Diligence on the dependence

The courts have always allowed a party who chooses to raise court proceedings the opportunity to put in place protective measures with a view to avoiding the possibility of their opponent being unable to meet any eventual judgement. This is known as "diligence on the dependence" and the most common forms are arrestment and inhibition. The former is aimed at freezing funds due to be paid to the opponent by third parties (the most common example being funds in bank accounts) while the latter prevents the sale or transfer of title of any heritable property including, for example, properties constructed as part of a development. In construction disputes such measures have historically been used to pressurise an opponent to settle a claim to avoid the serious consequences diligence can have for the financing of projects, sales and cashflow generally.

From 1st April 2008 new statutory procedures, introduced by the Bankruptcy & Diligence etc(s) Act 2007, have come into force, introducing a number of significant changes. The new procedures are available in the Court of Session and, for the first time, the Sheriff Court. The rules applicable in each court are essentially identical and a common approach should therefore develop over time.

In order to get a "warrant (permission) for diligence" an applicant must persuade the court

• that they have an apparently valid basis of claim which is set out in the court writ
• that there is a risk that any decree will be defeated either by insolvency of the paying party or as a result of assets being removed, concealed or disposed of thus preventing recovery
• that the use of diligence is reasonable in all the circumstances of the case

The basic procedure requires an applicant to give notification to his opponent of the intention to seek a warrant but in practice an attempt is more likely to be made to obtain authority to get the protective measures without prior warning. In either case there will be an early formal hearing before a judge at which the opponent will be given the opportunity to address the court. At that hearing, even where warrant has already been granted on an interim basis, the onus remains firmly on the applicant to persuade the court that the test has been satisfied and that the use of protective diligence is appropriate.

The Act includes provision for variation and recall of diligence if circumstances change during the course of the litigation. The procedure is straightforward and the court has wide powers to impose conditions and order alternative security if appropriate.

The overall effect is that it is likely to become much more common to apply for a warrant (largely because of the straightforward procedure now available in the Sheriff Court) but, at the same time, harder to obtain the use of diligence on the dependence as the Courts will more closely scrutinise whether it is appropriate.

We have already been successful in opposing the granting of warrant in circumstances where, prior to the Act coming into force, we might have expected the applicant to be successful.