Advice on arrestment

Summary

This paper provides an overview of arrestment as applied in civil proceedings in the United Kingdom. In particular, the paper provides advice to the client of the following issues;

• Current legal state of the law on arrestment
• Prevention mechanisms used to prevent creditors from reaching assets.

Background

Before advising on the current legal predicament of the client, it is important the client understands the legal basis under which his advice is based on. Enforcement of debts in law is known as diligence. Defaulters of a debt can be coerced into paying their debts by taking away their assets, preventing their houses from being sold and seizing their bank accounts. Diligence should not be confused with bankruptcy although the two have a link. In isolation there is no statute that handles diligence, however diligence matters are covered within the Bankruptcy and Diligence etc. (Scotland) Act 2007 and the Debtors (Scotland) Act 1987. Enforcement of diligence requires use of armed sheriffs commonly known as bailiffs in England.

Diligence is not the same as due diligence and its origin is Scotland where legally it is used to imply the steps a creditor takes in order to force a debtor to pay up after a court process is complete. It also includes forcing a debtor to attend a court proceeding. Diligence can only be applied in the presence of a warrant. The forms of diligence include but are not limited to arrestment and money attachment. Arrestment covers moveable property in the hands of third parties. The client is seeking advice on preventing creditors from reaching money in third parties as well as understanding the current state of the law concerning arrestment. The client’s advice squarely lies in the law pertaining to arrestment.

State of law on Arrestment

The Bankruptcy and Diligence etc. (Scotland) Act 2007 had some amendments made to it in relation to 73A – 73T. The changes had effect on arrestment in particular funds arrestment. In arrestment, the creditor is allow to withhold property that is moveable and belonging to the debtor where the property in question is the hands of a third party. Arrestment does take place when the property is in the hands of the debtor safe for the instances where the property is a ship. The creditor is under obligation to obtain a decree from the court. The decree is served to the third who is holding the assets for the debtor. The third party may wish to return the property to the debtor. Subsequently the creditor then files for action of forthcoming these allows the creditor to take the property in question from the third party in cases where the property in question is not finances in a bank.

On the other hand the arrestee can choose to pay the creditor the value of the property and keep the property for himself. On the same breadth the withholding agent may sell the property and submit the proceedings to the creditor. When the creditor is a public creditor such a local authority or the queen and the debt recovery process has been though a summary warrant, a charge has to be appended to the recovery process. The creditor is supposed to serve the third part with the arrestment schedule preventing the third party from releasing the goods in question. Where funds form part of the arrestment, the amount is limited to what is held on behalf of the debtor or what is owed to the creditor including accompanying charges, interest and any other accruing expenses.

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In case of monies held by banks, there is the minimum value which can be arrested. As of April 2016, the minimum balance of arrestment for a bank is set at 494.01 pounds. Arrested funds are inevitably released to the creditor within fourteen days upon issuance of arrestment decree however this is subject to existence of a contestation. The contestation in made to the sheriff in which case a hearing is constituted where the arrestment can be applied restively where only part of what is owed to the creditor is released. The contestation hearing can also result in the arrestment being recalled and in such a case the funds assume original position restoration.  Where goods are withheld without the mandate and consent of the debtor, the creditor can still proceed to apply for action of forthcoming in which the creditor is seeking leave of court to have the goods be released. Arrestment can also be used where a decision for issuance of a decree is still under consideration. In such instances, goods or funds are released to the creditor pending the decision on decree.

High Flex (Scotland) Ltd v Kentallan Mechanical Services Co. 1977 SLT (Sh Ct) 91) case set a precedent as far handling of arrested property is concerned. The case affirmed that receiving goods that have been arrested with full knowledge that way arrested warrants one to pay the creditor to whom the goods are due in full. The act also provides for application of the lifting of arrestment on goods by the debtor when he/she feels that arrestment is a harsh option. Subsequently a hearing would be put in place by the sheriff. Here the sheriff has an option of postponing of release of the funds until a later. Other items that are non-fund can also be arrested, this items include furniture and paintings currently in possession of depositaries of auctioneers.

