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FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2017] CSIH 23

CA222/14

Lord President

Lord Menzies

Lord Brodie

Lord Drummond Young

Lord Malcolm

 

OPINION OF LORD CARLOWAY, the LORD PRESIDENT

in the Reclaiming Motion by

DAVID MacMILLAN

Pursuer and Respondent

against

T LEITH DEVELOPMENTS LTD (in receivership and liquidation)

Defenders and Reclaimers

Pursuer and Respondent:  McBrearty QC, Roxburgh; Kennedys

Defenders and Reclaimers:  Sellar QC, Parratt; HBJ Gateley

10 March 2017

Introduction
[1]        Section 55(3)(a) of the Insolvency Act 1986 provides that the powers of a receiver over the property of a company which is subject to a floating charge are “subject to the rights of any person who has effectually executed diligence on all or any part of the property” prior to the receiver’s appointment.  Section 60(1)(b) provides that the moneys ingathered by the receiver should be distributed to the holder of the floating charge in satisfaction of the debt secured by the charge subject to the rights of “all persons who have effectually executed diligence on any part of the property”. 

[2]        This case concerns, first, whether the words “effectually executed diligence” encompass an inhibition.  This depends upon whether Lord Advocate v Royal Bank of Scotland 1977 SC 155, which determined that an arrestment was not such a diligence, was correctly decided and, in any event, applicable to an inhibition by analogy.  If Lord Advocate v Royal Bank of Scotland did not correctly interpret the words, the issue is whether they should nevertheless be so interpreted now.  This involves a consideration of the application of the canon of construction, enunciated in Barras v Aberdeen Steam Trawling and Fishing Co 1933 SC (HL) 21, where a statute post-dates a judicial construction of identical words in earlier legislation.

[3]        Secondly, the case concerns whether, in a competition between a floating charge holder and an inhibitor, the charge provides security for debts incurred after the recording of the inhibition.  This requires an analysis of the common law of inhibition and its interaction with the statutory schemes applicable to receivership and insolvency.  In all of this, it is recognised that neither the statutory scheme relative to receiverships nor the common law of inhibition is likely to be applicable in many situations arising in the future, standing the effective abolition of: (i) the appointment of receivers on charges created after the coming into force of section 250 of the Enterprise Act 2002 and; (ii) the preference given to inhibitors by section 154 of the Bankruptcy and Diligence etc (Scotland) Act 2007.

 

Facts
[4]        The defenders were incorporated in August 2000, with a view to purchasing and developing plots of land at Ayr Road, Glasgow.  On 30 November 2000 they granted a floating charge in favour of the Clydesdale Bank. It was registered on the same day.  By missives dated May and June 2005 the pursuer and his late wife, for whom he also sues as executor, bought one of the plots.  The defenders built a house on the plot and the pursuer and his wife took entry in July 2006.  In September 2006 the pursuer and his wife raised proceedings against the defenders at Paisley Sheriff Court craving damages for breach of contract arising from the construction of the house.  A Notice and Letters of Inhibition on the dependence of the action were registered respectively on 25 September and 5 October 2006.  On 30 November 2010 decree by default was granted for £333,993.42 plus interest and expenses.

[5]        At the time of the inhibition, the defenders’ indebtedness, as secured by the charge, was in excess of £1.8m.  This was substantially reduced in May 2008, when the pursuer and his wife agreed to a partial discharge of the inhibition relative to another of the plots.  By June 2008, the indebtedness had been reduced to £550,000.  Receivers were appointed by the Bank in February 2011.  Three months later a provisional, and subsequently an interim, liquidator was appointed upon the petition of the pursuer and his wife.

[6]        It is agreed that the whole of the debt due to the Bank as at the date of the receivership was incurred after the inhibition.  The defenders’ principal assets consist of two further plots at Ayr Road.  The pursuer seeks a declarator that the inhibition is an “effectually executed diligence” and that, when distributing the proceeds of sale of the plots, the sums due under the sheriff court decree fall to be paid to the pursuer prior to any distribution of the balance to the Bank.  In any event, the pursuer maintains that his inhibition provides him with a priority over the debt due to the Bank.

