By Alan McIntosh
Despite our #Repo2012 conferences being a huge success with over 150 attending, I have to make a confession. On reflection, I think we missed an opportunity: an opportunity to discuss the thorny issue of the Debt Arrangement Scheme (DAS) and secured debts.
I am not going to beat myself up over it: there was only so much possible within the time available and when you are trying to accommodate a variety of issues and perspectives, something has to give.
However, picking it up now, I would argue addressing this issue is long overdue and would argue there is now a powerful case for the DAS being strengthened to provide more protection for home owners who have arrears on secured debts.
It has always been a feature of the DAS Regulations that the definition of debt in regulation 3 included arrears on secured debts and therefore, logically, these can be included into programmes. This regulation has gone unchanged since 2004, when the original regulations were introduced and essentially was duplicated in the 2011 regulations.
However, the inclusion of such debts into programmes has never become established good practice and, as an aside, if anything, supports the argument that not all debts have to be included into a programme.
The main problem is neither the Debt Arrangement and Attachment (Scotland) Act 2002 or the Debt Arrangement Scheme (Scotland) Regulations 2011 prevent the holder of a standard security calling up a debt under S19(1) of the Conveyancing and Feudal Reform (Scotland ) Act 1970.
Therefore, if a debtor enters a programme and includes the arrears from a secured debt into the programme, the programme may be approved, either with the lenders consent (implied or expressed) or the DAS Administrator’s determination that it is fair and reasonable. The lender, however, is then at liberty to call up the debt, meaning the full amount becomes due.
Whether a lender doing this would be in compliance with other regulatory requirements is debateable. In relation to first charges they should comply with chapter 13 of the Financial Service Authority’s Mortgage Code of Business Handbook, which under paragraph 13.3.2A (6) requires them to not repossess a property unless all other reasonable attempts to resolve the position have failed; and in relation to second charges regulated by the Consumer Credit Act 1974, similar guidance is provided in paragraph 6.3 of the OFT’s Guidance for Second Charge Lenders.
The problem, however, is if a calling up notice is served the whole debt can becomes due and a variation of the programme may then become necessary meaning a programme that was previously deemed to be fair and reasonable, as it could be repaid in 6-7 years, could become unreasonable once a calling up notice is served if it would then take 15-20 years.
Also if a lender does call up a debt, either before or after a debt payment programme is established, the question needs to be asked whether it’s reasonable for a lender then to raise an action to obtain a warrant to exercise their rights under the standard security under S24(1B) of the Conveyancing and Feudal Reform (Scotland) Act 1970.
Section 24(1C) requires them to satisfy the pre-action requirements and S24A (4) (a) states that the creditor must not make an application under S24 (1B) where a debtor is taking steps which are likely to result in the payment to the creditor within a reasonable time any arrears, or the whole amount, due to the creditor under the standard security.
The problem is it is not clear what the effect an approved debt payment programme has on the rights of secured creditors. The DAS Administrator may find such a programme is fair and reasonable, but there is no guarantee that the Financial Service Ombudsman or the Office of Fair Trading will agree, or even a sheriff in deciding if the pre action requirements have been satisfied under S24(1C) under the 1970 Act.
However, this problem is not insurmountable. It has been clear from the outset the Debt Arrangement Scheme was aimed at tackling the problem of multiple debts and creditors competing for a debtors’ attention or money. It is already well accepted that in order to provide debtors with a manageable solution to such problems the rights of the creditors to enforce or recover debts may be restricted, even where they have legally constituted debts.
In principle there is no reason to argue that the rights of a secured creditor should not equally be restricted, particularly if the DAS Administrator was legally required to have regard to leading case law on what is reasonable for repaying secured debt arrears and the guidance that is provided by the Financial Service Authority and the Office of Fair Trading.
There is no reason to believe legally that such amendments would prove too difficult either. Currently, S7(1)(c) of the Debt Arrangement and Attachment (Scotland) Act 2002 allows the Scottish Government to make regulations as to the effect the approval of a debt payment programme has, so arguable the provisions already exist which would allow them to make regulations that would prevent a calling up notice being served for arrears; also the existing Pre Action Requirement Order (Scotland) 2010 could be amended to prevent creditors raising an action where a debt payment programme has been approved.
Is it so unreasonable to argue that where a decision is made that a programme is fair and reasonable that those creditors should have their rights restricted, possibly preventing them from serving a calling up notice or raising an action to obtain a warrant to exercise their rights under any security? Arguably secured creditors would not have their rights restricted any more than they currently are under FSA and OFT guidance and under the current pre-action requirements.
However, greater clarity would be provided to advisers and home owners as to the effect including arrears on secured debts into debt payment programmes would have and arguably unnecessary expensive legal and court proceedings could be avoided.