Vol 9 (2012) - Issue 2

Article preview

The Effect of Landlord’s Hypothec on Corporate Insolvencies

Introduction
As the majority SNP Scottish Government and the Westminster Coalition wrangle over the precise timing and scope of a referendum on Scotland’s future within the UK, Scottish insolvency professionals are wrangling with an equally knotty problem: the Scottish security known as 'landlord’s hypothec'.
Insolvency law in Scotland occupies an interesting position on the devolved/reserved boundary. Legislative competence in relation to some aspects of insolvency law are reserved to Westminster (substantive corporate insolvency law) and others are devolved to the Scottish Parliament (securities, personal insolvency, procedural aspects of corporate insolvency). Where the implications of any proposals are not fully considered, this can therefore give rise to significant practical difficulties.
The legislation that brought in reforms to landlord’s hypothec in 2008, the Bankruptcy and Diligence (Scotland) Act 2007, is a case in point. No consideration appears to have been given to how the reforms would impact on insolvency and the consequences have proven to be challenging for insolvency professionals to manage.

What is landlord’s hypothec?
Pre-2008 reforms
Landlord’s hypothec is a common law security that landlords enjoy over corporeal moveable assets on leased premises. Historically, it granted the landlord a number of rights:
– he could enforce the hypothec by way of Court proceedings known as 'sequestration for rent' proceedings;
– he could insist on the premises being furnished to a degree sufficient to meet his security and, in certain cases, require assets that had been removed to be returned; and
– he had a right to obtain a preference over the assets on the bankruptcy of his tenant.

It was recognised long before the 2008 reforms that landlord’s hypothec required reform for various reasons, for example, the effect of the hypothec extended to goods owned by third parties and this was in plain breach of Article 8 of the European Convention of Human Rights.

The reforms
The Bankruptcy and Diligence (Scotland) Act 2007 brought together a number of proposed reforms in the field of bankruptcy and enforcement that had collectively been the subject of several consultations over the previous decade. The reforms to landlord’s hypothec take up only one section of the act, namely section 208.
The Policy Memorandum that accompanied the Bill on its introduction to the Scottish Parliament in November 2005 set out the key objectives in relation to landlord’s hypothec. These were:
– to exempt all third party assets from landlord’s hypothec;
– to exempt certain classes of leases from landlord’s hypothec (dwellinghouses and certain agricultural leases that were not already exempt);
– to clarify the amount of rent secured by landlord’s hypothec by extending this to 'all rent due and unpaid'; and
– to confirm the landlord’s entitlement to a preference in insolvency.

The language used in the Policy Memorandum indicates an intention to narrow and clarify the scope of the security rather than to fundamentally change it, however, the practical effect of the reforms has been to significantly alter how landlord’s hypothec operates in practice.