Inhibition: What is this Scottish debt Recovery Remedy?

Definitions of an inhibition include “a feeling that makes one self-conscious and unable to act in a relaxed and natural way or, by way of example: “The children, at first shy, soon lost their inhibitions

So what is an Inhibition?

If I have given you the impression that Scottish law is empathic then I’m delighted – after all, what else would you expect from the land of lochs, hills and glens and Billy Connolly!

But as you may expect an inhibition in Scottish law is something entirely different – although it does have a special place in our hearts. So what is an inhibition?

From a   debt recovery perspective an inhibition affects the debtor’s land and buildings. It is a preventative or “freezing” remedy in as much as it affects a debtor’s future a voluntary deeds dealing with land, such as its sale or the grant of security over it, to the creditors prejudice. An inhibition is personal to the debtor affecting all of such land, as opposed to the creditor requiring to be aware of any particular property which the creditor owns and wants to inhibit. The creditor does not have any power of sale so there is no way the creditor can realise the asset.

What’s the point of having an Inhibition?

You are probably asking “what’s the point of inhibiting a debtor?”. The answer is that an inhibition is seen as an effective enforcement measure because a purchaser from an inhibited debtor will refuse to settle any conveyancing transaction unless the inhibition is discharged. Before the conclusion of the transaction the purchaser’s lawyer will require to see a clear search in the register of inhibitions prior to settling it and making monies over to the inhibited debtor. This is because the transaction will be voidable at the instance of the inhibited creditor.

A post decree inhibition (there is provision for an inhibition to be pre-decree which is not discussed here) is generally available to a creditor once they have a decree which constitutes the debt.

An inhibited debtor breaches the inhibition when the debtor delivers a deed to a third party transferring or granting a right in any property affected by the inhibition.

Legislation addresses the situation where a purchaser in good faith and for adequate consideration purchases property from an inhibited debtor and is unaware of the inhibition’s existence. Protection will be given to such an individual provided that all reasonable steps were taken to discover whether the inhibition was outstanding. In these circumstances a person acquiring the relevant property will get good title to it free from the inhibition.

To establish whether an inhibition exists a search is conducted by professional searchers. But what happens if they get it wrong?

So what happens if it goes wrong?

The case of Commodity Solution Services v First Scottish Searching Services raised some interesting issues and is a good pointer as to what may happen if the searchers get it wrong. The Sheriff Appeal Court has allowed an action by an inhibiting creditor who sought damages from a firm of searchers. The court decided that it was relevant to aver that the searchers owed the creditor a duty of care not to overlook its registered inhibition, when reporting on a search in the Register of Inhibitions. The pursuing creditor averred that in breach of that duty, the defending searchers had wrongly reported there to be no registered inhibition, thus allowing the inhibited debtor to transfer property to third parties, to the creditor’s loss.

Commodity Solution Services v First Scottish Searching Services

The facts of the case were straightforward. The searchers had been instructed by the debtor who were going to sell property to a third party. When the search was reported it did not disclose the extant inhibition. It was Commodity’s case that an erroneously clear search had been disclosed to the third-party prospective purchasers who proceeded to take title to a property effectively in breach of the inhibition.

Notwithstanding the breach in terms of The Bankruptcy & Diligence (Scotland) Act 2007, Commodity’s argument was that if the purchasers were in good faith and gave adequate consideration, then the purchaser’s title was irreducible, in terms of section 159 of the Act.

First Scottish’s position was that they had been unaware that the creditor even existed, so had undertaken no specific responsibility to them.

What Did the Court Decide?

In the court’s opinion whilst Commodity had not relied on anything said or done by the searchers a duty could arise where one person voluntarily undertook a function knowing that the economic well-being of another person depended on it being performed properly. Assumption of responsibility for a task could give rise to responsibility to a person whose protection depended on doing it carefully. Given s. 159, if searchers were not liable to inhibiting creditors, then they would have little incentive to search with care.

Accordingly, Commodity’s grievance was that there was a failure to put the purchasers on notice, and as a result the court would allow an inquiry into whether the searchers should indemnify it for the sustained losses.

Conclusion

The litigation illustrates just how effective inhibitions can be. Any other decision would have diluted their effectiveness and it is to be welcomed that the court have given due consideration to this historic Scottish common law remedy.

Another dictionary definition of “inhibition” is “shyness” One hopes the case should encourage creditors not being shy with their inhibitions!

By Stephen Cowan, managing director at Yuill + Kyle