JUDGMENT
Royal Bank of Scotland plc (Respondent) v John
Patrick McCormack Wilson and another
(Appellants) (Scotland)
Royal Bank of Scotland plc (Respondent) v Francis
John Wilson and another (Appellants) (Scotland)
before
Lord Hope, Deputy President
Lord Rodger
Lord Walker
Lady Hale
Lord Clarke
JUDGMENT GIVEN ON
24 November 2010
Heard on 13 and 14 October 2010
Appellant Respondent
Alan A Summers QC Rhoderick R McIlvride
John P Robertson John Paul Sheridan
(Instructed by Aitken
Nairn WS)
(Instructed by Anderson
Fyfe LLP)
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LORD RODGER
The Facts
1. The appellants, Mr Francis John Wilson and his wife, Mrs Annette Wilson,
are the proprietors of a house at 100 Dalum Grove, Loanhead, which is also now
their home. On 12 July 1991 they granted a standard security over the house in
favour of the respondent, the Royal Bank of Scotland (“the Bank”). The standard
security was recorded in the Register of Sasines on 3 December of the same year.
2. The appellants, Mr John Patrick McCormack Wilson and Mrs Norma
Wilson, are the proprietors of the neighbouring house at 98 Dalum Grove,
Loanhead, which is also now their home. On 28 November 1991 they granted a
standard security over the house in favour of the Bank. The standard security was
recorded in the Register of Sasines on 4 December 1991. Since it is accepted that
material circumstances in the two appeals are the same, for the sake of
convenience, I shall concentrate on the appeal by Mr Francis John Wilson and Mrs
Annette Wilson (“Mr and Mrs Wilson”), the result in which will be determinative
of the appeal by Mr John McCormack Wilson and his wife.
3. The standard security granted by Mr and Mrs Wilson included the personal
obligation in respect of which it was granted, in accordance with Form A in
Schedule 2 to the Conveyancing and Feudal Reform (Scotland) Act 1970 (“the
1970 Act”). The personal obligation was in these terms:
“WE, FRANCIS JOHN WILSON and MRS ANNETTE WILSON,
residing at Sixty Three Park Avenue, Loanhead, Midlothian
(hereinafter referred to as ‘the Obligant’) hereby undertake to pay to
THE ROYAL BANK OF SCOTLAND plc (hereinafter referred to as
‘the Bank’, which expression includes its successors and assignees
whomsoever) on demand all sums of principal, interest and charges
which are now and which may at any time hereafter become due to
the Bank by the Obligant whether solely or jointly with any other
person, corporation, firm or other body and whether as principal or
surety….”
The deed went on to declare that the interest was to be “at the rate(s) agreed
between the Bank and the Obligant or (failing such agreement) determined by the
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Bank and shall be payable at such dates as may be so agreed or determined by the
Bank.”
4. After further declarations, the deed continued: “For which sums … the said
Francis John Wilson and Mrs Annette Wilson … hereby grant a Standard Security
in favour of the Bank over” the house at Dalum Grove.
5. It is worth noting that the deed contained a declaration in terms of which the
expression, “the Obligant”, was to mean both the persons who granted the security
“together and/or any one or more of them; and in all cases the obligations hereby
undertaken by the Obligant shall bind all person(s) included in the expression ‘the
Obligant’ and his, her or their executors and representatives whomsoever all
jointly and severally without the necessity of discussing them in their order.” It
follows that Mr Wilson, as an individual, and Mrs Wilson, as an individual, were
undertaking both a joint and a several obligation to pay the sums in question. In
particular, Mrs Wilson was undertaking to pay any indebtedness of her husband to
the Bank. I refer to the discussion by the House of Lords of a comparable term in
AIB Group (UK) Ltd v Martin [2002] 1 WLR 94. But, in addition, together with
her husband, Mrs Wilson was granting the standard security in respect of both her
own indebtedness under the personal obligation and the indebtedness of her
husband under that obligation.
6. By a partnership letter dated 8 October 1992 Mr Wilson, along with his
brother and his son, became jointly and severally responsible to the Bank for the
repayment of any indebtedness or liability of the firm of F J Wilson Associates,
and interest and charges thereon. By a further partnership letter dated 15 October
1993 Mr Wilson, along with his brother, became jointly and severally responsible
to the Bank for the repayment of any indebtedness or liability of the firm of
Wilson Brothers, and interest and charges thereon.
7. On 20 June 1995 Mr Alistair Henderson, Assistant Recoveries Manager in
the Bank’s Insolvency Unit, wrote to Mr Wilson in these terms:
“Our Penicuik Branch
I regret to learn that your indebtedness to the Bank as undernoted at
our above Branch is not being repaid in accordance with
arrangements and I have therefore to advise that unless within ten
days from the date of this letter you effect repayment of the whole
sums due to the Bank or, alternatively, make a substantial payment
to account within that period coupled with acceptable proposals to
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take care of the remaining indebtedness I shall have no alternative
but to institute proceedings against you for recovery.
Such proceedings will involve expense for which you will be liable
and it is therefore in your own interest to give this matter your
immediate attention.”
The note showed that the Business Current Account of Wilson Brothers was
overdrawn in the sum of £22,250.61 excluding accrued interest and charges, while
the equivalent sum for the Business Current Account of F J Wilson Associates was
£26,211.88. There was a further indebtedness of £854.07 on a Business Term Loan
to F J Wilson Associates.
8. Mr McIlvride, who appeared for the Bank, accepted that, when they sent
this letter, the Bank were demanding payment of Mr Wilson’s debt under his
personal obligation in the standard security and were intending to exercise their
powers under the standard security, to take possession of the house at Dalum
Grove and to eject Mr Wilson and his family, if the debt were not paid. But the
sheriff found that, when Mr Wilson received and read the letter, he did not
understand this. He thought that the Bank were merely seeking the sums of money
from him. Mrs Wilson did not see the letter until early in 2007 and no similar letter
was ever sent to her.
9. No part of any of the sums mentioned in the letter of 20 June 1995 has been
repaid to the Bank. A certificate of default dated 3 February 2006 indicates that, by
then, the indebtedness in respect of Wilson Brothers had reached £141,247.52,
including accrued interest of £1,865.85, and in respect of F J Wilson Associates it
had reached £99,172.81, including accrued interest of £1,310.05.
These proceedings
10. In April 1998 the Bank began proceedings in Edinburgh Sheriff Court
against Mr and Mrs Wilson. Besides the usual crave for expenses, the initial writ
contained two craves. In the first crave, which constituted an application under
section 24(1) of the 1970 Act, the Bank asked the court:
“To grant warrant to the pursuers in terms of section 24(1) of the
Conveyancing and Feudal Reform (Scotland) Act 1970 to enter into
possession of [the house at Dalum Grove] being the subjects
described in the Standard Security by Francis John Wilson and Mrs
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Annette Wilson for all sums of money due and that may become due
to The Royal Bank of Scotland plc … and to exercise in relation to
the said subjects all powers competent to a creditor in lawful
possession of the security subjects including the power of sale of the
said security subjects.”
In the initial writ as originally drafted the Bank went on to crave removing of Mr
and Mrs Wilson with a view to selling the subjects. But in the course of the
hearing of an earlier appeal relating to a defence raised by Mrs Wilson, the Second
Division granted leave to Mr McIlvride for the Bank to amend the crave to one for
ejection: Royal Bank of Scotland v Wilson 2004 SC 153, 157, para 14. The second
crave is now in these terms:
“To grant warrant to officers of court summarily to eject the
defenders, and their family, goods, gear, and effects, from the said
subjects, and to make the same void and redd, that the pursuers, or
others in their name, may enter thereto and peaceably possess and
enjoy the same.”
11. On 27 April 1998 the initial writ was served on Mr and Mrs Wilson. This
was the first time that she became aware that the Bank were seeking to repossess
her home and eject herself and the family.
12. The action has been in one court or another for over twelve years. After Mrs
Wilson’s particular defence was rejected by the Second Division in Royal Bank of
Scotland v Wilson 2004 SC 153, a proof before answer was allowed. Eventually, it
took place in February 2007 and on 2 May 2007 Sheriff Stoddart assoilzied Mr and
Mrs Wilson. The Bank appealed to the Court of Session and on 5 May 2009 an
Extra Division (Lord Nimmo Smith, Lord Reed and Lord Drummond Young)
allowed the appeal and granted decree as craved: Royal Bank of Scotland Plc v
Wilson 2009 SLT 729. In effect, therefore, the Bank were granted a decree for the
ejection of Mr and Mrs Wilson from their home. The Wilsons appeal against that
interlocutor.