 

The Legislative History and the Commercial Judge’s Reasoning
[7]        The commercial judge traced the history of floating charges back to the Companies (Floating Charges) (Scotland) Act 1961.  At that time, receivership did not exist.  A charge only crystallised upon liquidation.  Section 1(2)(a) of the 1961 Act provided that the security then took effect subject to the rights of any person who had “effectually executed diligence on the property”.  Section 327 of the Companies Act 1948, which echoed the rule in sequestrations contained in section 108 of the Bankruptcy (Scotland) Act 1856, provided that no “arrestment or poinding” executed within 60 days of the liquidation was to be “effectual” (cf Bankruptcy (Scotland) Act 1913, s 10). 

[8]        The Companies (Floating Charges and Receivers) (Scotland) Act 1972 introduced receivership.  Section 1(2)(a) of the 1961 Act was re-enacted (with the same numbering).  Section 15(2)(a) of the 1972 Act provided that the receiver’s powers were subject to the rights of those who had “effectually executed diligence” on the property.  Section 20(1) gave such a person a priority in the distribution of ingathered funds along with those with a prior heritable security.  The Companies Act 1985 re-enacted the 1972 Act as sections 463(1)(a), 471(2)(a) and 476(1)(b), with the latter two sections becoming in turn sections 55(3)(a) and 60(1)(b) of the Insolvency Act 1986.

[9]        The commercial judge recognised that Lord Advocate v Royal Bank of Scotland (supra) was authority for the proposition that an arrestment, without a furthcoming, was not an “effectually executed diligence” for the purposes of what was then section 20(1) of the 1972 Act.  He noted that, whilst it had been the subject of some academic criticism, it had not been the subject of reconsideration.  Its correctness had been accepted in Iona Hotels v Craig 1990 SC 330 which held that, although only a step in diligence, arrestment rendered subjects litigious, with the result that the debtor could not defeat the arrester’s claim by a subsequent voluntary deed, including the execution of a floating charge.  The judge, applying dictum in R v Muhamad [2003] QB 1031 (Dyson LJ at para 24), reasoned that, where a statutory provision had been re-enacted, he should be “more than ordinarily cautious” in deciding not to follow a decision of a higher court upon repealed, but re-enacted, legislation.  The legislation which had been considered in Lord Advocate v Royal Bank of Scotland had twice been re-enacted, albeit by way of consolidation.  The judge determined that he was bound to follow Lord Advocate v Royal Bank of Scotland.  He rejected a submission that the “technical” approach in that case had been undermined by that taken in Sharp v Thomson 1997 SC (HL) 66.

[10]      Notwithstanding his view that Lord Advocate v Royal Bank of Scotland was binding upon him, and the absence of any argument that its ratio extended equally to an inhibition not followed by an adjudication, the commercial judge, adopting the reasoning in Gretton (Inhibition and Adjudication (2nd ed) 169), doubted the applicability of the analogy.  He did not agree with the view of Lord Hope (as he was to become; 1983 SLT (news) 177) that an inhibition could not be said to be a diligence “on the property of the company”, given its solely prohibitory nature.  The judge, following Iona Hotels v Craig (supra) and Gretton (at 170), determined that the personal nature of an inhibition did not prevent it from having a priority over a subsequently executed floating charge.  However, he held that an inhibition only affected future voluntary acts.  Since the floating charge in this case pre-dated the inhibition, neither it, nor its subsequent crystallisation, were affected by the inhibition.  On this basis the judge repelled the pursuer’s first plea-in-law that he had an effectually executed diligence and was entitled to a declarator to that effect.

[11]      The commercial judge noted that the defenders had correctly conceded that, in terms of the common law applicable in this case (and superseded by the prospective 2007 Act changes), inhibition conferred a priority over post-inhibition advances made by a fixed security holder.  The position relative to advances made by a floating charge holder must, he reasoned, be the same.  The significance of Iona Hotels v Craig (supra) was that a diligence could be effective against a charge holder even if it was not categorised as “effectively executed” in terms of section 60(1)(b) of the 1986 Act.  In that context, the effects of arrestment and inhibition were indistinguishable.  Thus, although the litigiosity created by the inhibition did not create a general preference when the charge crystallised (because the latter was not a voluntary act), it did create a preference over post-inhibition advances, even if, in a competition with other creditors, those would remain secured by the charge.  The judge sustained the pursuer’s second plea-in-law and granted declarator that all post-inhibition debts were affected by the inhibition.

