DAVID MACMILLAN AGAINST T LEITH DEVELOPMENTS LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)
OUTER HOUSE, COURT OF SESSION
[2016] CSOH 19
CA222/14
OPINION OF LORD TYRE
In the cause
DAVID MacMILLAN
Pursuer;
against
T LEITH DEVELOPMENTS LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)
Defender:
Pursuer: McBrearty QC, Roxburgh; Kennedys Scotland
Defender: Sellar QC; HBJ Gateley
27 January 2016
Introduction
[1] In the twilight of the era of receivership, I am asked in this case to revisit the issue of ranking preference as between a floating charge holder and an inhibiting creditor, and to consider afresh the meaning of the phrase “effectually executed diligence” which has given rise to much comment since floating charges were introduced to the law of Scotland in 1961. Because of changes made in 2002 and 2007 to the law affecting floating charges and inhibitions respectively, the questions raised by these proceedings are of largely historical interest, although they are obviously still live so far as the parties are concerned.
Factual background
[2] The pursuer sues as an individual and as executor of his late wife, Susan MacMillan, who died on 22 April 2015. The defender is a company in receivership and liquidation which was incorporated in 2000 for the purpose of constructing a small housing development at Whitecraigs, Glasgow. On 30 November 2000, the defender granted a floating charge in favour of the Clydesdale Bank. In 2005, Mr and Mrs MacMillan purchased a plot of land from the defender and entered into a contract with the defender for the construction of a house on the plot. Entry to the house was taken on or about 28 July 2006. Mr and Mrs MacMillan soon discovered what they regarded as fundamental defects in the construction of the house. In September 2006 they raised proceedings against the defender in Paisley Sheriff Court for breach of contract. Warrant to inhibit on the dependence was granted and an inhibition was served on the company and duly registered. A notice of letters of inhibition was registered on 25 September 2006; this was accordingly the effective date of the inhibition.
[3] After the date of the inhibition, the defender entered into a series of facility agreements with the Clydesdale Bank, in terms of which overdrafts and other facilities were made available to it. On 30 November 2010, decree by default was granted against the defender for payment to Mr and Mrs MacMillan of the sum of £333,993.42 plus interest and expenses. An appeal by the defender to the sheriff principal was refused. On 18 February 2011, the bank appointed Kenneth Patullo and Paul Dounis as joint receivers under the floating charge (Mr Dounis has subsequently resigned). Thereafter, on the petition of Mr and Mrs MacMillan, Mr Colin Hastings was appointed as provisional liquidator on 20 May 2011 and as interim liquidator on 8 June 2011. The defender’s principal assets are two houses in the same development as the pursuer’s house.
[4] It is now common ground between the parties that the whole of the debt due by the defender to the bank at the date of receivership, when the floating charge crystallised, is to be regarded as having been incurred after the date of the inhibition.
[5] In this action the pursuer concludes firstly for decree that the inhibition is an effectually executed diligence in terms of the Insolvency Act 1986, section 60, and accordingly that the receiver is obliged, when distributing the sale proceeds of the two houses, to pay the sum due in terms of the sheriff court decree to the pursuer before making payment of any balance to the bank as floating charge holder. Failing decree as first concluded for, the pursuer concludes for declarator that the receiver is obliged to distribute the sale proceeds in the following order: (i) to the bank in respect of pre-inhibition debt; (ii) to the pursuer in respect of all sums due to him; and (iii) to the bank in respect of post-inhibition debt. In other words, the pursuer contends in the alternative that even if the inhibition is not an effectually executed diligence, it nevertheless ranks ahead of the floating charge with regard to debt incurred after the inhibition which, in the circumstances of this case, amounts to the whole of the bank debt.
Legislative history
[6] Floating charges were introduced to the law of Scotland by the Companies (Floating Charges) (Scotland) Act 1961. The 1961 Act did not introduce the concept of receivership, and accordingly floating charges attached only in the event of the company’s liquidation. Section 1(2)(a) of the 1961 Act provided that on commencement of winding up, a floating charge attached “to the property comprised in the company’s property and undertaking”, but subject to the rights of, inter alia, any person who had “effectually executed diligence on the property or any part of it”.
