UK ACORN FINANCE LIMITED AGAINST CHARLES ALEXANDER SMITH
2014SCBAN25
SHERIFFDOM OF GRAMPIAN, HIGLAND AND ISLANDS AT BANFF
Judgment
of
Sheriff Philip Mann
in causa
UK Acorn Finance Limited, a Company incorporated under the Companies Acts and having its registered office at Acorn House, Hoppers Close, Isleport Business Park, Highbridge, Somerset TA9
Pursuer
against
Charles Alexander Smith, an individual residing at Fairview, Fishrie, Turriff
Defender
Act: Daley, Solicitor
Alt: Stalker, Advocate
Banff 14 July 2014
The Sheriff, having resumed consideration of the debate in this cause, repels the defender’s preliminary plea number 1; on joint motion, allows parties a proof of their respective averments before answer of the defender’s preliminary plea number 2 and continues the cause to 31 July 2014 at 10:00 a.m within Banff Sheriff Court, Low Street, Banff as a procedural hearing to ascertain a suitable date for the same; reserves meantime the question of expenses of the debate on 5 June 2014 and appoints parties to be heard thereon at the foregoing hearing.
Sheriff Philip Mann
Note
1. Introduction
1.1 This is an action in which the pursuer, as creditor in a standard security over agricultural property granted in its favour by the defender, has two craves. Firstly, it seeks a declarator that the defender has failed to make payment on demand of the principal sum and interest due to it and secured by the standard security; that the defender is thereby in default within the meaning of standard condition 9(1)(a) of the standard security; and that the pursuer is entitled to exercise all of the remedies of a heritable creditor on the defender’s default by virtue of the Conveyancing and Feudal Reform (Scotland) Act 1970. Secondly, it seeks ejection of the defender from the security subjects in terms of section 5 of the Heritable Securities (Scotland) Act 1894.
1.2 In terms of the standard security, which I shall hereafter refer to as “the first standard security”, the defender undertook to the creditor on written demand to pay or discharge “the indebtedness”. “Indebtedness” is defined as being, inter alia, all monies and obligations due by the defender, or the firm of which he is a partner, to the creditor in any manner. The standard security thus secures the personal obligation to repay a sum of money contained in a separate contract between the pursuer on the one hand and the defender and his firm on the other hand.
1.3 The pursuer granted in favour of a third party, Connaught Administration Services Limited hereinafter referred to as “Connaught”, a standard security over the first standard security to secure advances made to it by Connaught. This standard security, which I shall refer to as “the second standard security”, included an assignation in favour of Connaught of the personal obligation contained in the separate contract, the personal obligation in which is secured by the first standard security. There has been no assignation to Connaught of the first standard security.
1.4 The defender having failed to repay the money in terms of the personal obligation, the pursuer now seeks to enforce the first standard security. It has served a calling up notice on the defender which the defender has failed to comply with. It is that failure which the pursuer founds upon in this action.
1.5 The parties are in dispute as to whether or not the pursuer has title to sue in this action.
1.6 On 5 June 2014 I heard a debate in terms of the defender’s plea in law 1, asserting no title to sue, supported by his rule 22 note number 12 of process. The pursuer was represented by Mr Stalker, advocate. The defender was represented by Mrs Daley, solicitor.
2. The Debate
2.1 Parties took me through the terms of the first and second standard securities, the separate contract and various sections of the Conveyancing and Feudal Reform (Scotland) Act 1970.
2.2 Mrs Daley’s point was a short one. The first standard security and the separate contract containing the defender’s personal obligation fell to be read together. The personal obligation was to pay to the pursuer but the pursuer had assigned that obligation to Connaught by way of the second standard security. As a consequence, said Mrs Daley, there was no longer any debt due to the pursuer. In the Stair Memorial Encyclopaedia 20-46 it was stated on the authority of Stair Institutions III.I.6:
“A contractual right in security over an incorporeal moveable is usually constituted by a written instrument known as an assignation. The effect of an assignation by A to B followed by its intimation to C (the debtor in the right of property which is the subject of the assignation) is to divest A of the creditor's right in the property and vest it in B.”
2.3 Mrs Daley maintained that if there was no debt due to the pursuer there remained nothing secured by the first standard security and thus the pursuer could not have had the right to serve the calling up notice. Therefore, it had to follow that the pursuer had no title to sue in this action and the action fell to be dismissed.
2.4 Mrs Daley submitted that for the pursuer to have title to sue, the pursuer would need a retrocession of the personal obligation. If the personal obligation were to be retrocessed the pursuer would be entitled to sue for the remedies it sought but this particular action would still fall to be dismissed and the pursuer would need to start again with a new action.