 

Submissions
Pursuer
[12]      It was agreed that the pursuer would address the court first in support of his cross ground of appeal to the effect that the commercial judge had erred in determining that an inhibition was not an “effectually executed diligence” in terms of section 55(3)(a) of the Insolvency Act 1986.  The pursuer’s primary position was that Lord Advocate v Royal Bank of Scotland (supra) had been wrongly decided.  An inhibition struck at “such ‘debts and deeds’ voluntarily granted by the debtor after the date of the inhibition as affect or may affect his heritage to the prejudice of the inhibitor” (Gretton: Inhibition and Adjudication at 1)).  It did not provide the inhibitor with a real right, but it did have two effects.  The first was to prohibit subsequent debts and deeds which might diminish the value of the debtor’s heritable estate (Bell: Commentaries (7th ed) 2, 139; Stewart: Diligence at 551, 559).  The second was that any debts contracted after the inhibition were postponed to the claims of the inhibiting creditor in any process of realisation and distribution (Bell: Commentaries 2, 414; Baird & Brown v Stirrat’s Tr (1872) 10 M 414).  The inhibiting creditor ranked on the heritage as if there had been no post-inhibition creditors (Bell: Commentaries 2, 413).

[13]      The majority in Lord Advocate v Royal Bank of Scotland had adopted too technical an approach in holding that arrestment, being only a step in a diligence which required to be completed by a furthcoming, could never be regarded as “effectually executed”.  It had been accepted in subsequent cases (Armour and Mycroft Petnrs 1983 SLT 453; Taymech v Rush & Tompkins 1990 SLT 681) that, by analogy, this reasoning also applied to an inhibition which had not been followed by an adjudication.  The minority in Lord Advocate v Royal Bank of Scotland had held that “effectually executed” simply meant that the arrestment had been duly carried out.  Neither the majority nor the minority construction was correct.  Rather, there was a “third way”.  This was that “effectually executed diligence” meant any diligence not rendered ineffectual by the subsequent liquidation of the company within the statutory 60 day period (Insolvency Act 1986 s 185; see Wilson: Prior arrestment of funds and floating charges 1976 JBL 257, criticising the Lord Ordinary’s decision under reference to Johnston v Cluny Trs 1957 SC 184; Wortley: Squaring the Circle 2000 JR 325 at 340).  Alternatively, the ratio in Lord Advocate v Royal Bank of Scotland was not applicable to inhibitions, which were a complete diligence without the necessity of adjudication.

[14]      In order to interpret the statutory wording, the court required to proceed through a number of stages.  The first was to identify the relevant criteria.  The second was to select the decisive “interpretive factors”.  The third was to weigh these factors (Bennion: Statutory Interpretation (6th ed) 504).  The correct meaning was that which Parliament had intended.  This was ascertained by looking at the particular words in the context of the statute as a whole in its setting (R v Environment Secretary, ex p Spath Holme [2001] 2 AC 349 at 396-8).  If there was no clear meaning, then that which gave effect to the legislative purpose was to be preferred (ibid). 

[15]      The court could look at Hansard (Standing Committees - Companies (Floating Charges) (Scotland) Bill – 20 June 1961) in gauging the intention behind the 1961 Act (Pepper v Hart [1993] AC 593).  Forbes Hendry MP, the promoter of the Bill, had referred to “effectually executed diligence” as diligence executed more than 60 days before liquidation (cols 15-16).  A person executing such diligence was not to be prejudiced (cols 12 -13).  Such a person “very properly” stood to benefit and would not be affected by a pre-existing floating charge which had not crystallised on, at that time, liquidation (col 16).  The Parliamentary intention behind section 1(2)(a) of the 1961 Act had been to make it clear that priority was to be afforded to diligences executed outwith the 60 day period, even when a floating charge was in existence.

[16]      The word “effectual” had been used to describe arrestments and poindings outwith the 60 days (Companies Act 1948 s 327(1)(a)).  It had been considered in the equivalent provision in sequestrations (Bankruptcy (Scotland) Act 1856 s 108) and held to mean that the diligence secured the creditor a preference (Dow & Co v Union Bank (1875) 2 R 459 at 462).  Thus a creditor arresting or inhibiting would secure such a preference (Commercial Aluminium Windows v Cumbernauld DC 1987 SLT (Sh Ct) 91).