[7] The effect of liquidation of a Scottish company on the rights of creditors who had done diligence against it was at that time governed by the Companies Act 1948, section 327, which provided inter alia that no arrestment or poinding executed within 60 days prior to the date of winding up was effectual, although the arresting or poinding creditor was given a preference for expenses incurred by him in such diligence. Section 327 echoed the terms of earlier bankruptcy legislation, and in Dow & Co v Union Bank of Scotland (1875) 2R 459 it had been held that “effectual”, in relation to arrestment, meant effectual in securing a preference for the arresting creditor.
[8] The Companies (Floating Charges and Receivership) (Scotland) Act 1972 introduced the concept of receivership to Scots law by entitling a floating charge holder to appoint a receiver to realise the property subject to the charge. Section 1(2)(a) of the 1961 Act was re-enacted in the same terms as section 1(2)(a) of the 1972 Act. Section 15 of the 1972 Act conferred wide powers on a receiver, but in terms of subsection (2)(a) those powers were exercisable subject to the rights of any person who had effectually executed diligence on all or any part of the company’s property prior to the receiver’s appointment. Section 20(1) of the 1972 Act specified the ranking of the floating charge holder as follows:
“Subject to section 21 of this Act and to the rights of any of the following categories of persons, namely-
(a) the holder of any fixed security which is over property subject to the floating charge and which ranks prior to, or pari passu with, the floating charge;
(b) all persons who have effectually executed diligence on any part of the property of the company which is subject to the charge by virtue of which the receiver was appointed;
(c) creditors in respect of all liabilities, charges and expenses incurred by or on behalf of the receiver;
(d) the receiver in respect of his liabilities, expenses and remuneration; and
(e) the preferential creditors entitled to payment under section 19 of this Act,
the receiver shall pay monies received by him to the holder of the floating charge by virtue of which the receiver was appointed in or towards satisfaction of the debt secured by the floating charge”.
[9] The provisions of the 1972 Act were repealed and replaced by Part XVIII of the consolidating Companies Act 1985, with sections 463(1)(a), 471(2)(a) and 476(1)(b) thereof respectively re-enacting sections 1(2)(a), 15(2)(a) and 20(1)(b) of the 1972 Act. Sections 467 to 485 of the 1985 Act were then in turn repealed and replaced by Chapter II of Part III of the Insolvency Act 1986, in which sections 55(3)(a) and 60(1)(b) re-enacted the former sections 471(2)(a) and 476(1)(b). Those provisions, together with section 463 of the 1985 Act, remain in force.
[10] Two subsequent legislative developments require to be noted. Firstly, the Enterprise Act 2002, section 250 prohibited the appointment of a receiver by the holder of a floating charge created on or after 18 March 2003. Secondly, the Bankruptcy and Diligence etc (Scotland) Act 2007, section 154 removed, with effect from 22 April 2009, the “second” common law effect of inhibition, namely a preference in any insolvency proceedings over debts contracted by the debtor after the date of the inhibition, leaving intact the “first” common law effect, namely the prohibition of the inhibited debtor from alienating (including the granting of a security over) any part of its heritable property. (I mention in passing that the 2007 Act also abolished the diligence of adjudication for debt, but the relevant provisions are not yet in force.)
The first issue: effectually executed diligence
The decision in Lord Advocate v Royal Bank of Scotland
[11] Lord Advocate v Royal Bank of Scotland 1977 SC 155 concerned a competition between a floating charge holder and a creditor who had arrested funds but had not raised an action of furthcoming before the date of appointment of a receiver by the charge holder. The question was whether the arresting creditor had effectually executed diligence on the debtor’s property so as to obtain a ranking in preference to the charge holder in terms of what was then section 20(1) of the 1972 Act. By a majority, the Inner House held that it had not. Lord President Emslie observed (page 169):
“The accurate description of an arrestment, however, is that it is merely an ‘inchoate’ diligence [Stair III.I.42] a ‘step’ of diligence or an ‘inchoate or begun’ diligence [Erskine III.VI.11 and 15]. It has never been held otherwise and is succinctly described in Lucas’s Trs v Campbell & Scott (1893) 21 R 1096 by Lord Kinnear – a master in this field of law – in these terms: ‘An arrestment and furthcoming is an adjudication preceded by an attachment and the essential part of the diligence is the adjudication’ (p. 1103). It is accordingly part but not the essential part of a diligence consisting of arrestment and furthcoming.”