2.5 Mr Stalker’s argument in reply was that the debt still existed although it was owed, now, not to the pursuer but to Connaught. The statutory rights in terms of the standard security by virtue of the 1970 Act were distinct from the common law rights in terms of the personal obligation contained in the separate contract between the pursuer and the defender.
2.6 The case of Watson v Bogue 2000 S.L.T. (Sh Ct) 125 was authority for the proposition that the statutory rights and the common law rights could be held by two different parties. The pursuer remained the creditor in the first standard security because the real right in that standard security had not been assigned to Connaught by the second standard security. As creditor in the first standard security the pursuer had the right to serve the calling up notice and to enforce the security which was vested in it. Accordingly, the pursuer had title to sue in this action.
2.7 During the course of his argument Mr Stalker referred to various textbooks for a general overview of the law relating to standard securities. However, none of these describe the circumstances which pertain in this case, so far as I can see, and so I have found them to be of only limited assistance.
3. Discussion and Decision
3.1 The operative clause of the first standard security, clause 2, is in the following terms:
“The Debtor undertakes to the Creditor on written demand to pay or discharge the Indebtedness when the same is due and payable and in security of the Indebtedness the Debtor grants a standard security in favour of the Creditor over the property…”
Mrs Daley maintained that the first standard security was a hybrid of form A and form B in schedule 2 to the 1970 Act. This was because clause 2 contained an undertaking to pay which made it a form A security; whilst at the same time it secured the “indebtedness” and by extension, by way of the definition clause, the personal obligation contained in the separate contract, which made it a form B security. I did not understand Mrs Daley to make any specific point about this but, in any event, the only consequence of the standard security being in one form or another is that if it is in form A certain things are imported, by virtue of section 10 of the 1970 Act, into the obligation to pay contained in the standard security. The question whether the standard security is in one form or another or is a hybrid has no relevance to the determination of the dispute between the parties in this case.
3.2 What is of crucial relevance to the determination of the dispute is to observe that what is secured by the first standard security is not the obligation to discharge the “indebtedness” but the “indebtedness” itself. As Mrs Daley correctly observed, “indebtedness” is defined in such a way as to include the personal obligation contained in the separate contract. Thus the first standard security secures the personal obligation contained in the separate contract.
3.3 The personal obligation in the separate contract is set out in clause 5.1 thereof which is in the following terms:
“… the term of the Loan is for 9 months from the Drawdown Date and the Borrowers shall repay the loan in full ……….. upon the expiry of 9 months from the Drawdown Date.”
Mrs Daley observed that clause 5.1 does not specify the person to whom repayment is to be made but in my view, and I think that this was accepted by Mrs Daley, it is a natural inference that that person must be the pursuer. In terms of clause 12.2 of the separate contract the “Lender”, defined in the preamble as being the pursuer, is entitled to assign or otherwise transfer all or part of its rights under the contract. Therefore, the personal obligation is in favour of the pursuer and its assignees.
3.4 Mrs Daley may be right to say that there is no longer any debt due to the pursuer but the personal obligation undertaken by the defender in the separate contract is owed to the pursuer and its assignees. The obligation is to repay money advanced as a loan by the pursuer. It is the same obligation after the assignation in the second standard security as it was before it except that it is owed now to the assignee of the pursuer. It cannot be the case that the obligation has failed to survive the assignation. Mrs Daley effectively acknowledged this by asserting that a retrocession of the obligation would cure the pursuer’s lack of title. There could be no retrocession of the obligation unless it were the same obligation.
3.5 By the express terms of section 11(1) of the 1970 Act the first standard security vested in the grantee, the pursuer in this case, a real right in security for the performance of the contract to which the security relates. This is a statutory right governed by the provisions of the Act. It is in addition to the right at common law to obtain a decree for payment which can be enforced, ultimately, by the procedure of sequestration. It is a right that carries with it a preference, in competition with other creditors, in favour of the creditor in the standard security. Such a right does not exist at common law. It is different from the right at common law. It can be dealt with separately from the right at common law. It has been dealt with separately in this case.
3.6 Even a common law right in security is distinct from the right created by the personal obligation which is secured. This is confirmed in the Stair Memorial Encyclopaedia volume 20 paragraph 1(1)(a)1 where, on the authority of W M Gloag and J M Irvine Law of Rights in Security (1897) pp 1, 2, it is stated in relation to rights in security over moveables:
“A right in security has been succinctly described as 'any right which a creditor may hold for ensuring the payment or satisfaction of his debt, distinct from, and in addition to, his right of action and execution against the debtor under the latter's personal obligation'. A right in security is always an accessory right, its essential purpose being to provide the favoured creditor with a safeguard against the personal failure of the debtor, notably in the event of his insolvency.”