[17]      In their 1970 Report (on the 1961 Act, no 14), the Scottish Law Commission had recommended the introduction of receivership.  The Bill annexed to the Report had been framed in a manner which made the powers of the receiver subject to those persons who had “effectually executed diligence” (see para 57).  This wording, which was adopted in the 1972 Act, had been derived from the 1961 Act.  The Companies Act 1985 and the Insolvency Act 1986 had consolidated the legislation, using the same wording, without further discussion (see SLC and Law Commission Joint Reports: Amendment of the Companies Acts 1948-1983 (nos 83 and 126) at 1; Further Amendments of the Companies Acts 1948-1983 (nos 87 and 136 at 1).  The Bankruptcy (Scotland) Act 1985 (s 37(2), Sch 7 para 21) read the new inclusion of inhibitions in the 60 day rule into the liquidation regime (Companies Act 1985 s 623; Insolvency Act 1986 s 185) and there were other amendments to bring Scots law into line with that in England and Wales.  However, the provisions under consideration were unchanged.  Thus the intention behind the wording of sections 55(3)(a) and 60(1)(b) of the Insolvency Act 1986 must be taken to have been the same as the identical wording in the 1961 legislation.

[18]      The court now had the additional benefit of the approach to legislation involving floating charges (1985 Act s 462(1)) in Sharp v Thomson 1997 SC (HL) 66.  The court (at 77 and 82) had criticised the view that the words “property and undertaking” were to be construed according to the law relating to heritable property and securities.  Rather they ought to be interpreted in a practical manner according to the ordinary use of language, having regard to the way in which floating charges were intended to operate.  Given that such charges were alien to Scots law at the time of their introduction, a construction which restricted the rights of the charge holder was to be preferred to any wider view impinging on the rights of third parties.  The court ought not to construe the provisions in such a way as to provide a receiver with a right which a liquidator did not have.

[19]      The construction of the majority in Lord Advocate v Royal Bank of Scotland failed to have regard to the similar wording in the earlier statutes.  It deprived what was a saving provision almost entirely of any effect.  Diligence on the dependence would have limited value where the debtor had already granted a floating charge.  Different priorities would arise in receiverships and liquidations.  If there was no receivership but a liquidation, then, despite the identical use of the words “effectually executed diligence”, the diligence would only be affected if executed within the 60 days.  This gave a receiver a better right than a liquidator to nullify the effect of any diligence.  In contrast to a liquidation, the construction gave the charge holder the benefit of an arrestment without paying the costs.  It produced anomalies in relation to arrestments, assignations and charges (see Sim: The receiver and effectually executed diligence 1984 SLT (news) 25; Wilson: Effectively Executed Diligence 1978 JR 253; Wortley (supra))

[20]      In the event of ambiguity, one view was that any precedent interpreting prior legislation had to be applied in construing a statute containing the same wording (Barras v Aberdeen Steam Trawling and Fishing Co (supra) at 27).  This was not a canon of “absolute obligation” (ibid at 50; Haigh v Charles W Ireland 1974 SC (HL) 1 at 40; R v Chard [1984] AC 279).  The court was not prevented from reversing an earlier judicial error where legislation had been reworked (Farrell v Alexander [1977] AC 59 at 74-5, 89, 91; A v Hoare [2008] 1 AC 844 at para 15; cf Lowsley v Forbes [1999] 1 AC 329; R (N) v Lewisham LBC [2015] AC 1259 at paras 27, 36 and 52-3, cf paras 83-84, 142-4, 147-8, 167-8; Haile v Waltham Forest LBC [2015] AC 1471 at paras 72 and 75; David T Morrison & Co v ICL Plastics 2014 SC (UKSC) 222 at paras 35 and 56).  The Barras principle was no more than an aid to construction. In this case, the SLC reports leading to the 1985 consolidation and the 1986 Act had made no mention of Lord Advocate v Royal Bank of Scotland and there had been no Parliamentary discussion either. 