13. As is immediately apparent from the fact that Mr and Mrs Wilson have not
paid any of their indebtedness to the Bank, the appeal relates to rather technical
legal issues which are said to stand in the way of the Bank enforcing their security.
Moreover, both Mr and Mrs Wilson have for many years been aware of the debt
and of the steps which the Bank are taking to enforce their security. But a striking
feature of the case is that the letter which the Bank sent to Mr Wilson on 20 June
1995 did not make any express reference to the standard security. Indeed, as
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already mentioned, at the time Mr Wilson did not realise that the Bank were
indicating that they would, if necessary, take steps to enforce their security.
14. The steps taken to alert Mrs Wilson were even less satisfactory. Although,
by virtue of the personal obligation in the standard security, she was personally
liable for her husband’s indebtedness under the partnership letters, the Bank have
never sought to enforce that liability against her. Had they done so, they would
have required to demand payment from her and she would have become aware of
the situation. But presumably the Bank thought that there would be no point in
trying to enforce her liability to pay the debt since she would not have had the
resources to do so. What the Bank did, however, was to take steps which they
considered would be sufficient to enforce the standard security that she and Mr
Wilson had granted as proprietors of their home at Dalum Grove. The Bank wrote
to Mr Wilson to demand payment. When he did not pay, they treated him as being
in default and chose to enforce their security by applying to the court under section
24(1). This meant that the Bank did not contact Mrs Wilson at any stage before
they launched these proceedings by serving the initial writ. This Court has to
decide whether the Bank were entitled to enforce their standard security and obtain
a decree of ejection of Mr and Mrs Wilson in this way.
The 1970 Act
15. In Multi-Link Leisure Developments v North Lanarkshire Council 2010 SC
302, 308, para 24, Sir David Edward QC, giving the opinion of an Extra Division
of the Inner House, indicated that their Lordships were more familiar with the
mindset of the Scots conveyancer than with the mindset of the man on the Jubilee
line on his way to Canary Wharf. But even if the man on the Glasgow underground
on his way to Buchanan Street were familiar with the mindset of the Scots
conveyancer, he would often find his language and approach somewhat
challenging. As its title suggests, the 1970 Act deals with matters of conveyancing.
Moreover, it does so in a manner which makes few concessions to those not
steeped in the art. Indeed, even Professor Gretton and Professor Reid have felt
moved to warn that “The law about the enforcement of standard securities is a
subject of great and unnecessary complexity: it is a veritable maze”: Conveyancing
(third edition, 2004), para 19-32. The Court must try to find a way through that
maze.
16. Part II of the 1970 Act created a brand new form of security over heritable
property, the standard security. Although securities granted in the old forms
remained valid, all new securities had to take the form of a standard security. But,
as Mr Summers QC emphasised on behalf of Mr and Mrs Wilson, Part II of the
1970 Act did not create a comprehensive code to regulate the way that the standard
security was to operate. Rather, Parliament created the new form of security and
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laid down certain rules as to its operation but, for the rest, slotted it into a modified
version of the existing statutory and common law regulating heritable securities.
To see this, it is sufficient to refer to section 20(1), which provides that the
creditor’s rights are to be in addition to “any right conferred by any enactment or
by any rule of law”, and to section 32:
“The provisions of any enactment relating to a bond and disposition
or assignation in security shall apply to a standard security, except in
so far as such provisions are inconsistent with the provisions of this
Part of this Act, but, without prejudice to the generality of that
exception, the enactments specified in Schedule 8 to this Act shall
not so apply.”
It may therefore be necessary to travel outside the 1970 Act to see how the
standard security works in particular situations.
17. The scheme of the 1970 Act is sometimes confusing, since it requires the
reader to go backwards and forwards between the provisions contained in the body
of Part II and the contents of Schedules 2 to 9. For example, section 9(2) provides
that it is to be competent to grant and record a standard security to be expressed in
conformity with one of the forms prescribed in Schedule 2 to the Act. Schedule 2
contains two forms of standard security, Form A, “to be used where the personal
obligation is included in the deed”, and Form B, which is to be used “where the
personal obligation is constituted in a separate instrument or instruments.”
Appended to Schedule 2 are various notes telling the conveyancer what to do in
certain situations. But, in order to discover the meaning of Form A, the reader has
to return to section 10. That section explains what is meant by the personal
obligation in Form A, thus avoiding the need for the draftsman of the standard
security to spell it all out. The technique is familiar from, say, section 119 of the
Titles to Land Consolidation (Scotland) Act 1868, with its (1594-word)
commentary on Form No 1 of Schedule FF to that Act.
18. The effect of recording a standard security under section 9(2) is to be found
in section 11. But, to discover the conditions which are to regulate the standard
security (subject to any variations validly agreed by the parties), section 11(2)
directs the reader to Schedule 3. This schedule contains the Standard Conditions,
the first six of which impose various obligations on the debtor, e g, to maintain and
repair the security subjects and to insure them. Conditions 7 to 10 relate to powers
of the creditor, while 11 concerns the exercise of the debtor’s right of redemption.
19. For present purposes conditions 8, 9 and 10 are of importance. They must
therefore be set out, so far as relevant:
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“8. The creditor shall be entitled, subject to the terms of the security
and to any requirement of law, to call-up a standard security in the
manner prescribed by section 19 of this Act.
9. (1) The debtor shall be held to be in default in any of the
following circumstances, that is to say—
(a) where a calling-up notice in respect of the security has
been served and has not been complied with;
(b) where there has been a failure to comply with any other
requirement arising out of the security;
(c) where the proprietor of the security subjects has become
insolvent.
…
10. (1) Where the debtor is in default, the creditor may, without
prejudice to his exercising any other remedy arising from the
contract to which the standard security relates, exercise, in
accordance with the provisions of Part II of this Act and of any other
enactment applying to standard securities, such of the remedies
specified in the following sub-paragraphs of this standard condition
as he may consider appropriate.
(2) He may proceed to sell the security subjects or any part thereof.
(3) He may enter into possession of the security subjects and may
receive or recover feuduties, ground annuals or, as the case may be,
the rents of those subjects or any part thereof.
(4) Where he has entered into possession as aforesaid, he may let the
security subjects or any part thereof.
(5) Where he has entered into possession as aforesaid there shall be
transferred to him all the rights of the debtor in relation to the
granting of leases or rights of occupancy over the security subjects
and to the management and maintenance of those subjects.
(6) He may effect all such repairs and may make good such defects
as are necessary to maintain the security subjects in good and
sufficient repair, and may effect such reconstruction, alteration and
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improvement on the subjects as would be expected of a prudent
proprietor to maintain the market value of the subjects, and for the
aforesaid purposes may enter on the subjects at all reasonable times.
(7) He may apply to the court for a decree of foreclosure.”
20. It is not the practice of conveyancers to set out these conditions in the
standard security itself. So the debtor cannot discover the conditions regulating the
security simply from reading it. To set them out would, of course, increase the
length of the deed – and so defeat one of Parliament’s aims in devising this form of
shorthand deed. But, further than that, listing the contents of standard condition 10
would be potentially misleading, unless, at the very minimum, various sections in
Part II of the Act were also reproduced. For example, it is only by consulting
section 20 that the reader finds confirmation that, when a debtor fails to comply
with a calling-up notice under section 19, the creditor can indeed exercise any
appropriate power under standard condition 10. Equally, it is only by consulting
section 23 that the reader discovers that – by contrast – if the debtor fails to
comply with any other requirement arising out of the security after the service of a
notice of default under section 21, the creditor can actually only exercise his
powers under standard condition 10(2), (6) and (7) – unless he makes an
application to the court under section 24 for a warrant giving him other powers.
21. Bearing in mind the structure of Part II of the Act, I turn to look more
closely at the way that the legislation operates in the present case.
The application under section 24(1)
22. As already explained, the Bank set events in train by writing to Mr Wilson
in June 1995. Although he did not understand their letter in this way, by sending it,
the Bank intended to warn him that they would take steps to enforce their standard
security if he did not pay. Since his personal obligation under the standard security
was to pay on demand, his liability to pay was not triggered until this demand was
made. In other words he was not in default until he failed to comply with the
demand. The question is: what steps does the 1970 Act envisage that a creditor in
the position of the Bank will take in those circumstances?
