Select a region
In this month's Connect magazine, Advocate Olaf Blakeley focuses on bankruptcy and dégrèvement, an ancient procedure that has recently seen a rise in popularity.
"It was a sad sign of the times that many companies (and individuals) over the past few years started to suffer financially, and some ended up as bankrupt.
"While the economic ill wind may now be abating somewhat, its storm-path caused underlying damage to the fabric of many businesses weakening their stability, and it is only now that the bricks have started to crumble. It is not a surprise then to see notices advising of companies being declared en désastre, or notices concerning dégrèvement proceedings. This month’s article is a brief explanation about the ancient dégrèvement process, and in a later edition I will cover the subject of désastre.
"Dégrèvement is an ancient procedure in which creditors who have security over real property of a debtor may ‘foreclose’ on that property, allowing them to take the property in satisfaction of the debt owed to them. It is a procedure that in the past has been criticized, yet it is becoming more and more widely used. I will return to the reasons for its rise in popularity shortly. The process is available to those people who have registered security over property. After taking a judgment for the money owed, the creditor applies to the court for an Order requiring the debtor to pay the sum due. If s/he fails to do so in two months, then the creditor can take the next step to obtain judgment and proceed to obtain his judgment sum.
Pictured: Advocate Blakeley advises debtors faced with dégrèvement proceedings to take legal advice immediately.
"All creditors who have security over the property are summonsed to appear before the court to take part in the procedure. They are not compelled to attend. Each creditor in turn is offered the opportunity to ‘take’ the property in satisfaction of the debt owed to them. However, the offering is made to the creditors in reverse order of priority (date) of their security with the requirement that if they take the property they must then pay all prior ranking creditors the sums owed to them. So, for instance, 3 creditors X, Y and Z. Each have debts owed to them of £100,000. The property is worth £240,000. X registered his security over the property in 2010; Y in 2011 and Z in 2012. Z is offered the property first. If he decides not to take it, it is then offered to Y. If Y takes the property he then must pay X £100,000.
"This begs the question, “what about Z?” Z loses his security over the property, but the debt owed to him remains. If the situation has progressed to dégrèvement, the debt is probably worthless. Of course, Z could have taken the property and recovered £40,000 after paying X and Y each £100,000.
"Many shy away from doing so simply because of the onerous obligation of probably having to sell the property, and pay prior ranking creditors without delay. The next question that arises is, “what happens to the surplus value of the property in the hands of Y?” After all, Y was owed £100,000 and had to pay £100,000 to X, but the property was worth £240,000 so there is £40,000 left over. The short answer is that Y is allowed to keep it. It is for this reason that dégrèvement is criticized.
"However, this ‘buffer’ (the surplus) provides one benefit to the procedure. All costs and expenses incurred by a creditor can be covered by this amount, giving some degree of comfort. Also, generally, the process is a lot quicker than désastre proceedings. Furthermore, a creditor can act unilaterally, whereas under the désastre process, the procedure is run by the Viscount and her costs and expenses must be paid/underwritten. While the dégrèvement procedure is quite draconian (but efficient) a debtor can often avoid it should they chose to properly address their debts and take action. A debtor who buries their head in the sand will find their property has been swept away when they later decide to resurface, and any equity in the property may have equally disappeared.
"Many argue that surplus amounts should either be returned to the debtor or distributed amongst unsatisfied creditors. There is merit in such arguments. In my experience, professional institutional lenders do not keep the surplus, being content that the overdue debt and interest has been repaid. My advice to any debtor faced with dégrèvement proceedings is to take legal advice immediately. It can be avoided if swift action is taken."
Comments
Comments on this story express the views of the commentator only, not Bailiwick Publishing. We are unable to guarantee the accuracy of any of those comments.