[21]      If the court accepted that Lord Advocate v Royal Bank of Scotland had been wrongly decided, that was a strong factor supporting the conclusion that it should not be followed, irrespective of the re-enactment of the statutory provisions and any argument based upon certainty and settled practice.  It was not clear that the law was settled.  Prior to the 2007 Act changes, the Keeper of the Registers would record a disposition of property subject to an inhibition, but would not grant any title indemnity.

[22]      In any event, the ratio in Lord Advocate v Royal Bank of Scotland relative to arrestment did not apply to inhibitions.  This had not been argued by the pursuer before the commercial judge, but he had found it an attractive proposition.  He had considered that inhibition was a completed diligence rather than a step.  The contrary had been conceded in Armour and Mycroft Petnrs (supra) and Taymech v Rush & Tompkins (supra).  Gretton (Inhibition and Adjudication at 169) had expressed the view that an inhibition probably was an “effectually executed diligence” on the debtor’s property (see Bankruptcy (Scotland) Act 1985 s 37(2)).  An inhibition was a “freeze diligence” on property.  The reasoning in Menzies v Murdoch (1841) 4 D 257 (at 261 and 264-5) to the effect that an inhibition was not a complete diligence was particular to the terms of the 1661 Act under consideration in that case.

[23]      Even if Lord Advocate v Royal Bank of Scotland had been correctly decided, the common law provided that, in a competition with an inhibiting creditor, a holder of a pre-existing security could not claim a preference over debts incurred after the inhibition.  An inhibition registered prior to the coming into force of the 2007 Act provided a ranking prior to that of a subsequent floating charge (Gretton: Inhibition and Adjudication 170).  This was not because it was an “effectually executed diligence”, but because it rendered the heritage litigious (Stewart: Diligence 553).  It prevented the debtor from granting deeds prejudicing the inhibitor.  Any security granted after the inhibition would be voidable (Monteith v Haliburton (1632) Mor 6947).

[24]      In terms of ranking, all debts contracted after an inhibition were postponed to it (Halifax Building Society v Smith 1985 SLT (Sh Ct) 25), even if the pre-existing security was for all debts due and to become due.  The Institutional Writers (Erskine: Institutes (Nicolson ed) I, XI, 13 (p 604); Bell: Commentaries 2, 138) described inhibition as striking at posterior debts without qualification.  There was no suggestion that a subsequent debt to a holder of a prior security would be treated differently from one to an unsecured creditor.  That was not surprising as the Bankruptcy Act 1696 had provided that no security had the effect of providing security for future debts.  In relation to sums lent after the execution of an ex facie absolute disposition, these were treated as new debts and subject to a new agreement (Union Bank of Scotland v National Bank of Scotland (1886) 14 R (HL) 1).  An inhibition would affect the reversionary interest due to the debtor (Stewart: Diligence 565).  By analogy, the principle would apply to a competition between an inhibitor and debts advanced subsequent to the inhibition but covered by an ex facie absolute disposition.

[25]      This was consistent with the general principle that an inhibiting creditor is not to be prejudiced by the future voluntary acts of the debtor; a principle to be interpreted widely (Stewart: Diligence 561).  Obtaining further advances was a voluntary act of the debtor potentially prejudicing the inhibiting creditor.  The principle would be violated if an inhibition could be defeated by post-inhibition advances (Gretton: Inhibition and Adjudiciation 151-152).  The defenders had conceded the application of the principle to standard securities and it must apply equally to floating charges.  The Conveyancing and Feudal Reform (Scotland) Act 1970 (s 9(6)) had removed the prohibition in the 1696 Act relative to future advances, but it had not provided that such advances would be treated as if advanced at the date of the security (cf the bond of cash credit; Debts Securities (Scotland) Act 1856).  There was no provision protecting post security advances from the normal effect of an intervening inhibition (Gretton: Inhibition and Adjudication 151). The 1970 Act provided (s 13(1)) that where a second standard security was granted, the preference in ranking of the first security holder was restricted to sums due at the time of the second security.  A similar provision existed where there were two or more floating charges (Companies Act 1985 s 464(5)).  The same effect would be achieved by inhibition (ibid 150-4; Maher & Cusine: Diligence para 10.24).

