The law and formalities around the validity of assignations of standard securities has been given some much-needed clarity following a recent sheriff court decision.
The case of Promontoria (Henrico) Limited v The Firm of Portico Holdings (Scotland) and Linda Arthur at Greenock Sheriff Court has been welcomed by those in the property lending sector as it has helped resolve some of the uncertainty which followed the conflicting decisions in the earlier cases of OneSavings Bank v Burns and Shear v Clipper Holdings.
The Conveyancing and Feudal Reform (Scotland) Act 1970 sets out the form of assignation (Form A) of a fixed sum security. Where the security is not a fixed sum a short description of the nature of the debt or obligation should be inserted. There is a degree of flexibility, provided the assignation conforms “as closely as may be” to the style.
The facts in Promontoria (Henrico) Limited
- The debt was secured by 34 ‘all sums’ standard securities assigned by Clydesdale Bank plc to Promontoria.
- The assignation contained no balance due but instead stated: “to the extent of all obligations and liabilities due or to become due by the relevant Chargor to the Buyer”.
- The assignation clearly identified the security subjects, the assignor, the assignee and the debtor.
- The calling up notice stated the outstanding balance.
The borrowers challenged the validity of the assignation when Promontoria attempted to enforce the securities:
- They argued (following the case of OneSavings Bank v Burns) that the assignation was invalid because it did not state the outstanding balance.
- The security was therefore unenforceable.
- The borrowers’ solicitor accepted there was no substantive defence to the action so if their argument was unsuccessful, decree would be granted.
Promontoria relied on the Shear v Clipper Holdings case:
- Promontoria argued the insertion of the additional description of the nature of the liability kept the assignation “as closely as may be” to the statutory Form A.
- The assignation was therefore valid.
- Even if the assignation was not strictly compliant with the legislation, any omission was not fatal.
- The borrowers were trying to use a technicality to delay payment.
The court’s decision
The sheriff followed the Court of Session decision in Shear v Clipper Holdings and found the assignation to be compliant and valid. In the circumstances of this case the form of wording used was wholly reasonable and was “as close as may be” to the statutory style.
Interestingly, the court went further and said that even if it had found the assignation to be non-compliant with the Form A, any variation was not fatal. It caused no prejudice to the borrowers who should not be able to rely on what was clearly a technical challenge as a means to delay repayment.
Another point which was raised, although not fully addressed in the case, was the question of whether or not inserting the balance due at the date of assignation converted an ‘all sums’ security into a fixed sum security for that sum. This remains a potential point of challenge open to borrowers in future cases. However, it is difficult to see this succeeding where an assignation states both a current balance and an additional description of the ‘all sums’ nature of the liability, such as in this case.
Loan book sales by way of assignations are common in the banking and finance sectors and this case is unlikely to be the last of its type to go through the courts. This decision is a helpful indication that purely technical challenges, in certain circumstances, are not going to be tolerated particularly when it is clearly being used as a delaying tactic. Nevertheless, care should still be taken by lenders and their advisors when drafting assignations of standard securities.
Our specialist Banking Litigation team works with a number of lenders and is well placed to provide advice on any of the issues raised in the discussion above.