At page 170, Lord President Emslie applied the following further dictum of Lord Kinnear in Lucas’s Trs v Campbell & Scott:
"[Arrestment] is not a diligence directly affecting the goods themselves in whose hands soever they may be, but a diligence in personam which can only be carried
into effect by the operation of a decree for payment or delivery against the person in whose hands the arrestment is used."
Lord President Emslie then stated (page 171):
“What then is the ambit of section 15(2)(a)? It would be surprising if it were designed to cover rights established subsequent to the date of creation of the floating charge, a public fact because of its registration, by diIigences which were not truly comparable with rights of fixed security and were lesser rights of a purely personal character such as arrestment.”
[12] The decision of the majority in Lord Advocate v Royal Bank of Scotland has for many years been the subject of sustained academic criticism. It has never, however, been the subject of judicial reconsideration. In Iona Hotels Ltd v Craig 1990 SC 330, Lord President Hope observed obiter that, correctly in his Lordship’s view, senior counsel for an arresting creditor had made no criticism of the decision. The facts of Iona Hotels were different from those of Lord Advocate v Royal Bank of Scotland in respect that the arrestment pre-dated the creation of the floating charge. The court held that although the arrestment was only a step in diligence which had not been completed by furthcoming, it rendered the subject arrested litigious with the result that the debtor could not defeat it by any subsequent voluntary deed. The property to which the floating charge attached on crystallisation was accordingly subject to the rights of the arrester.
[13] Another matter which has never been the subject of express judicial determination is whether the effect of the decision in Lord Advocate v Royal Bank of Scotland so far as inhibition is concerned is that a floating charge holder takes priority over an inhibiting creditor, at least (post-Iona Hotels) where registration of the inhibition post-dates the creation of the floating charge. In Armour and Mycroft, Petitioners 1983 SLT 453, the Lord Ordinary (Kincraig) did not require to decide the point because the inhibiting creditor departed from his submission that he had effectually executed diligence on the property after a “powerful argument” to the contrary had been made on behalf of the receivers. In Taymech Ltd v Rush & Tompkins Ltd 1990 SLT 681, the Lord Ordinary (Coulsfield) noted that counsel for an inhibiting creditor had not disputed the proposition advanced on behalf of the receiver that an inhibition not followed by adjudication was in the same position as an arrestment not followed by a furthcoming, and was therefore of no effect against the receiver.
Submission for the pursuer
[14] Like Armour and Mycroft and Taymech, the present case concerns an inhibition registered after the creation of a floating charge but not followed by adjudication prior to attachment of the charge. On behalf of the pursuer, it was submitted that I should decline to follow Lord Advocate v Royal Bank of Scotland. This submission, which in the Outer House might seem surprising, was advanced on the following basis. Lord Advocate v Royal Bank of Scotland was concerned with interpretation of sections 15(2)(a) and 20(1)(b) of the 1972 Act whereas the present case was concerned with sections 55(3)(a) and 60(1)(b) of the 1986 Act. Technically, therefore, the decision was not binding upon me, a proposition that I understood the defender to accept under reference to R v Muhamad [2003] QB 1031 at para 24. Although it was accepted by the pursuer that the Lord Advocate decision should be regarded as highly persuasive, it should nevertheless not be followed. In the first place, it was submitted, it was plain that the Lord Advocate case had been wrongly decided. Seven specific arguments, derived largely from the academic material to which I have referred, were advanced in support of this submission. Reference was also made to statements in Parliament during the passage of the bill that became the 1961 Act, which statements were said to indicate unequivocally that the parliamentary intention had been that the priority afforded in a liquidation to diligences effected more than 60 days before the date of winding up would apply where there was a floating charge.
[15] In the second place, it was submitted that the reasoning of the court in Lord Advocate v Royal Bank of Scotland was fundamentally at odds with the approach taken by the House of Lords in Sharp v Thomson 1997 SC (HL) 66 to the interpretation of the legislative scheme relating to floating charges. It was now clear from Sharp v Thomson (i) that words in the legislation should not be defined by reference to technicalities of the law relating to property or diligence, and that consideration had to be given to the way in which the floating charge was intended to operate and the consequence that a particular interpretation would have; and (ii) that legislation conferring rights on the holder of a floating charge, a vehicle unknown to Scots law before 1961, should be given a narrow construction, and should not in the absence of clear wording be interpreted as giving a receiver a right that a liquidator would not have had.