[26]      In Iona Hotels v Craig (supra) it was held that an arrestment served prior to the creation of a floating charge was not an effectually executed diligence.  Nevertheless, it was also determined (at 335, following Erskine: Institutes III vi 11; Stewart: Diligence 126 and Lord Advocate v Royal Bank of Scotland at 169-170) that the arrestment had rendered the arrested funds litigious.  The arresting creditor’s interest could not be defeated by the voluntary act of the debtor in incurring subsequent debt.  Section 60 of the Insolvency Act 1986 did not provide a complete code (cf Forth and Clyde Construction v Trinity Timber & Plywood Co 1984 SC 1) but was subject to common law principles.  In any event, that section referred to the receiver distributing the funds to the satisfaction “of the debt secured by the floating charge”.  An advance made subsequent to an inhibition could not be regarded as so secured.

 

Defenders
[27]      The primary contention for the defenders was that Lord Advocate v Royal Bank of Scotland had been correctly decided and that therefore the pursuer was not a person who had “effectually executed diligence” in terms of sections 55(3)(a) and 60(1)(b) of the Insolvency Act 1986.  These words had to be construed according to 10 “principles” of statutory interpretation. 

[28]      First, the words had to be interpreted in their internal and external contexts (R v Environment Secretary, ex p Spath Holme (supra) at 397).  The words ought to be given their ordinary meaning.  If they were technical legal terms, this would be presumed to be their legal meaning.  Secondly, interpretation was not an improvement process designed to remove anomalies (Stock v Frank Jones (Tipton) [1978] 1 WLR 231 at 234, 236-8).  Thirdly, context included legislative history (R v Environment Secretary, ex p Spath Holme at 397), even in a consolidation statute (ibid at 388, 406 and 410) and no matter the type of consolidation (eg that under the Consolidation of Enactments (Procedure) Act 1949).  Fourthly, context included other statutes dealing with the same subject matter (R (N) v Lewisham LBC (supra) at paras 26, 30 and 104).  Fifthly, Parliament was presumed to be aware of the legal background, but not the law as later determined (Black-Clawson International v Papierwerke Waldhof-Aschaffenburg [1975] AC 591 at 648). 

[29]      Sixthly, where Parliament had re-enacted a provision which had been the subject of judicial interpretation, the court would readily infer that it intended it to bear the judicially determined meaning (R (N) v Lewisham LBC at paras 53, 147 and 167; Barras v Aberdeen Steam Trawling and Fishing Co (supra); Haile v Waltham Forest LBC (supra) at paras 73-75; Lowsley v Forbes (supra); A v Hoare (supra).  The doubts expressed in Haigh v Charles W Ireland (supra at 40) and R v Chard (supra) related to acts consolidated under the 1949 Act (supra).

[30]      Seventhly, where a provision had been subject to judicial interpretation, which had been followed in practice for a significant period without serious problem or injustice, there was a strong presumption against reversing that interpretation (R (N) v Lewisham LBC at paras 53 and 95-7 and 148-9).  Eighthly, statements in Parliament could be used as a guide, but only if: (i) the provision was ambiguous; (ii) the statements were from a minister or promoter of the Bill; and (iii) the effect of the statements was clear (ibid at paras 391 and 398-9).  Ninthly, such statements may be of lesser weight than the other principles (ibid at 399). Tenthly, Law Commission reports could also be used as guides to interpretation (ibid at 397). 

[31]      Applying these principles, the defenders’ interpretation was the correct one.  It was common ground that the words were not clear as a matter of ordinary language.  The words were technical and legal.  “Effectually executed diligence” was not an ordinary English phrase.  The clearest guide, and first consideration for the court, was the sixth principle.  Since Lord Advocate v Royal Bank of Scotland, Parliament had used the same expression twice.  It was inconceivable that Parliament, the Department of Trade and Industry and the Scottish Law Commission would have been unware of Lord Advocate v Royal Bank of Scotland and the subsequent academic criticism.  It was accepted that the Companies Act 1985, which had been foreshadowed by the Law Commissions’ reports, and the Insolvency Act 1986 were consolidations, but the Insolvency Act 1985, which could have changed the wording in light of the criticism, was not.  There had been consultation with the Scottish Law Commission, which had been considering the terms of the prospective Bankruptcy (Scotland) Act 1985.  The Insolvency Act 1985  had made changes to both the Scottish and English regimes.  The Companies Act 1985 and the 1986 Act had not been consolidated under the 1949 Act procedure.  They could have amended the pre-existing statutory phraseology.  There had also been opportunities for amendment in the Companies Acts 1980 and 1981.