23. As Lord Walker pointed out at an early stage in the hearing, subsections (1)
and (2) of section 19 seem to provide a clear answer, that the creditor “shall” serve
a calling-up notice:
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“(1) Where a creditor in a standard security intends to require
discharge of the debt thereby secured and, failing that discharge, to
exercise any power conferred by the security to sell any subjects of
the security or any other power which he may appropriately exercise
on the default of the debtor within the meaning of standard condition
9(1)(a), he shall serve a notice calling-up the security in conformity
with Form A of Schedule 6 to this Act (hereinafter in this Act
referred to as a ‘calling-up notice’), in accordance with the following
provisions of this section.
(2) Subject to the following provisions of this section, a calling-up
notice shall be served on the person last infeft in the security subjects
and appearing on the record as the proprietor, and should the
proprietor of those subjects, or any part thereof, be dead then on his
representative or the person entitled to the subjects in terms of the
last recorded title thereto, notwithstanding any alteration of the
succession not appearing in the Register of Sasines.”
Form A in Schedule 6 is in these terms:
“TAKE NOTICE that CD (designation) requires payment of the
principal sum of £ with interest thereon at the rate of ………………
per centum per annum from the ……………… day of ……………………
(adding if necessary, subject to such adjustment of the principal sum
and the amount of interest as may subsequently be determined)
secured by a standard security by you (or by EF) in favour of the
said CD (or of GH to which the said CD has now right) recorded in
the Register for ……………… on ……………… And that failing full
payment of the said sum and interest thereon (adding if necessary,
subject to any adjustment as aforesaid), and expenses within two
months after the date of service of this demand, the subjects of the
security may be sold.”
If the Bank had served a calling-up notice, by virtue of section 19(2), it would
have had to be served on Mrs Wilson, as one of the proprietors of the security
subjects.
24. Under a calling-up notice Mr Wilson would have had two months in which
to pay the full amount due to the Bank – after which he would have been in default
within the meaning of standard condition 9(1)(a). By virtue of section 20(1) and
(2), the Bank would then have been entitled to exercise any of their rights under
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the security and, in particular, their right to enter into possession and to sell the
house.
25. In fact, however, the Bank did not proceed under section 19, but took an
entirely different course. The Bank treated Mr Wilson as having failed to comply
with a requirement arising out of the security, other than a requirement under a
calling-up notice. So they treated him as being in default under standard condition
9(1)(b).
26. Assuming, for the moment, that this was permissible, when Mr Wilson
failed to comply with the demand to pay the debt, the Bank would have been
entitled to serve a notice of default under section 21, calling on him to purge his
default by paying the debt within one month. If Mr Wilson had been aggrieved by
the requirement to pay, he could have applied to the court under section 22. If he
had not objected, or his objection had been rejected and the notice of default
upheld, then Mr Wilson would have been required to comply with the requirement
in the notice. Failing which, the Bank would have been entitled to exercise their
powers under standard condition 10(2), (6) and (7).
27. As explained already, the Bank did not go down this route. Instead,
eventually, in April 1998 – still on the basis that Mr Wilson was in default under
standard condition 9(1)(b) – they made an application to the court under section
24, which provides:
“(1) Without prejudice to his proceeding by way of notice of default
in respect of a default within the meaning of standard condition
9(1)(b), a creditor in a standard security, where the debtor is in
default within the meaning of that standard condition or standard
condition 9(1)(c), may apply to the court for warrant to exercise any
of the remedies which he is entitled to exercise on a default within
the meaning of standard condition 9(1)(a).
(2) For the purposes of such an application as aforesaid in respect of
a default within the meaning of standard condition 9(1)(b), a
certificate which conforms with the requirements of Schedule 7 to
this Act may be lodged in court by the creditor, and that certificate
shall be prima facie evidence of the facts directed by the said
Schedule to be contained therein.”
As the first crave (at para 9 above) shows, the Bank asked the court to grant
warrant to enter into possession of the house at Dalum Grove (standard condition
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10(3)) and to exercise in relation to the house all powers competent to a creditor in
lawful possession, including the power of sale (standard condition 10(2)). By
granting decree in terms of the first crave, the Extra Division granted the Bank
warrant to exercise those powers.
The Bank’s crave for ejection
28. In the Inner House and in the hearing before this Court much of the
argument was directed, however, to the Bank’s second crave as amended, which, it
will be recalled, is a crave for the ejection of Mr and Mrs Wilson and their family
from their home.
29. Assuming that the Bank were granted the power under standard condition
10(3) to enter into possession of the subjects, under standard condition 10(1) they
could only exercise this power in accordance with the provisions of Part II and “of
any other enactment applying to standard securities”. Paragraphs 18 to 24 of
Schedule 8 to the 1970 Act show that section 5 of the Heritable Securities
(Scotland) Act 1894 (“the 1894 Act”) is among the provisions of that Act which
apply to standard securities. Section 5 provides:
“Where a creditor desires to enter into possession of the lands
disponed in security, and the proprietor thereof is in personal
occupation of the same, or any part thereof, such proprietor shall be
deemed to be an occupant without a title, and the creditor may take
proceedings to eject him in all respects in the same way as if he were
such occupant: Provided that this section shall not apply in any case
unless such proprietor has made default in the punctual payment of
the interest due under the security, or in due payment of the principal
after formal requisition.”
As counsel for the Bank accepted, this section applies in the present case where the
Bank wish to enter into possession of security subjects which are in the personal
occupation of the proprietors, Mr and Mrs Wilson. In that situation section 5
allows the creditor to take summary proceedings for ejection, provided that the
proprietor has made default in the punctual payment of the interest due under the
security, or in due payment of the principal after formal requisition. (The language
of the section is not well adapted to a case where only one of the proprietors is in
default.)
30. Mr McIlvride acknowledged that the Bank had not established that Mr
Wilson had failed to make punctual payment of any interest due under the security.
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So they have to show that there has been default by Mr Wilson “in due payment of
the principal after formal requisition” (emphasis added). For his part, Mr Summers
accepted that, if the Bank had served a calling-up notice in Form A in Schedule 6,
this would have met the requirement of a formal requisition. He pointed out that
the terms of such a calling-up notice were comparable in their material respects to
the Form of Schedule of Intimation, Requisition, and Protest, which is Form No 2
in Schedule FF to the Titles to Land Consolidation (Scotland) Act 1868 – the form
that would have been in use at the time when section 5 of the 1894 Act was
enacted. But, he submitted, since the Bank had proceeded under section 24 of the
1970 Act, they had never served any kind of notice which could constitute a
“formal requisition” for purposes of section 5 of the 1894 Act. So they were not
entitled to ask the court for decree of eviction.
31. The Extra Division dealt with this point in para 44 of their judgment, 2009
SLT 729, 738:
“We agree with the submission by counsel for the Bank that the
Sheriff erred in holding that warrant for ejection can only be granted
if a formal requisition of payment has been made in terms of section
5 of the 1894 Act. For the reasons given above, warrant for ejection
may competently be granted where the debtor in a standard security
is in default in terms of standard condition 9(1)(b). The only voucher
that is required is a Schedule 7 certificate. No separate requisition is
required. The effect of section 24 of the 1970 Act is that such a
certificate constitutes a formal requisition for the purposes of section
5. In any event, there is no difference between these provisions. The
requirement in a notice of default is the same as a requisition. The
word ‘formal’ means no more than that it must be made in the
statutory form. Moreover, the comma in the proviso to section 5, and
the absence of further words such as ‘in either case’, make it clear
that the phrase ‘after formal requisition’ only applies to payment of
principal and not to interest.”
As already explained, the point about payment of interest does not arise in this
case since the Bank have not established that there has been a failure in that
respect. So far as the Division proceeded on the basis that a Schedule 7 certificate
can constitute a “formal requisition” for the purposes of section 5 of the 1894 Act,
Mr McIlvride explained that he had not advanced that argument before the
Division and felt unable to support this aspect of their reasoning. A Schedule 7
certificate contains no requirement of any kind: it is simply a piece of evidence
which is created for, and used in, the proceedings. It cannot therefore constitute the
formal requisition which must precede the proceedings for ejection. Moreover,
even if the requirement in a notice of default in the form in Form B in Schedule 6
would count as a formal requisition, as the Extra Division argued, that is irrelevant
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in the present case since the Bank did not serve such a notice. It respectfully
appears to me that the reasoning of the Extra Division on this point cannot be
upheld.