Whether in execution or security, arrestments have are subject to ranking if there are multiple arrestments on the same day. According to Bankton, III, i, 41; Suite v Ross (1705) M 816), the forthcoming decree notwithstanding the rank of the arrestments is pari passu.

Prevention of arrestment

In Scotland, the Scottish government came up with the debt arrangement scheme (DAS). These arrangement scheme is an endeavor to allow creditors to get paid what they are owed. The program is structured in a manner that all debtors who have made a commitment to pay back what they owe to do so in a favorable environment. Once the DAS is adopted, interests, penalties and fees that may accrue as a result of the debt are frozen. The income made by the debtor determines the amount set in the DAS and the repayment period can be as long as it is reasonably possible to do so if the debtor in question is an individual, in cases where the debtor is a corporate or business, the repayment period is capped at five years.

The eligibility for to join the DAS is based on several factors including but not limited to the fact that the applicant has to be a permanent resident in Scotland or in case of a business, the business should have been started based on the Scotland law. Equally the applicant must have gone through the consultation of a money adviser approved by the DAS. The applicant should prove that they are intending to seek the help of DAS without being threatened with legal action by the creditor and lastly the applicant should have reasonable amount of income left to cover basic needs when repaying the loan. The debtors who are under the protected trust deed or are bankrupt get an automatic disqualification against seeking help from DAS.

Additionally debtors who are paying their debt in line with Scotland’s Credit Act of 1974 subsection (d) are also not eligible for inclusion in the DAS. It’s important to note that although DAS is restricted to Scotland, it can include businesses creditors from the UK. Once the program is approved, all fines, interest and penalties get frozen. It can therefore be concluded that in order for the client to avoid creditors having access his assets, he has an option of going through the DAS and repaying the debt. Another avenue available to the debtor is a trust deed. The trust deed can be voluntary or involuntary. In case of a voluntary deed the debtor and the creditor voluntarily agree on a mechanism to repay existing debts usually through the debtor giving up the rights of ownership he or she has to things. The trust deed may include contribution from personal income for a given specific period of time usually 4 years subject to change.

A voluntary deed is never legally binding on the part of the creditor until the creditor agrees to the terms contained in the deed which subsequently becomes protected. Trustee involved in drafting and instituting trustee deeds must be qualified and approved by the governing body and the fees they charge depends on the licensing authority. A protected trust deed is another avenue for debtor asset protection. Unlike voluntary deed, a protected deed is legally binding on the creditor. The deed protects the debtor from being pursued further to pay debts or take any action in this regard. The protected deed restrict the debtor from applying for personal bankruptcy, however, any extra debts acquired after the protected trust deed has been instituted are not protected.

The negative side of trust deeds is in the fact that it affects the credit ratings of the debtors going into the future. The deed may also make potential employers reluctant to employ individuals. The reason why the club is reluctant to pay the large sum of money rent to it is unexplained. Refusal to pay the debt would potentially lead the property developer to move to court to recover back what he is owed, what this means is that the club would expose its properties to being attached against  the debt.

Conclusions

Most of the club properties are syndicated in banks, these means that the club lacks enough assets to liquidate in order to offset potentially disastrous debts. Bankruptcy and arrestment are different in that in bankruptcy one loses all his assets while in arrestment the goods or funds arrested are those equal in value to the debt owed. Creditors have many avenues to force a debtor to pay up and one way is through the use a court decree. Some creditors would have powers under the fast tracking procedure to force the debtor to pay. In absence of a fast tracking procedure, the creditor has an option has an option of writing a legal document called charge of payment. The danger of waiting for the creditor to make a move towards recovering his dues lies in the fact that existing assets may be sold at value below its real value in order to cover the debt owed to the creditor, as such the club ought to make necessary arrangements to pay back what belongs to the property developer or alternatively make arrangements to with the creditor on how to pay.