[32]      The second consideration was the seventh principle.  Between 1977 (Lord Advocate v Royal Bank of Scotland) and 1986 (Insolvency Act) there had been a large number of receiverships (eg Armour and Mycroft Petnrs (supra)).  There had been a recession.  It was very probable that there had been at least one arrestment and one inhibition in each receivership.  Lord Advocate v Royal Bank of Scotland had been applied “day in and day out”.  HM Revenue and Customs, who had been the pursuers and would have been creditors in many of the receiverships, had never subsequently sought to challenge its ratio.  Insolvency law required to be certain.  If Lord Advocate v Royal Bank of Scotland was determined to have been wrongly decided, the consequences would be striking.  Every receivership would be deemed to have proceeded on the basis of an error of law.  The money would have gone to the wrong persons.  This could result in a flood of litigation depending upon the applicable prescriptive period.

[33]      After the 1986 Act, Lord Advocate v Royal Bank of Scotland had been endorsed, albeit by concession, in Iona Hotels v Craig (supra) and Armour and Mycroft Petnrs (supra).  It had been decided in the Outer House by the specialist liquidation judge.  It had now been followed for 38 years in the commercial field of corporate insolvency (see Lord Hope in 1983 SLT (news) 177).  There was no obvious injustice in affording floating charge holders a preference and allowing unsecured creditors to lose out.  It was now far too late to impugn the authority of Lord Advocate v Royal Bank of Scotland.  This was so even if it was difficult to escape from the conclusion that its ratio gave little practical content to the statutory phraseology.

[34]      The third consideration (“fourth” in the Note of Argument) was that the defenders’ construction was confirmed by the fifth principle.  Parliament had regarded Lord Advocate v Royal Bank of Scotland as having been correctly decided.  This was not affected by statements made at the time of the 1961 Act.

[35]      What Lord Advocate v Royal Bank of Scotland had decided (at 171-2, 173-5) was that “effectually executed diligence” did not encompass any diligence which was personal in nature.  Later decisions (Iona Hotels v Craig at 332 and 335; Armour and Mycroft Petnrs; Taymech v Rush & Tompkins) had confirmed that this applied to inhibitions, which also created litigiosity.  This view was shared by the academic writers (Maher & Cusine: Diligence para 9.26; Gretton: Inhibition and Adjudication at 170); Greene & Fletcher: Receivership (3rd ed) para 2.16).  Inhibition was only a personal, and negative, diligence (Stewart: Diligence 551, 566; Gretton (supra) 1, 2, 95 and 96; Menzies v Murdoch (supra)).  It had less positive effect than arrestment.

[36]      The doubts of the commercial judge on whether Lord Advocate v Royal Bank of Scotland applied to inhibitions were unfounded.  The reasoning of the Lord Ordinary, in relation to the crystallisation of the floating charge not being a voluntary act, was not supported.  If an inhibition was an “effectually executed diligence”, it would provide the pursuer with a priority over the charge holders in relation to subsequently incurred debt. 

[37]      In relation to the pursuer’s argument that “effectually executed diligence” was referable solely to the 60 day rule, at the time of the 1961 Act, the rule had been set out in section 327 of the 1948 Act.  It was that “no arrestment ... shall be effectual” if within 60 days of a winding up.  If the pursuer was correct, the rule could have been expressed in clear terms as applying upon receivership, which it was not.  It did not have any practical application in a receivership.  The diligence would always be effectual, unless there was a liquidation.  The pursuer’s interpretation would result in diligence in a receivership being treated more favourably than in a liquidation.

[38]      The Parliamentary statements made in 1961 were not admissible to interpret sections 55 and 60 of the Insolvency Act 1986.  Such statements could not be used to undermine a settled meaning retrospectively.  In 1961, Parliament had not intended the words to apply to inhibitions, since they were not then subject to the 60 day rule.