32. Counsel preferred to base his argument on part of the wording of section
24(1) of the 1970 Act. He argued that, if the court did indeed grant the Bank
warrant to exercise any of the remedies which a creditor is entitled to exercise on a
default within the meaning of standard condition 9(1)(a), then the Bank would be
in the same position as if they had served a calling-up notice with which Mr
Wilson had not complied. In other words, the Bank must be treated as having, in
effect, served a calling-up notice which – as Mr Summers accepted – would
constitute a formal requisition for purposes of section 5 of the 1894 Act. So the
court could grant decree to eject Mr and Mrs Wilson, who had no substantive
defence to the Bank’s claim.
33. The argument certainly has its attractions, not least because – as Mr
McIlvride stressed – Mr and Mrs Wilson know perfectly well what they have been
asked to pay and they have had ample opportunity to put forward their defence.
Nevertheless, I would not accept the argument since the simple fact is that section
5 of the 1894 Act only allows the creditor to take proceedings for ejection if they
have been preceded by a formal requisition. Mr Summers referred to a number of
authorities, including Inglis’ Trs v Macpherson 1911 2 SLT 176, to show that
section 5 was passed in order to introduce a new summary procedure for obtaining
the drastic remedy of ejection. Mr McIlvride accepted this. That being so, it would,
in my view, be wrong to water down the precondition imposed by Parliament for
using that summary procedure. In more concrete terms, if a formal notice had been
given, Mrs Wilson would have been warned about the situation and about the
danger of being ejected from her home, before any proceedings were started.
Which seems only reasonable. Approaching the matter on this footing, I would
have allowed the appeal.
34. Mr McIlvride’s cri de coeur – that to impose a requirement on the Bank to
make a formal requisition is tantamount to requiring them to serve a calling-up
notice – really brings us back to the fundamental point. Were the Bank actually, all
along, obliged to serve a calling-up notice if they wanted to require payment of the
debt and, failing payment, to sell the Wilsons’ house? I must retrace my steps to
see if there is another way through the maze.
Must a creditor serve a calling-up notice when section 19(1) applies?
35. The terms of section 19(1) are quoted at para 23 above. It is not disputed
that the subsection applies to the situation in this case: undoubtedly, therefore, the
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Bank could have served a calling-up notice, with the result that any default would
be under standard condition 9(1)(a). The question is: were they bound to do so?
Section 19(1) (“he shall serve a notice calling up the security”) appears to say that
they were. But, in practice, it has not been treated as requiring a creditor to serve a
calling-up notice in these circumstances. Rather, it has been treated as permitting a
creditor to use the calling-up procedure, but as also permitting him, in the
alternative, to treat the debtor as being in default within the meaning of standard
condition 9(1)(b). On that approach, the creditor can serve a calling-up notice
under section 19, or serve a notice of default under section 21, or simply apply to
the court for a warrant under section 24. Section 19(1) is simply one option for the
creditor: he can use it if he wants, but he can also choose to use one of the other
remedies, if he wants. Such, we were told, is the way the legislation has been
interpreted in practice.
36. Counsel mentioned that at the hearing in the Inner House one of the judges
questioned whether this was the correct interpretation of these sections. But,
understandably, the point was not pursued after their Lordships were referred to
the decision of the Extra Division (Lord Sutherland, Lord MacLean and Lord
Allanbridge) in Bank of Scotland v Millward 1999 SLT 901. This decision would
certainly have been well known to Lord Drummond Young who had been counsel
for the Bank of Scotland. It is not binding on this Court, however, and its
reasoning must be scrutinised. A footnote to another report of the case, 1998
SCLR 577, 585, suggests that an appeal to the House of Lords may have been
contemplated. If so, it was not pursued.
37. In Millward Lord MacLean gave the court’s decision, which is summarised
at p 903H-I:
“In our opinion the law is correctly stated in Halliday’s
Conveyancing Law and Practice (2nd ed), that the creditor may
serve a calling up notice where a creditor in a standard security
intends to require repayment of the principal sum and interest, but he
is not required to do so. He may, alternatively, serve a notice of
default.”
As this summary suggests, their Lordships appear to have been much influenced
by their perception that the late Professor Halliday, whom they rightly described as
“the architect of the Act”, considered that a creditor who intends to require
repayment of the principal sum and interest is not obliged to serve a calling-up
notice under section 19(1) and has the alternative of serving a notice of default
under section 21(1). It is noticeable that they make no mention of an application to
the court under section 24(1). Before looking more closely at what Professor
Page 16
Halliday said, I must examine an assumption that apparently underlies the Extra
Division’s approach in Millward.
38. In outlining the parties’ arguments Lord MacLean recorded, 1999 SLT 901,
903B-C, that counsel for the Bank had “acknowledged” that section 19 of the Act
applied only when there was a requirement of discharge of the entire debt. In the
present case the Bank required Mr Wilson to repay the entire debt and so it is –
strictly speaking – unnecessary to decide whether that view is correct. Moreover,
the point may be unlikely to arise very often in practice since most banks and
building societies will include an acceleration clause entitling them to require
repayment of the entire loan if the debtor fails to pay any part of the total debt
when it becomes due.
39. Nevertheless, it should not be assumed that it is only where the creditor
requires repayment of the entire sum that serving a calling-up notice under section
19(1) is competent. Presumably – no reasoning is given in Millward – the view
that this is the position is based on the opening words of section 19(1): “Where a
creditor in a standard security intends to require discharge of the debt thereby
secured…”. The suggestion must be that the combination of “the debt thereby
secured” and “discharge” indicates that Parliament is referring to the situation
where the creditor requires the debtor to pay the whole of the debt or perform the
whole of the obligation ad factum praestandum for which the security has been
granted.
40. As Lord Clarke pointed out in the course of the argument, however, section
9(8)(c) provides that “debt” means “any obligation due, or which will or may
become due, to repay or pay money … and any obligation … ad factum
praestandum….” An obligation to repay £50K of a loan of £100K must fall within
the words “any obligation due … to repay … money” and the debtor who repays
£50K discharges that obligation, which is secured by the standard security.
Moreover, where Parliament wishes to refer to the whole of the debt due from the
debtor, it uses the expression “whole amount due”. See sections 18(4), 27(1)(c),
28(2) and 30(1) and standard condition 11(4) and (5) in Schedule 3. For these
reasons, it seems difficult to restrict the scope of section 19(1) to situations where
the creditor intends to recover the entire debt.
41. It may be worth mentioning another point about the opening words of
section 19(1). They refer to the creditor in a standard security intending to require
discharge of “the debt thereby secured”. That expression aptly describes the
debtor’s liability under any personal obligation, irrespective of whether it is
constituted by a separate instrument (Form B in Schedule 2) or in the deed itself
(Form A). So a calling-up notice applies to both. It is much less clear that the same
can be said of a notice of default – or of the procedure in section 24(1). Both of
Page 17
those procedures apply where the debtor is in default “within the meaning of
standard condition 9(1)(b)” and, reading short, that standard condition applies
where there has been a failure to comply with a requirement “arising out of the
security”. Where the debtor fails to comply with a personal obligation constituted
by a separate instrument, he fails to comply with a requirement under that
instrument. But it is hard to see how he can properly be said to have failed to
comply with a requirement “arising out of the security”.
42. It is true that, when Parliament refers to “the whole amount due under the
security” in section 28(4), for example, this must refer to standard securities in
Form B as well as Form A. But, by section 30(2), that expression has to be read in
the light of the definition of “whole amount due” in section 18(4). So read, the
expression provides no basis for ignoring the specific words used in standard
condition 9(1)(b).
43. There is therefore a difficulty in holding that a notice of default could apply
to a failure to pay a sum due under a separate instrument. This tends to support the
view that serving a calling-up notice under section 19(1) is the only competent
route in the circumstances, since it is hard to see why Parliament would have
intended to distinguish between Form A and Form B standard securities in this
respect. Other complications can be envisaged, but it is unnecessary to explore
them.