Submission for the defender
[16] On behalf of the defender it was submitted that on a proper application of the principles of statutory interpretation, and regardless of whether or not it had been correctly decided, the authority of the decision in Lord Advocate v Royal Bank of Scotland could not now be impugned. Among the principles said to exist were the following:
- Parliament and its draftsman are presumed to know the legal background to a statutory provision.
- Where a statutory provision is ambiguous but has been the subject of authoritative interpretation in the courts, and where public or private activities had been ordered on that basis for a significant period without serious problem or injustice, there should be a strong presumption against a higher court overturning that settled practice.
- Where Parliament re-enacts a statutory provision which has been the subject of authoritative judicial decision, the court will readily infer that Parliament intended the re-enacted provision to bear the meaning that the case law had already established.
[17] The second of these three principles was derived from the judgment of Lord Carnwath in R (N) v Lewisham LBC [2015] AC 1259 at para 95, where it is stated under reference in turn to previous House of Lords authority. Although both Lord Neuberger (at para 148) and Lady Hale (at para 168) expressed reservations about the existence of such a principle, Lord Canwath’s view was shared, obiter, by Lord Hodge, with whom the other three Justices agreed, at para 53.
[18] The third of the defender’s principles was derived from the formulation by Lord Hodge in R (N) v Lewisham LBC (above) at para 53 of what is commonly referred to as the Barras principle. In the case of Barras v Aberdeen Steam Trawling and Fishing Co Ltd 1933 SC (HL) 21, Viscount Buckmaster observed at page 27:
“It has long been a well established principle to be applied in the consideration of Acts of Parliament that where a word of doubtful meaning has received a clear judicial interpretation, the subsequent statute which incorporates the same word or the same phrase in a similar context, must be construed so that the word or phrase is
interpreted according to the meaning that has previously been assigned to it.”
This principle has not been without its critics. In Royal Crown Derby Porcelain v Russell [1949] 2 KB 417, Denning LJ said at page 429:
“I do not believe that whenever Parliament re-enacts a provision of a statute it thereby gives statutory authority to every erroneous interpretation which has been put upon it. The true view is that the court will be slow to overrule a previous decision on the interpretation of a statute when it has long been acted on, and it will be more than usually slow to do so when Parliament has, since the decision, re-enacted the statute in the same terms. But if a decision is, in fact, shown to be erroneous, there is no rule of law which prevents it being overruled.”
In Farrell v Alexander [1977] AC 59, Lord Wilberforce stated at page 74:
“My Lords, I have never been attracted by the doctrine of Parliamentary endorsement of decided cases; it seems to me to be based upon a theory of legislative formation which is possibly fictional. But if there are cases in which this doctrine may be applied, and I must respect the opinions of those judges who have so held, any case must be a clear one.”
The Barras principle has, however, recently been endorsed by a majority of the Supreme Court in R (N) v Lewisham LBC, where only Lord Neuberger disagreed, and also, perhaps somewhat reluctantly, by Lord Neuberger himself in Haile v Waltham Forest LBC [2015] AC 1471 at para 75.
[19] Applying those principles to the circumstances of the present case, it was submitted by the defender that Parliament was to be presumed, by twice using the same words in 1985 and 1986, to have intended them to have the meaning that they were accorded in Lord Advocate v Royal Bank of Scotland. Ironically, that presumption applied with greater force given the criticism to which the decision had been subject, and of which Parliament, its draftsmen, and the sponsoring department of the 1986 Act, must have been aware. They must also have been aware that, despite the criticism, the decision was being routinely applied in insolvency practice. It had continued to be so applied since 1986, albeit that receiverships were now rare. It was too late now to impugn the authority of the decision.
Reply for the pursuer
[20] In response to the defender’s argument based upon principles of statutory interpretation, the pursuer emphasised the limitations that had been placed upon the scope of the Barras principle in a series of House of Lords judgments, including Farrell v Alexander, Lord Wilberforce (above) and Lord Simon of Glaisdale at page 91; Lowsley v Forbes [1999] 1 AC 329, Lord Lloyd of Berwick at page 340; and A v Hoare [2008] AC 844, Lord Hoffmann at para 15. Statements made by the Supreme Court in R (N) v Lewisham LBC were all obiter as regards both the Barras principle and the existence of a “settled practice” principle. As regards the latter, given the criticism that had been directed towards the Lord Advocate decision, it had never been safe for a receiver to regard it as immune from court challenge.
