a strange rule in relation to shares NOT EXAMINABLE BECAUSE SW DOES NOT UNDERSTAND

Question 17

What is the effect of arrestment?

Answer 17

⁃ There are two views: attachment theory and prohibition theory.

• They can be viewed from the perspective of the debtor or the arrestor or the common debtor.
• An arrestment blocks the arrestee from paying the debt. It thus has a prohibitive effect. To the extent the arrestment is a freeze. This element is based on prohibition theory
• But it is also a seize, it creates a right in security in favour of the arrester. It creates a right which gives the arrester priority in the event that the current debtor becomes insolvent thus giving them a claim before other creditors. This element is based on attachment theory.

Question 18

Which theory does the case law suggest prevails?

Answer 18

The case law suggests that attachment theory prevails:
⁃ Lindsay v London and North Western Railway Co 1860 and Inglis v Robertson and Baxter (1898) support the attachment theory and indicate that the arrester obtains a real right in the asset.

Question 19

Which case rejects the attachment theory and why?

Answer 19

⁃ However the case of Lord Advocate v RBS 1977 rejects the attachment theory.
⁃ In this case there was company which had granted a floating charge in favour of RBS. The debtor company owed money to HMRC. The HMRC knew that the company had multiple assets and so it seized one of the bank accounts that was held by the company (by arrestment). The company appointed a receiver and the floating charge attached.
- We know from the companies legislation that the floating charge ranks after effectively executed diligence.
⁃ Did the floating charge take priority over the arrestment or did the arrestment take priority over the floating charge? Do they pay the bank which has a security or the company with a floating charge?
⁃ The court held that an arrestment did not attach to the bank account - it did not consider HL authority in Inglis or Lindsay and held that arrestment does not create a real right over the asset - it simply creates a freeze diligence which prohibits the common debtor from dealing with the property. But because the common debtor has already granted the floating charge, the floating charge must prevail over the arrestment.
⁃ So the argument was that arrestment was not effectually executed diligence until furthcoming takes place.
⁃ But there is a logical flaw [ But it is still an inner house decision which represents the law. ]in this argument:
- A floating charge when it attaches attaches as if it is a fixed security (as if an intimated assignation).
- If there is a competition between an arrestment and an intimated assignation, the arrestment prevails.
- Furthcoming transfers the asset to the arrester. The moment the asset is transferred to the arrester it is no longer owned by the company and if the asset is no longer owned by the company the floating charge cannot attach to it. If the floating charge cannot attach to it then there is NO COMPETITION between arrestment followed by furthcoming and a floating charge.
⁃ [Therefore, this decision is almost certainly wrongly decided, but it is still the law.]
- This case provides that arrestment will always prevail over the floating charge.

Question 20

Consider the following scenario: a floating charge is granted, an arrestment takes place, the day after there is an assignation, the assignee intimates and then the floating charge attaches.

Answer 20

⁃ Once the intimation takes place the asset is removed from the company’s property so the floating charge cannot attach.
⁃ But the assignation does not beat the arrestment because it is made before the assignation takes place. Thus the arrestment takes priority over the assignation.
⁃ But the floating charge, on the authority of Lord Advocate v RBS takes priority over the arrestment.
⁃ But the assignation has removed the asset from the scope of the floating charge so the assignation will prevail over the floating charge.
⁃ Etc etc etc. Thus there is a circle of priorities created as a direct result of the decision in Lord Advocate v RBS.

⁃ Despite all these logical problems, Lord Advocate v RBS remains the law and has also been approved in a subsequent Inner House case of Iona Hotels Ltd v Craig 1990
⁃ In this case the court applied the prohibition theory.
⁃ NB In this case the arrestment took place prior to the floating charge being granted and the court held that in this case the arrestment prevailed because the floating charge could only take effect subject to the pre-existing arresment - the prohibition theory stopped the floating charge attaching to any assets covered by the arrestment.

Question 21

What are multiple arrestments?

Answer 21

⁃ It is possible to have more than one arrestment over an asset. If a debtor isn’t paying one creditor then typically they aren’t going to pay other creditors too.
⁃ Due to the ease of creating arrestments over bank accounts in Scotland, the possibility of there being two or more arrestments over the same account is quite high.

Question 22

What is double distress?

Answer 22

⁃ When there are two arrestments over an asset this is known as double distress.[ means that the common debtor needs to go to the court and ask “who do I pay?”. ]
⁃ The arrestee is left not knowing who takes priority. They have to raise an action of multiplepoinding.[ Where you go to the court and say “whose right takes priority”? ]
- See MacLeod v Kerr (police raised an action saying we have this car, who do we give it to?”

Question 23

When does the arrestment of goods occur?

Answer 23

⁃ Arrestment of goods can occur when assets are held in the hands of another (e.g. if goods are held in a warehouse, the warehouse person has an obligation to the owner, but in theory you can arrest these assets.)
⁃ This is slightly odd because you could also use an attachment against these assets.
⁃ In the 2007 Act s 73E was inserted which substantially limited the scope of arrestement of goods. Now, goods can only be arrested where “the arrestee holds both funds due to and other moveable property of the debtor” (s 73E(4)(a)). So if the arrestee happens to have corporeal moveable property as well as owe the right to payment then goods can be arrested - otherwise they can’t.
⁃ [So now arrestment of goods is very uncommon now.]

Question 24

When does the arrestment of earnings occur?

Answer 24

⁃ Earnings (includes pensions, wages, holiday pay etc) can also be arrested under the Debtors (S) Act 1987.
⁃ The creditor serves a schedule on the employer and the employer takes a slice of the income owed to the employee. The schedule of payment provides for the slice of payment you can take.
- For arrestment of earnings there must be a charge for payment and then the arrestee (the employer) must take a slice to pay to the arrester - so the employee still gets paid but with a deduction given to the debtor.
⁃ If the creditor is the employer then they can arrest in their own hands (Slater v Grampian RC 1991)
⁃ SW: not going to go into the detailed rules - we just need to be aware that arrestement of earnings exists and is a possible diligence.

Sheriff has supervisory powers. NB earnings cannot be arrested on dependence: Law Reform (Miscellaneous Provisions) (S) Act 1966 s 2. Pensions covered by scheme but social security rights unarrestable.

(i) Earnings arrestment.
(ii) Current maintenance arrestment.
(iii) Conjoined arrestment order. To cover case of multiple arrestments. Employer pays arrested slice to sheriff clerk, who then distributes.

Question 25

What is the arrestment of ships and cargo governed by [not mentioned]?

Answer 25

Arrest of ships and cargo (also called admiralty arrestments)
Ships arrestable not attachable. Special rules. See RC Ch 46. Action not of furthcoming but of “sale”. Cannot be arrested on dependence except in terms of s 47 of Administration of Justice Act 1956. Two types: in rem and in personam. Former is to enforce maritime hypothec. To prevent ship from sailing, arrester must obtain warrant to dismantle. Cargo likewise not attachable but only arrestable.

The law will be reformed by Sch 4 to the 2007 Act, as introduced by s 213 of the 2007 Act.