44. I can now return to the reasoning of the court in Bank of Scotland v
Millward 1999 SLT 901. The Extra Division appear to have been influenced by
their perception that conveyancing practitioners used notices of default “even in
situations where they could use calling up notices”: 1999 SLT 901, 903G. In
particular, they had been told, at p 903C-D, that the Bank of Scotland tended to use
calling-up notices for residential property and notices of default for commercial
property, apparently on the view that commercial debtors did not need to be given
so long to pay. But the facts of this case suggest that other financial institutions do
not follow that policy. In any event the practice of even the most distinguished
conveyancers cannot prevail if it is irreconcilable with the provision enacted by
Parliament.
45. Against the background of the perceived practice of conveyancers, the
Extra Division suggested, at p 903G-H, that, if a creditor had to use the calling-up
procedure in section 19(1), this would mean that the creditor could use a notice of
default where 99% of the debt had been demanded, but would have to use a
calling-up notice where 100% had been demanded. They did not consider that the
statutory framework in sections 19 to 22 necessarily led to that conclusion. Indeed
it does not: the substance of the supposed objection dissolves if, contrary to the
Page 18
Division’s assumption, a calling-up notice can be served in cases where the
creditor has asked for payment of less than the whole debt.
46. The Extra Division really based their conclusion, that a calling-up notice
and a notice of default are alternatives, on their understanding of Professor
Halliday’s view. They referred to his Conveyancing Law and Practice Vol 2
(second edition, 1997), para 54-05:
“Where a creditor in a standard security intends to require repayment
of the debt thereby secured and, failing such repayment, to exercise
any of his powers in respect of a security, he may serve a calling up
notice.”
The court emphasised the word “may”. But the simple fact is that Parliament used
the word “shall” in section 19(1). Although their Lordships must have accepted the
submission of counsel for the bank that “shall” had to be read “in a permissive and
not a mandatory sense”, they do not explain what there is in the Act, or indeed in
authority, to justify that interpretation of section 19(1). For my part, I can see
nothing.
47. Moreover, I very much doubt whether Professor Halliday actually intended
to say otherwise. It is noticeable that, while the Division emphasised the word
“may” in the passage which they quoted, the author did not. Nor did he say that,
alternatively, the creditor may serve a notice of default in such cases. The Division
cited the second (posthumous) edition of his Conveyancing Law and Practice
(revised by Mr I J S Talman), but the same applies to the first edition, published
during his lifetime: Conveyancing Law and Practice Vol 3 (first edition, 1987),
paras 39-03, and 39-19 and 39-20. The same also goes for his commentary on the
1970 Act, the first edition of which was published very shortly after the Act was
passed. In The Conveyancing and Feudal Reform (Scotland) Act (first edition,
1970), para 1-27; (second edition, 1977), para 1-26, Professor Halliday – who was
in a position to know – said that the provisions for the enforcement of the standard
security had posed the most difficult questions of policy for the legislature. In his
view sections 19 to 29 incorporated “a compromise solution which permits
considerable flexibility in procedures but affords reasonable protection to the
debtor on essential matters.” He went on to describe the calling-up procedure (first
edition, para 1-28; second edition, para 1-27), before continuing in the next
paragraph: “A new additional remedy is provided which permits the creditor to
proceed in certain circumstances by way of serving a notice of default.” While
Professor Halliday was pointing to the wider range of remedies which the new
statute made available to the creditor to cater for different situations, there is
nothing to show that he considered that serving a notice of default was an
Page 19
alternative to serving a calling-up notice – far less, that the section 24(1) procedure
was also such an alternative.
48. What Professor Halliday did emphasise – and rightly emphasise – was the
quite different point that a calling-up notice and a notice of default are not
mutually exclusive. In other words, a creditor can use both, if that is appropriate.
Lord MacLean refers, 1999 SLT 901, 903E-F, to the relevant passage in Professor
Halliday’s Conveyancing Law and Practice Vol 2, para 54-22. Passages to a
similar effect are found in his earlier works. There may indeed be situations where
the creditor will want to exercise both rights at the same time and, as section 21(1)
shows, there is nothing to prevent this. For example, if the security subjects were
deteriorating, the creditor might well wish to serve both a calling-up notice
requiring the debtor to pay the debt and a notice of default requiring him to fulfil
his repairing obligation. Although the Extra Division drew attention to this point, it
does nothing to support their view that a notice of default can be used as an
alternative to the calling-up notice. That is an altogether different matter.
49. The auctoritas of Professor Halliday among conveyancers was, and is,
immense. But, for judges at least, in the end even a word from Professor Halliday
would have to yield to the words of Parliament. In that event it would also be
worth bearing in mind the observation of the Earl of Halsbury LC, that the worst
person to construe a statute is the person who was responsible for its drafting,
since he “is very much disposed to confuse what he intended to do with the effect
of the language which in fact has been employed”: Hilder v Dexter [1902] AC
474, 477. Happily, however, in my view there is no sufficient reason to conclude
that Professor Halliday intended to say anything that is inconsistent with the text of
the statute.
50. Finally, it is noticeable that serving a calling-up notice under section 19
entitles the creditor to exercise a wider range of powers on default than those that
are available on default after service of a notice of default under section 21.
Compare section 20(1) with section 23(2). The disparity is instructive: if
Parliament had really intended that the two remedies should operate as alternatives
in this particular situation, it might have been expected to align the rights and
powers available to the creditor to deal with it.
51. For these reasons I would overrule the decision in Bank of Scotland v
Millward 1999 SLT 901 on this point and hold that, in a case falling within the
scope of section 19(1), the creditor must serve a calling-up notice. That
interpretation ensures that all debtors are treated alike and, in particular, that they
are all given the two-month period in which to pay, that is specified in the callingup notice. Professor Halliday stressed that, in enacting the enforcement powers,
Parliament had been concerned to strike the right balance between creditors and
Page 20
debtors. Interpreting section 19(1) in this way ensures that Parliament’s policy on
this important matter is given effect.
Conclusion
52. In these cases case the Bank did not serve a calling-up notice back in 1998.
Mr McIlvride was unable to say why. He was also unable to say why they had not
done so at some later stage when the cases had become bogged down in technical
arguments about section 24 of the 1970 Act and section 5 of the 1894 Act.
Unfortunately, for all the reasons which I have given, the Bank have pursued the
wrong course. I would therefore allow the appeals, recall the interlocutor of the
Extra Division, sustain the first plea-in-law for the first defender and the plea-inlaw for the second defender and assoilzie both defenders in each of the appeals.
53. It is only right that I should acknowledge the assistance that I have derived
from the excellent submissions of counsel on both sides.
LORD HOPE
54. I agree with Lord Rodger that these appeals must be allowed and I would
make the orders that he proposes. I also agree with him that, on a correct analysis
of the relevant provisions of the Conveyancing and Feudal Reform (Scotland) Act
1970 (“the 1970 Act”), the Bank pursued the wrong course when they decided to
enforce these securities. It has to be recognised however that this conclusion runs
counter to the way these provisions have been widely understood and applied in
practice for the past four decades. So I should add some words of my own to
explain why I too have come to be of that view.
55. The 1970 Act was the product of a movement for reform of conveyancing
law and practice which had been embodied in a series of reports, of which the
relevant one for present purposes was the Report of the Halliday Committee
(Cmnd 3118) which was published in December 1966. It contained proposals for
the modernisation and simplification of the existing system which formed the basis
for the measures enacted in Parts II to IV of the 1970 Act. Among the proposals in
the Halliday Report was the introduction of a new statutory security. It was to be
incompetent to create a heritable security by any other means after 29 November
1970, when the relevant provisions were to come into force six months after the
Act was passed: section 54(2)(a).