Decision: status of Lord Advocate v Royal Bank of Scotland
[21] It is important to recognise that discussions of the Barras principle and, more recently, of the existence of a “settled practice” principle, have taken place in the appellate and supreme courts. They have been concerned with the circumstances in which a higher court may depart from a previous decision of a court at a similar level in the hierarchy. That is different from the situation in which a judge sitting at first instance is urged not to follow a decision of an appellate court within the same hierarchy. In that situation it seems to me that principles of statutory interpretation have a much more restricted scope of application because in most cases the first instance court will simply be bound to follow the prior appellate decision. The principles are relied upon by the defender in the present case for the purpose only of bridging the gap between the provisions of the 1972 Act which were interpreted by the court in Lord Advocate v Royal Bank of Scotland and the provisions of the 1986 Act which require to be interpreted here. In my opinion that gap, in the case of a consolidation statute, is a very narrow one indeed. Delivering the judgment of the court in R v Muhamad [2003] QB 1031, Dyson LJ observed (para 24):
“It is true that the decision in R v Salter is not technically binding on this court, because it was dealing with a provision under repealed legislation. But Parliament decided to re-enact section 157 with minor changes, first in section 191(1)(a) of the Insolvency Act 1985, and then in section 362(1)(a) of the 1986 Act. When re-enacting, Parliament is to be taken to have been aware of the decision in R v Salter. We would accept in such circumstances that the following passage in Cross, Statutory Interpretation, 3rd ed (1995), p 170 is a correct statement of the law: ‘the position is simply that the re-enactment of a provision which has been judicially interpreted provides a reason of limited force why the courts should be more than ordinarily cautious in overruling that interpretation’.”
Applied to the present case, I read this passage as an admonition that where a statutory provision has been re-enacted, a court of first instance should be more than ordinarily cautious in deciding not to follow a decision of a higher court on interpretation of the repealed legislation. Moreover, it should be borne in mind that the Insolvency Act 1985, at issue in R v Muhamad, was not a consolidation. By contrast, in the present case the provisions at issue in Lord Advocate v Royal Bank of Scotland have undergone two re-enactments both of which were consolidations. On neither occasion was there an opportunity for Parliament to make substantive amendments to the law except in so far as necessitated by the consolidation processes. In R v Secretary of State for the Environment, ex p Spath Holme Ltd [2001] 2 AC 329, Lord Bingham of Cornhill referred at page 388 to an “assumption” that on consolidation no change in the law was intended. I regard the distinction between judicial interpretation of the provisions of the 1972 Act and of the corresponding provisions of the 1986 Act as so fine as to amount to little more than a technicality. Putting the matter another way, I regard the persuasive force of Lord Advocate v Royal Bank of Scotland as being practically indistinguishable from binding authority and I do not regard it as open to me to decline to follow it on the ground that it was wrongly decided. Unless its force has been impugned by subsequent higher authority, I consider that I am bound to follow it.
[22] As I have noted, the pursuer argued that the approach taken by the court in Lord Advocate v Royal Bank of Scotland was irreconcilable with that later adopted by the House of Lords in Sharp v Thomson. The speeches of Lord Clyde and Lord Jauncey were said to demonstrate that the court in the Lord Advocate case had erred by founding upon the technical legal meaning of words such as “property” and “diligence” and had further erred by failing to adopt a restrictive approach to the rights of a floating charge holder. I am unable to accept this submission. Lord Jauncey noted at the outset of his speech (page 68) that the issue in Sharp v Thomson was the meaning of the word “property” in a floating charge and in section 53(7) of the 1986 Act. Similarly, Lord Clyde at page 79 identified the question as being one of construction of the terms of the floating charge and of the underlying statutory language. It is self-evident that the case was not concerned with any issue of competition between a floating charge holder and a creditor who has executed diligence. Lord Advocate v Royal Bank of Scotland was concerned with interpretation of a different section of the legislation, and in particular with the meaning of the phrase “effectually executed diligence”. In addressing that issue, the court focused not upon the floating charges legislation but rather on the precise nature of the rights conferred by the common law on a creditor who had carried out an arrestment. On the one hand I find nothing in Sharp v Thomson, concerned as it is with the meaning of the word “property” in the 1986 Act, to suggest that the approach taken in Lord Advocate v Royal Bank of Scotland to construction of the phrase “effectually executed diligence”, under reference to the law of arrestment, was misconceived. On the other hand I find nothing in Lord Advocate v Royal Bank of Scotland to suggest that a more generous view was taken of the rights of a floating charge holder than that described 20 years later by Lord Clyde. If the authority of Lord Advocate v Royal Bank of Scotland were to be impugned, one would expect it to be done expressly or by necessary implication; in fact neither the case itself nor the point decided by it is mentioned in either of the leading speeches in Sharp v Thomson, with which the other members of the Judicial Committee concurred.