3.7 The assignation in favour of Connaught transferred the common law rights in the personal obligation to them. It did not transfer to them the statutory rights of enforcement provided for by the 1970 Act. Following the assignation of the personal obligation by the pursuer to Connaught the latter are now vested in the common law rights in relation to it. There can be no vesting of rights in something that does not exist. Therefore, again, the personal obligation must have survived the assignation. Connaught has the right at common law to enforce performance of the contract giving rise to the personal obligation. The defender has as much an obligation to perform his part of the contract after the assignation of the personal obligation to Connaught as he had before it. By section 11(1) of the Act the pursuer has a real right in security for that performance. It is not stated to be a prerequisite of that right that the pursuer remain as creditor in the personal obligation. All that is required is that it remain as creditor in the standard security.
3.8 The assignation was in security of the pursuer’s obligation to repay monies advanced to it by Connaught. It seems to me to be entirely logical that the pursuer should retain the rights provided by the first standard security by virtue of the 1970 Act. In that way it has a powerful means of ensuring that it can meet its obligation to repay to Connaught. From Connaught's point of view it is right that a procedure whereby the pursuer can meet its obligation to them, and any attendant costs, should be the responsibility of the pursuer.
3.9 In Watson v Bogue the standard security was assigned. In that case it was held that the assignation of the standard security was not effective to assign the personal obligation which it secured because the personal obligation was not expressly mentioned in the document of assignation. As a result the standard security was ineffective to secure payment to the assignee. But that does not mean that for the standard security to be effective to any extent the rights in the standard security require to be vested in the same person who holds the rights in the personal obligation. In Watson v Bogue the creditor in the standard security was in competition with the creditors of the creditor in the personal obligation. The correct analysis of that situation is that the standard security would have been effective to enforce performance of the contract to which it related but that it was ineffective to secure payment to the creditor in the standard security. That is because performance of the contract would have involved payment to the creditor in the personal obligation and thus to his trustee in sequestration. In this case, too, the rights in terms of the personal obligation and the rights in terms of the first standard security are held by different parties. Enforcement of the standard security will result ultimately in payment not to the pursuer but to Connaught as creditor in the personal obligation.
3.10 Mrs Daley, rightly, did not seek to argue that the pursuer is not the creditor in the standard security. All of the rights of enforcement contained in the 1970 Act are exercisable by the creditor in the standard security. Thus, the pursuer had the right to serve the calling up notice which gave it the foundation for this action. A calling up notice in the mandatory form prescribed by schedule 6 to the 1970 Act requires payment not to the creditor in the standard security but simpliciter. Thus, the defender would comply with such a notice by payment to Connaught not to the pursuer. That would be entirely logical as it would serve to satisfy the pursuer’s obligation to Connaught. There was no suggestion that the calling up notice was other than in the statutory form and Mrs Daley made no issue of it.
3.11 It should also be noted, as was pointed out by Mr Stalker, that clause 5.5 of the second standard security provides that the first standard security be assigned by the pursuer to Connaught in certain circumstances relating to default by the pursuer in the second standard security. Given that the pursuer could not be divested of the creditor’s right in the personal obligation without intimation of the assignation to the defender, it was a necessary part of Mrs Daley’s argument that there was valid intimation of the terms of the second standard security to the defender by virtue of its registration in the Land Register. Accordingly, the defender cannot claim to be ignorant of the true position relating to the assignation of the personal obligation to Connaught and its inter-relationship with the rights of the creditor in the first standard security.
3.12 Mrs Daley did not make any attack on the pursuer’s title to sue in respect of section 5 of the Heritable Securities (Scotland) Act 1894. That section provides that where a creditor desires to enter into possession of the lands disponed in security and the proprietor thereof is in personal occupation of the same, the creditor may take proceedings for ejection. Mrs Daley was right not to make such an attack because the expression “a creditor” must be, or include, a reference to the creditor in the standard security.
3.13 I am satisfied that the pursuer has both an interest and a title to sue in this action and the defender’s preliminary plea number 1 must necessarily be repelled.
4. Further Procedure and Expenses
4.1 The defender also has a preliminary plea number 2, which is a general plea to relevancy and specification. Parties were agreed that in the event that I found in favour of the pursuer it would be appropriate to allow parties a proof of their respective averments before answer of that preliminary plea. I have made provision for that in the interlocutor.
4.2 Parties were also agreed that I should reserve the question of expenses, including the question of sanction for the employment of counsel. I have provided accordingly in the interlocutor.