Page 21
56. The new standard security was to follow one of the forms prescribed in
Schedule 2. Form A was for use where the personal obligation was included in the
deed. It contains an obligation to pay the debt. Form B was for use where the
personal obligation was included in a separate instrument or instruments. It
contains no obligation to pay the debt and is limited to creating the security, but
the nature of the debt and the instrument or instruments constituting it must be
referred to and sufficiently identified. The introduction to the commentary on the
Act in Current Law Statutes noted that a valuable innovation under section 11 was
the incorporation in the new security of the standard conditions prescribed in
Schedule 3, unless conventionally varied. They were to regulate every standard
security. The import of the form of bond and disposition in security prescribed was
much more limited. Absent special agreement to the contrary, the creditor could
insure the subjects against all loss by fire and recover the premiums from the
debtor, but it was not until he had entered into possession that he was given any
statutory powers of management: Conveyancing (Scotland) Act 1924, section
25(1)(a). It has been suggested that the creditor was entitled to object to any act
which diminished the security: Gordon, Scottish Land Law (2nd ed, 1999), para 20-
12. Where the security was constituted by way of ex facie absolute disposition, a
back letter would typically contain obligations on the debtor such as to keep the
subjects in good repair or to observe title conditions. It would also set out the terms
on which the ex facie absolute owner was entitled to enter into possession in the
event of the debtor’s default in the fulfilment of any of his obligations: Gordon,
para 20-100. But the benefit of incorporating the standard conditions was that
everything that was relevant to the maintenance and enforcement of the security
was set out in the statute.
57. It is plain that much thought was given to the design of the forms, which
were supplemented by the seven notes annexed to Schedule 2, and to the content
of the standard conditions. These were matters of particular interest to the
conveyancer, whose expertise lies the framing of deeds that give effect to the
transaction that the client wishes to enter into and will meet the requirements for
registration. A conveyancer in practice deals mainly with the sale and purchase of
heritable property: Sinclair, Handbook of Conveyancing Practice in Scotland (3rd
ed, 1995), para 1.1. His task is usually complete when the deed that transfers title
to the purchaser or the deed that creates the heritable security is registered. What to
do if a creditor has to enforce his security because the debtor has failed to perform
his obligations under it has normally passed to someone else. The draftsman of the
1970 Act had to consider this problem, however, and the relevant provisions are to
be found in sections 19 to 28 and in standard conditions 8 to 11. Section 19
provides for the calling-up of the security, and section 20 sets out the rights of the
creditor if the debtor is in default in failing to comply with the calling-up notice.
Section 21 introduces what the commentator in Current Law Statutes described as
an entirely new remedy, the notice of default.
Page 22
58. These provisions need to be read in the light of standard condition 9(1),
which provides:
“The debtor shall be held to be in default in any of the following
circumstances, that is to say –
(a) where a calling-up notice in respect of the security has been
served and has not been complied with;
(b) where there has been a failure to comply with any other
requirement arising out of the security;
(c) where the proprietor of the security subjects has become
insolvent.”
59. The circumstances listed in standard condition 9(1) are not presented as
alternatives which are exclusive of each other. Necessarily so, as all three
circumstances could be present in the event of the debtor’s insolvency. But, as the
wording indicates, they are distinct circumstances. The question that these appeals
give rise to is whether a creditor who wishes to enforce the security to obtain
performance of the debt for which security was given can choose whether to
proceed by way of a calling-up notice or may proceed instead on the basis that the
debtor is in default under standard condition 9(1)(b). Finding the right answer to
this question is important if the creditor wishes, as the Bank does in this case, to
obtain an order to eject a debtor who is in personal occupation of the subjects of
the security under section 5 of the Heritable Securities (Scotland) Act 1894, which
applies to standard securities by virtue of section 32 of the 1970 Act. That section
applies if the debtor has made default “in due payment of the principal after formal
requisition”. It is not in doubt that a calling-up notice which is served under
section 19 of the 1970 Act is a formal requisition for the purposes of section 5 of
the 1894 Act. But the kind of default referred to in standard condition 9(1)(b),
which is the route that the Bank has chosen to enforce the securities in this case,
does not require the service of a calling-up notice. The requirements of section 5
could have been met by serving a notice of default which was appropriately
worded, but the Bank did not regard this as a step that needed to be taken.
60. Mr Summers QC’s case for Mr and Mrs Wilson was that the Bank had
failed to serve on them a document that could be described as a formal requisition
for the purposes of section 5 of the 1894 Act. He set out his argument in this way.
Summary ejection by a heritable creditor of a proprietor with a valid and subsisting
title is not possible apart from section 5: Inglis’s Trustees v Macpherson 1911 2
SLT 176, 177-178, per Lord President Dunedin; Craigie, Scottish Law of
Conveyancing; Heritable Rights (1899), p 949. If there is no formal requisition
within the meaning of that section, the proprietor cannot be ejected. The word
“formal” is not defined in the 1894 Act, but it should be understood as requiring
the creditor to provide full details of the security to the proprietor so that the basis
Page 23
for the demand is made clear. What will be required to achieve that clarity will
depend on the circumstances of the case. In this case the absence of any reference
to the security in the Bank’s demand letters gave the misleading impression that
this was a demand that was made of the husbands only, in respect of their
obligations as partners for partnership debt: see para [6] where their terms are set
out by Lord Rodger. No such letter was sent to the wives, and there was no
mention in the letters of their obligations under the standard securities.
61. In the Inner House this argument was rejected by the Extra Division (Lords
Nimmo Smith, Reed and Drummond Young): 2009 SLT 729, paras 39-44. In para
44, delivering the opinion of the court, Lord Nimmo Smith said:
“We agree with the submission by counsel for the bank that the
sheriff erred in holding that warrant for ejection can only be granted
if a formal requisition of payment has been made in terms of section
5 of the 1894 Act. For the reasons given above, warrant for ejection
may competently be granted where the debtor in a standard security
is in default in terms of standard condition 9(1)(b). The only voucher
that is required is a Schedule 7 certificate. No separate requisition is
required. The effect of section 24 of the 1970 Act is that such a
certificate constitutes a formal requisition for the purposes of section
5. In any event there is no difference between these provisions. The
requirement in a notice of default is the same as a requisition.”
The Schedule 7 certificate referred to in this passage is the certificate that the
creditor may lodge in court under section 24(2) of the 1970 Act. If it contains the
information required by the Schedule, which includes specification of the standard
security in respect of which the default is alleged to have occurred and full details
of the default, it will be prima facie evidence of the facts founded on as the default.
These details were given in the certificates of default that the Bank lodged in
January and February 2006, long after the actions were served in April 1998. They
were not to be found in the demand letters which were sent to the husbands in June
1995.
62. The propositions which I have quoted from the Extra Division’s opinion do
not fit easily with the concept of a formal requisition as an essential preliminary
for the taking of proceedings for ejection under section 5 of the 1894 Act. This was
explained by Gloag and Irvine, Law of Rights in Security (1897), p 98. After
noting that a creditor was entitled to remove the debtor by an action of removing in
the Court of Session (see, eg, Blair v Galloway 1853 16 D 291), the authors said
that no-one was entitled to make rules by contract which tend to establish a
diligence different from that established by law and that extreme powers in a bond,
although consented to by the debtor, will not be enforced:
Page 24
“Thus where it was stipulated that in the event of the debtor falling
into arrears for two months with monthly instalments of the debt it
should be in the power of the creditor to remove him ‘without any
warning or legal process whatever,’ it was held that such extreme
powers could not be legally enforced, and that a petition to the
sheriff for summary removal of the debtor from the occupation of the
subjects was incompetent.
But the powers of a creditor in this respect have been enlarged by the
Heritable Securities Act, 1894. It is there provided that where a
debtor is in the natural possession of the lands covered by the
security, or a part thereof, and has made default in payment of the
interest under the security, or of the principal after a formal
requisition for payment, the creditor may take proceedings to eject
him as if he were an occupant without title. That is to say, it is
presumed, he may bring a summary action of removing in the sheriff
court.”
63. The requirement that there should be a formal requisition or demand for
payment was not new. Section 119 of the Titles to Land Consolidation (Scotland)
Act 1868 made provision for the service of a demand for payment in the form of
No 2 of Schedule FF, which is headed “Form of Schedule of Intimation,
Requisition and Protest.” The essential requirement of the formal requisition
referred to in section 5 of the 1894 Act is that the proprietor should be put on
notice before summary proceedings for possession are brought against him that the
principal sum due under the bond and disposition in security is due for payment
and that, in the event of non-payment by a given date, the creditor may proceed to
take proceedings against him. The reference to default in payment “after” formal
requisition in section 5 makes it clear that the requisition must come first. The
default occurs if, and only if, the demand that it sets out is not complied with.
64. The Extra Division’s conclusion that the requirement for a formal
requisition was met by the lodging of the Schedule 7 certificates eight years after
the raising of these actions seems hard to understand in the light of that
background. But the point is the same however long or short the interval was
between the raising of the actions and the lodging in court of the certificates.