Inhibitions and effectually executed diligence
[23] The pursuer’s argument that the inhibition registered in his favour was an effectually executed diligence was founded upon the proposition that Lord Advocate v Royal Bank of Scotland should not be followed. Although reference was made to the fact that in subsequent cases it was conceded but not decided that the reasoning in the Lord Advocate case applied to an inhibition not followed by adjudication, I did not understand it to be part of the pursuer’s argument that the ratio of Lord Advocate v Royal Bank of Scotland was distinguishable with regard to inhibitions. For my part, however, I would not necessarily regard this point as settled. In his 1996 work The Law of Inhibition and Adjudication, Mr GL Gretton (as he then was) explained why the relationship between arrestment and furthcoming is not analogous to that of inhibition and adjudication. The difference is that arrestment and furthcoming are stages in a single diligence, whereas inhibition and adjudication are two different diligences; it is possible to have each without the other. Inhibition is a “freeze” diligence creating litigiosity; the inhibitor’s claim may in due course be vindicated by adjudication but equally it may not. On this basis, Gretton expressed the view (page 169) that an inhibition probably was “effectually executed diligence on the property”. It respectfully seems to me that that view has considerable force.
[24] Gretton referred (loc cit) to a possible argument that the diligence of inhibition was not effected “on” the property of the inhibitee. That argument had been developed in an article by Mr JAD Hope QC (as he then was) at 1983 SLT (News) 177, responding to an article by Mr Gretton criticising the decision in Armour and Mycroft, Petitioners (mentioned above). Mr Hope, who had appeared in that case as senior counsel for the petitioners, referred to the emphasis placed by the court in Lord Advocate v Royal Bank of Scotland on the personal nature of the right of an arresting creditor; the significance of that categorisation must now, however, be assessed in the light of the decision in Iona Hotels Ltd v Craig, discussed above. Mr Hope continued:
“…It should be noted that the argument which led to the alteration in counsel for the inhibitors’ position was directed to the phrase ‘effectually executed diligence on the property of the company’ as a whole, and that the sting in the tail of the argument, so far as the inhibitors were concerned, lay in the concluding words of the phrase. It is very difficult to see how an inhibition, which is merely prohibitory in its nature, could properly be said to be a diligence ‘on’ the property of a company.”
For my part, and with respect to the very distinguished author of the article, I do not regard the latter proposition as self-evident. One might argue, to the contrary, that it is difficult to see how inhibition, viewed as a complete diligence in its own right, freezing the inhibited company’s right to dispose of or burden any of its heritable property, could be said to be a diligence otherwise than “on” the property of the company.
[25] I need not, however, express a concluded view on this point because it was not founded upon by the pursuer. In any event it does not seem to me, in the light of the decision in Iona Hotels Ltd v Craig, that it is decisive of the parties’ rights in these proceedings. The principal opinion in that case, with which the other members of the court concurred, was delivered by Lord President Hope who did not regard the personal nature of the arresting creditor’s right as preventing it from conferring a priority over the subsequently-created floating charge, because by virtue of the arrestment the property was rendered litigious. In agreement with views expressed by Gretton (op cit), page 170 and other writers, it seems to me that the same reasoning would apply a fortiori to an inhibition registered before the creation of a floating charge. In the present case, it was argued on behalf of the defender that the characterisation of the rights established by diligence as being of a purely personal character was part of the ratio of Lord Advocate v Royal Bank of Scotland, capable of applying equally to diligence in the form of inhibition. Whether or not that is so, by analogy with Iona Hotels Ltd it does not seem to me to be decisive of the parties’ respective rights.