Unless there was clear wording in the 1970 Act to support it, it would seem that
the Extra Division ought to have held that the statutory requirement was not
satisfied because Mr and Mrs Wilson were not put on notice before the actions
were raised that the Bank was proposing to enforce the security. Section 5 of the
1894 Act was not amended by the 1970 Act, so that section is left to speak for
itself. It cannot be said that the change in the timing of the requirement that
follows from the Extra Division’s decision has been addressed directly. Section 32
of the 1970 Act provides, however, that the provisions of any enactment relating to
Page 25
a bond and disposition or assignation in security shall apply to a security, except in
so far as such provisions are inconsistent with the provisions of Part II of that Act.
This makes it necessary to look more closely at the wording of these provisions.
65. It has to be said that it was no part of Mr Summers’s argument that the
Bank had pursued the wrong course by relying on a standard condition 9(1)(b)
default and applying to the sheriff court under section 24 instead of serving a
calling-up notice. He concentrated on the Bank’s failure to serve a further
document which could be regarded as a formal requisition before the actions were
raised. It was Mr McIlvride’s attempt, in a very able argument, to answer this point
that led to the scrutiny of the provisions of Part II which has led in turn to the
conclusion that the Bank’s error can be traced back to their choice of remedy and
to the conclusion, too, that the passage in Lord MacLean’s opinion in Bank of
Scotland v Millward 1999 SLT 901, 903 on which the Extra Division relied to the
effect that there was a choice of remedies was unsound.
66. It is perhaps worth noting that the point that Lord MacLean made in Bank of
Scotland v Millward had already been considered in the sheriff court. In United
Dominions Trust Ltd v Site Preparations Ltd (No 1) 1978 SLT (Sh Ct) 14 and
United Dominions Trust Ltd v Site Preparations (No 2) 1978 SLT (Sh Ct) 21 it
was argued that a failure to pay interest was not “a failure to comply with any
other requirement arising out of the security” as required by standard condition
9(1)(b). It was said that the liability to pay interest arose out of the existence of the
debt and that the appropriate procedure to follow was the calling-up procedure. In
the first case Sheriff DB Smith said at p 16 that it would be a very strained
interpretation of standard condition 9(1)(b) to hold that a failure to pay interest was
not a failure to comply with the requirement arising out of the security. In the
second Sheriff Wm C Henderson said at p 23 that the requirements to pay interest
and/or capital were every bit as much requirements arising out of the security as
the other standard conditions incorporated by reference in the security documents.
These cases are cited in Gloag and Henderson, Law of Scotland (12th ed, 2007),
para 37-09, fn 137 for the proposition that failure to pay interest under a loan
secured is a failure to comply with a requirement of the security for the purposes
of standard condition 9(1)(b): see also Cusine and Rennie, Standard Securities (2nd
ed, 2002), para 8.21.
67. The Extra Division in Bank of Scotland v Millward 1999 SLT 901 relied for
its conclusion that standard conditions 9(1)(a) and 9(1)(b) were alternative and not
mutually exclusive on Professor Halliday’s statements in his Conveyancing Law
and Practice (2nd ed, 1997), para 54-05 that where a creditor in a standard security
intends to require repayment of the debt thereby secured and, failing such
payment, to exercise any of his powers in respect of a security he “may” serve a
calling up notice and in para 54.22 that the remedies of serving a calling-up notice
and serving a notice of default were not mutually exclusive. It also relied on a
Page 26
passage in the latter paragraph where Professor Halliday said that where there was
serious default in payment of interest and capital and the debtor has abandoned the
subjects, which are deteriorating, service of a notice of default may be the quickest
approach to a sale of the security subjects.
68. Lord Rodger doubts whether, when he used the word “may”, Professor
Halliday intended to indicate that the word “shall” in section 19(1) was to be read
in a permissive, and not a mandatory, sense. But a further indication that it was
indeed Professor Halliday’s view that this word was to be read in the permissive
sense is to be found in a passage from his commentary on the 1970 Act, The
Conveyancing and Feudal Reform (Scotland) Act 1970 (2nd ed, 1977), at para
10.19, where he discussed the circumstances in which a notice of default could be
used:
“Any failure by the debtor to implement an obligation enforceable
under a standard security will entitle the creditor to serve a notice of
default. Default in payment of interest or of a periodical instalment
of capital and interest, or breach of an obligation under standard
conditions 1, 2, 3 or 5, or failure to implement an obligation
undertaken in the personal obligation or in a variation of the standard
conditions, are obvious examples. The only qualification is that the
failure should be remediable.”
69. Professor Halliday is not alone in failing to notice the distinction between
circumstances in which a calling-up notice is required and those where recourse
must be had instead to a notice of default or a section 24 application to the sheriff
court. Cusine and Rennie say in their introduction to para 8.14 that there is some
doubt about what condition 9(1)(b) means, the question being whether “a failure to
comply with any other requirement arising out of the security” is wider than a
failure to comply with something mentioned in a notice of default. In their view
this phrase means “a failure to comply with any condition of the standard security,
or the standard conditions, ie anything except failure to comply with a calling-up
notice.” But I understand them to accept that the passage which they quote from
Professor Halliday’s Commentaries is an accurate statement of the effect of the
1970 Act. This is certainly the predominant view that is taken in the textbooks.
The approach is to view the Act as providing the creditor with a basket of remedies
and then providing him with the calling-up notice, the notice of default and the
application to the sheriff court for a warrant as different routes by which they can
be obtained.
70. In The Laws of Scotland: Stair Memorial Encyclopaedia: Conveyancing
(2005), paras 223-224 it is stated that a calling-up notice is to be used where the
creditor wants payment of all the debt, and that a notice of default is used where
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there has been failure to comply with any requirement of a security. The word
“other” which the statute uses in standard condition 9(1)(b) is omitted from the
reference to the notice of default, suggesting that this is a mechanism that can be
used for any failure to comply with a requirement of the security. Cusine and
Rennie, Standard Securities, para 8.03 say that a creditor who wishes the debt to
be discharged by payment of the amount due or performance of an obligation ad
factum praestandum “may” serve a calling-up notice, but that it would also be
appropriate to serve a calling-up notice in respect of a default which cannot be
remedied. The editors of the 12th edition of Gloag and Henderson, Law of
Scotland, in their carefully re-written chapter on Rights in Security, para 37.09 say
that where the creditor in a standard security intends to require discharge of the
debt secured and, failing discharge, to exercise any power conferred by the
security to sell the subjects, the creditor “may” serve a calling-up notice. They too
omit the word “other” before the word “requirement” when they summarise the
circumstances when a notice of default may be used. Gretton and Reid,
Conveyancing (3rd ed, 2004), para 19.36, referring to Bank of Scotland v Millward
1999 SLT 901, say that the calling-up procedure and the notice of default
procedure are often alternatives, and that in practice there is a certain tendency
amongst institutions to use the former for residential standard securities and the
latter for commercial ones. They do however note that the law in this area is of
labyrinthine complexity: Conveyancing 2009, p 179.
71. There may indeed be cases where the calling-up procedure and the notice of
default procedure are both available as alternatives. The example given by
Professor Halliday in Conveyancing Law and Practice, para 54.22, where there has
been serious default in payment of interest and capital and the debtor has
abandoned the subjects, which are deteriorating, may be such a case. But a case
such as the present, where the creditor is faced with a defaulting debtor who is in
personal possession of the subjects and intends to seek an order for the debtor’s
summary ejection under section 5 of the 1894 Act, cannot be dismissed so easily.
Treating a calling-up notice and a notice of default as alternatives between which
the creditor may choose at his option runs into serious difficulty when this is tested
against the section 5 requirement that ejection is a remedy that may only be sought
where the debtor is in default after formal requisition. The calling-up procedure
satisfies that requirement. The notice of default procedure and the warrant
procedure referred to in section 24, without more, do not.