[26] Conversely, however, categorisation of inhibition as an effectually executed diligence on the debtor’s property does not of itself, in my view, entitle the inhibiting creditor to preference over a creditor whose floating charge is registered before the inhibition but crystallises after it. That is because inhibition strikes at future voluntary acts of the inhibitee. Crystallisation of the floating charge is not a voluntary act of the debtor company; it is carried out by the charge holder who, by virtue of section 53(7) of the 1986 Act, is put in the same position, vis à vis the inhibitor, as a fixed security holder whose security antedated the inhibition.
[27] The pursuer’s first plea-in-law is in the following terms: “The pursuers having an effectually executed diligence on the Properties are entitled to decree as first concluded for”. For the above reasons, I hold that this plea must be repelled, regardless of whether the inhibition falls properly to be categorised as an effectually executed diligence on the two houses owned by the defender.
The second issue: post-inhibition advances
Submission for the pursuer
[28] The pursuer’s alternative argument did not depend upon the proper construction of the phrase “effectually executed diligence”, but was based instead upon treating post-inhibition advances by a floating charge holder as analogous to diligence effected prior to creation of the floating charge. As I noted earlier in this opinion, until the change in the law effected by the Bankruptcy and Diligence etc (Scotland) Act 2007, one of the effects of inhibition was to confer a preference on the inhibiting creditor in respect of debts contracted after registration of the inhibition. The inhibition in the present case pre-dated the commencement date of the change in the law and accordingly benefits from such preference. It was submitted that there was no logical reason why a heritably secured debt was in a better position in this regard than any other debt. It had to be borne in mind that until 1970, heritable securities could not, by virtue of the Bankruptcy Act 1696, secure future advances. The conveyancing solution to this difficulty was the ex facie absolute disposition. In Union Bank of Scotland v National Bank of Scotland (1886) 12 App Cas 53, it was held that the security of a disponee under an ex facie absolute disposition did not extend to advances made after the disponee had received intimation that the disponer’s reversionary right had been assigned in security to another creditor. On this authority, Graham Stewart, Law of Diligence (1898) expressed the view (at page 565) that intimation of an inhibition to the disponee would prevent the disponee making further secured advances, but noted that the question had never arisen for decision.
[29] Unlike the older forms of heritable security, the standard security introduced by the Conveyancing and Feudal Reform (Scotland) 1970 was capable of securing future advances. The 1970 Act made no express provision for the ranking of post-inhibition advances by a standard security holder and there had been no judicial consideration of the point. The pursuer accordingly founded upon the views expressed by Gretton (op cit, pages 151-4 and 171), citing Graham Stewart in support, (i) that post-inhibition advances should be treated as unsecured as between a standard security holder and an inhibiting creditor, and (ii) that the same considerations applied in the case of a floating charge. A tentative view to the same effect was expressed by Maher and Cusine, The Law & Practice of Diligence (1990) at para 9.25.
[30] The pursuer further submitted that the foregoing analysis was supported by three propositions derived from the decision in Iona Hotels Ltd v Craig, namely (i) that where subjects are litigious at the time when a floating charge is created, the granting of the charge will not prejudice the rights of the creditor whose diligence rendered the subjects litigious; (ii) that in assessing the interaction of an inhibition with a floating charge it was appropriate to have regard to the interaction, in a parallel scenario, of an inhibition with a fixed security; and (iii) that the absence of express statutory provision for a particular situation did not lead to the conclusion that the floating charge was to prevail over diligence; instead, reference required to be made to the common law. In the present case the inhibition had rendered the property litigious. The debts incurred through subsequent advances by the bank were to be regarded as voluntary acts, so the reasoning in Iona Hotels Ltd, based on an analysis of the common law consequences of diligence, applied.