72. The answer to the problem is to be found in the words of the statute, to
which all too frequently insufficient attention appears to have been given. The
word “default” is used in standard condition 9 to describe three quite different
circumstances. In Laird v Securities Insurance Co Ltd 1895 22 R 452,461 Lord
Adam said that this meant nothing more or less than that the debtor had failed to
pay. But the word takes its meaning from its context. Each of the circumstances
referred to in standard condition is treated as a “default” for the purposes of Part II
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of the 1970 Act. There is a default for these purposes where the proprietor of the
subjects has become insolvent, even though there has not yet been any failure in
payment of any part of the debt which is secured by the standard security: standard
condition 9(1)(c). That there is a difference between the defaults contemplated by
standard conditions 9(1)(a) and 9(1)(b) is indicated by the word “other” which
appears before the words “requirement arising out of the security” in standard
condition 9(1)(b). In other words, standard condition 9(1)(a) refers to the kind of
requirement which is to be dealt with by serving a calling-up notice. Standard
condition 9(1)(b) refers to any requirement which is not to be so dealt with. To
understand the difference between them it is necessary to refer back to section 19,
in which the calling-up procedure is described.
73. Section 19(1) states that when a creditor in a standard security intends to
require discharge of the “debt” thereby secured and, failing that, to exercise any of
the powers which he may appropriately exercise on the default of the creditor
within the meaning of standard condition 9(1)(a), he “shall” serve a notice callingup the security. The word “debt” is widely defined in section 9(8)(c), which must
be read together with section 9(3) which provides that the grant of any right over
land or an interest in land for the purpose of securing any debt by way of a
heritable security shall only be capable of being effected by standard security. It
includes any obligation due, or which will become due, to pay or repay money. It
also includes any obligation ad factum praestandum. No distinction is drawn
between obligations to pay the whole or part of the principal, the payment of the
principal by instalments or the payment of interest or capital. So the word “debt”
in section 19(1) refers to anything and everything that is “secured” by the grant of
the interest referred to in the standard security. Where the Act means to refer to the
whole amount due it says so: see section 18(4). The word “debt” is not so limited.
74. Section 21(1) introduces the valuable innovation referred to in the
introduction to the commentary on the Act in Current Law Statutes. It applies
where the debtor is in default within the meaning of standard condition 9(1)(b) and
the default is remediable. As standard condition 9(1)(b) refers to a failure to
comply with any other requirement arising out of the security, this section must be
taken to refer to defaults other than in respect of the debt secured by the standard
security. Content for its application is to be found in the requirements that are set
out in standard condition 1 (maintenance and repair), standard condition 2
(completion of buildings), standard condition 3 (observance of conditions in title)
and standard condition 5 (insurance) and any other similar conditions that may
have been included by way of variation to maintain the value of the security
subjects. It was a weakness of the previous law that the steps that might be taken to
achieve this were not clearly spelled out in the statutes. The innovation is
broadened by giving the creditor the right under section 24(1) to apply to the court
for a warrant to exercise any of the remedies which he is entitled to exercise on a
default within the meaning of standard condition 9(1)(a).
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75. The Bank is this case has been seeking all along to require discharge of the
debt secured by the standard security. Mr McIlvride said that its position was that a
calling-up notice was appropriate for use where the property had been abandoned
and the creditor could exercise the powers referred to in standard condition 10
immediately. If the debtor was still in occupation it was preferable to proceed
under section 24 and apply to the court for a warrant to exercise them.
Unfortunately this approach overlooks the fact that the summary process of
ejection, to which resort may be needed in these circumstances, is available only
under section 5 of the 1894 Act and then only if the proprietor is in default after a
formal requisition has been served on him. Section 19(1), properly understood
according to its own terms and read together with standard condition 9(1)(a),
addresses this problem. The route that standard condition 9(1)(b) indicates does
not, as it is designed to deal with requirements arising under the standard security
other than the discharge of the debt secured by it. So even if the Bank had taken
the further step of serving a notice that met the requirements of section 5, it would
not have been entitled to the order it seeks as it did not serve a calling-up notice as
required by section 19(1).
LORD WALKER
76. I agree with the judgments of Lord Hope and Lord Rodger.
LADY HALE
77. I agree that this appeal should be allowed, for two reasons. The first formed
no part of counsel for the appellants’ argument but emerged during the hearing
before us. Section 19(1) of the Conveyancing and Feudal Reform (Scotland) Act
1970 requires that a creditor in a standard security who intends to require the
discharge of the debt secured and, failing that, to exercise any of his enforcement
powers “shall” serve a calling up notice. Although we were referred to textbooks
and authorities since the Act which have assumed that “shall” means “may”, we
were not referred to anything in the Report of the Halliday Committee (Cmnd
3118), which led to the Act, suggesting that it was intended that a creditor could
by-pass the calling up procedure required by section 19(1), either by serving a
notice of default under section 21 or by applying to the court for a warrant under
section 24.
78. If practice south of the border is anything to go by, the policy makers whose
decisions lead to legislation are not actually responsible for the words which
Parliamentary counsel use in translating their instructions into statutory language. I
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would therefore be surprised if Professor Halliday were responsible for the words
used in the Act. This makes the absence of any prior recommendations on this
point the more telling. Without them, we need only focus on the actual language of
the Act.
79. Although section 24 says that a creditor may apply to the court for a warrant
if the debtor is in default within the meaning of standard condition 9(1)(b) or (c), it
does not say that a default within the meaning of standard conditions 9(1)(b) or (c)
is to be equated with a default within the meaning of standard condition 9(1)(a) or
vice versa. In other words, it does not displace the requirements of section 19(1).
80. In policy terms, it would be very surprising if it did. Why provide for the
calling up procedure at all, if it can simply be got round by going to court under
section 24? There is obvious good sense in a policy which requires prior notice to
the proprietors that a creditor intends to call in his security if the debt is not paid.
This case is a good example. We do not know whether these debtors could have
found a way of discharging their debts had they and their wives been told at the
outset that their homes were at risk. In some cases, no doubt, it would be quite
impossible. But in others, there might be enough surplus value (what we south of
the border would call “equity”) in the home to raise alternative finance to pay off
the loan or the home might be sold to do this before the debt had escalated to
astronomical proportions as it has done here. The Bank, of course, has every
interest in allowing the debt to mount up until it gets close to the value of the
home. Without the calling up procedure the creditor can simply allow the debt to
escalate without suffering any disadvantage. There has to be something to make
him declare his hand at a time when the debtor may be able to do something about
it.
81. Secondly, in cases like this, there has to be power actually to get the
occupiers out of the premises. Without this the other remedies, such as the power
of sale, will not work. As I understand it, the only way in which this can now be
done is under section 5 of the Heritable Securities (Scotland) Act 1894. This
requires a formal requisition, at least for repayment of the principal. The calling up
procedure supplies this, although no doubt there are other ways. The policy is the
same. A debtor should be given an opportunity of remedying his default before he
is dispossessed. It is not much to ask. Who knows whether these wives had sums
in their own bank accounts which might have enabled them to discharge these
debts had they been told? It is sexist simply to assume that they did not.
82. It is such an injustice to deprive these wives of their homes without even
asking whether they might have had the resources to discharge their husbands’
debts that I cannot believe that, even in 1970, Parliament could have contemplated
it. We have been given no reason to think that it did.
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83. These reasons are simply a supplement to the reasons given by Lord Hope
and Lord Rodger. In agreement with them both, therefore, I would allow this
appeal.
LORD CLARKE
84. I agree that this appeal should be allowed on the simple basis that, as Lord
Rodger has demonstrated, Bank of Scotland v Millward 1999 SLT 901 was
wrongly decided. The effect of section 19(1) of the Conveyancing and Feudal
Reform (Scotland) Act 1970 is that a creditor in a standard security who intends to
require discharge of the secured debt and, failing that discharge, intends to exercise
“any power conferred by the security to sell any subjects of the security or any
other power which he may appropriately exercise on the default of the debtor
within the meaning of standard condition 9(1)(a) … shall serve … ‘a calling up
notice’”. (My emphasis.)
85. In Bank of Scotland v Millward the Inner House construed ‘shall’ as if it
said ‘may’. However, it gave no convincing reason for doing so and there is in my
opinion no warrant for construing the word ‘shall’ in that way in the context of the
Act. As I see it, the purpose of the subsection was to ensure that the proprietors of
secured property should be given proper notice of the creditor’s intention to take
possession of or to sell the property. The giving of such a notice is a simple step
and would have saved years of litigation in this case. The Bank did not give such a
notice on the facts of this case. It follows that, although this point was not taken on
behalf of the appellants until it arose in the course of the argument in this appeal,
for the reasons given by Lord Rodger, I would allow the appeal on that ground.