Submission for the defender
[31] On behalf of the defender it was submitted that preferences among creditors were determined entirely by application of the ranking provisions in section 60 of the 1986 Act. Once persons falling within the categories listed sequentially in section 60(1) had been paid in full, the floating charge holder was entitled to be paid before anyone else. The omission from section 60(1) of any express reference to an inhibiting creditor, far less to post-inhibition advances, was because diligence of all kinds was dealt with exhaustively by the category in section 60(1)(b), ie persons who have effectually executed diligence on any part of the company’s property. If the pursuer did not fall into that category – which he did not – then he did not rank in preference to the defender in respect of any part of the debt secured by the floating charge. It was accepted that in the case of a fixed security, the legal effect of an inhibition was to give the inhibiting creditor priority over post-inhibition advances. It did not follow that the same applied to a floating charge, however logical and desirable it might have been to make statutory provision to that effect. The purpose of what is now section 60(1) was described in Scottish Law Commission Report no 14 on the 1961 Act (at para 66) as being “to have a clear statement of the receiver’s duties as to distribution of monies received by him”. The section was intended to provide, and did provide, an exhaustive statement of those duties and was not to be supplemented by the common law. The present situation was distinguishable from that in Iona Hotels Ltd.
Decision
[32] In my opinion the argument for the pursuer is to be preferred. It was conceded by the defender, correctly in my view, that inhibition conferred priority over post-inhibition advances made by a fixed security holder. I understood that concession to relate to the law applicable to the circumstances of the present case, ie as it stood prior to the 2007 amendment. There is, however, no provision to that effect in the legislation concerning standard securities. It depends upon the common law of inhibition, as applied to circumstances which could not have occurred before 1970 when it first became possible to grant and receive security for future advances. In my opinion the position is no different as regards floating charges. The relevant effect of inhibition, namely to render the inhibitee’s heritable property litigious, is the same. The significance for present purposes of the decision of the court in Iona Hotels Ltd is that it clearly established that diligence can be effective against the holder of a floating charge otherwise than by virtue of falling within section 60(1)(b) of the 1986 Act as effectively executed diligence on the property of the company.
[33] I see no reason to distinguish between arrestment and inhibition in this respect. Indeed it seems to me that an analysis based upon litigiosity is more soundly based in relation to inhibition than it is in relation to arrestment: see eg the discussion of the Lord Advocate and Iona Hotels cases in Scottish Law Commission Report no 164 on Diligence on the Dependence and Admiralty Arrestments (1997) at paras 9.10-9.19. As I have already observed, rendering the defender’s heritable property litigious at the time when the inhibition became effective did not give the pursuer a general preference over the charge holder when the charge subsequently crystallised, because the crystallisation was not a voluntary alienation by the defender. It did, however give a preference over post-inhibition advances because the “second effect” of the inhibition, as the law then stood, was to confer priority on the pursuer as inhibiting creditor over such advances. The fact that those advances were secured by a floating charge, whose effectiveness as against all other creditors was unaffected by the inhibition, did not in my view prevent the operation of the common law of inhibition to the benefit of the pursuer.
[34] I record that in relation to the second issue, the pursuer advanced a fall-back argument that if it were necessary to find a basis within the terms of section 60(1)(b) for the contention that post-litigation advances were excluded from the charge holder’s preference over the inhibitor, such a basis could be found in the reference at the end of the subsection to “the debt secured by the floating charge”. It was submitted that if, in a question between the floating charge holder and the inhibitor the receiver was bound to satisfy the inhibitor’s debt before making payment to the charge holder in respect of post-inhibition advances, it could not be said that those advances constituted a debt “secured” by the floating charge. I would not have been inclined to accept this submission. I agree with the defender’s observation that this would suggest a very counter-intuitive drafting technique in which most categories of ranking are set out expressly and sequentially, leaving a further freestanding category to be implied from the words at the end of the subsection. It would also be inaccurate to describe the post-inhibition advances as not being debt secured by the floating charge: they are secured in every respect except for being subject to the priority of the inhibitor. The pursuer’s success in the present action is not, for the reasons that I have already given, dependent upon falling within the wording of section 60(1).
Disposal
[35] The pursuer’s second plea-in-law is as follows: “Esto the pursuers do not have an effectually executed diligence on the Properties (which is denied), all debts incurred by the Company on or after 25 September 2006 being subject to the inhibition in favour of the pursuers, the pursuers are entitled to decree as second concluded for”. It seems to me that the pursuer is entitled to have a plea sustained in more or less these terms. However, in accordance with parties’ request, I shall put the case out by order to discuss the precise terms of my interlocutor. In the meantime I wish to express my gratitude to all counsel for their very thoroughly researched and clearly presented arguments. Questions of expenses are reserved.