[39]      Section 60(1) of the 1986 Act provided instructions to a receiver on whom to pay.  Those not on the list, which included those who had “effectually executed diligence”, did not get paid.  The section did not recognise the common law effect of an inhibition.  The list of payees was exhaustive.  Section 60 was an exclusive statutory code (Forth and Clyde Construction v Trinity Timber & Plywood Co (supra); cf Iona Hotels v Craig).

[40]      It was not disputed that, as a generality, an inhibition affected posterior debts.  However, the meaning advanced by the pursuer in relation to the effect of inhibition on subsequent debts covered by a prior security was not supported by any case or textbook, other than Stewart (Diligence 565).  The Scottish Law Commission’s report on the 1961 Act (SLC no 14) had recommended (para 66) that it was desirable for there to be a clear statement of the receiver’s duties in a distribution.  Thus, what was to become section 20(1) of the 1972 Act was intended to be exhaustive. 

[41]      The pursuer’s fall-back position in relation to whether a debt post-dating an inhibition was secured by a floating charge in terms of the section was even more ingenious than his primary argument, but also counter intuitive.  It was inconsistent with the structure of the section.  It would create anomalies between the effect of diligence on the attachment of a floating charge in receivership as distinct from liquidation.  The effect of that attachment on liquidation was set out in the 1985 Act (s 463) which did not include the word “secured”.

 

Decision
Inhibition as a Diligence
[42]      A glance at Bell’s Dictionary (7th ed, 1890) will provide (at 325) the reader with a clear statement of what “diligence” ought to mean to a Scots lawyer.  The third definition is the relevant one for present purposes.  It is that diligence is the term applied generally to the process of law, by which persons (at that time), lands or effects are attached on execution, or in security, for debt (see also Stewart : Diligence 1).  The warrant for the use of diligence must be duly constituted by a liquid document, a decree or an action in which decree is sought.  In the latter case, “although the intermediate nexus is effectual, yet the ultimate efficacy of the diligence is contingent on decree being obtained in the depending suit” (at 326).  This use of the word “effectual” in connection with diligence is apparent at least as far back as Stair (Institutes IV, 41, 2 (p 981)).  Bell describes the diligences applicable to heritable property.  He refers, first, to inhibition as the diligence which prevents a debtor from selling or burdening his heritage to the prejudice of his creditor.  Secondly, he mentions adjudication as the means by which property is transferred, initially redeemably, to the creditor in lieu of the debt.

[43]      At the very start of his Commentaries (7th (McLaren) ed 1870), which had started life as a treatise on bankruptcy, Bell writes about diligences, real and personal.  He refers (at 1, 5) to those diligences which proceed “against the land or other heritable estate of the debtor” as being one of two forms.  The first is inhibition, which is directed “only to the purpose of laying an embargo on the debtor’s power of alienation to the creditor’s prejudice”.  It prohibits the debtor from disponing of heritage and “even from incurring new debts, by which land may be affected to the inhibitor’s prejudice”.  Yet it is described as a “mere prohibition” conferring no right to enter into possession.  The second is adjudication, which operates as a judicial transfer of the estate in payment of the debt.  The summons concluding for adjudication creates a “litigiosity” over the debtor’s heritage, but that is presumably where such litigiosity has not already been created by an inhibition (see also Stewart: Diligence 551-3).

[44]      That an inhibition is a diligence whose effect is to prohibit the debtor from dealing with his heritage in a way prejudicial to the creditor is clear.  In practical terms, where bankruptcy has not followed, the debtor will have to pay his creditor if he wishes to realise his heritage (Stewart: Diligence 555-6).  Theoretically, the creditor would have to proceed to adjudication in order to a secure transfer of the heritage in satisfaction of the debt.  In the modern era that has been a rarity, given that the debtor could redeem the heritage during the “legal” period of 10 years.  Either the debt would be paid from the proceeds of a sale or the creditor would proceed, in the case of an individual, to sequestration.  In the latter event, the question would then become one of ranking; the sequestration being the equivalent, in so far as bearing upon diligence, of a decree of adjudication of the heritable estate for payment of the debt then due (Bankruptcy (Scotland) Act 1985 s 37(1)).  So far as companies are concerned, the same principles apply in liquidations (Insolvency Act 1986, s 185).

[45]      Describing an inhibition as creating a preference over heritable estate or part of it is perhaps not quite accurate, although it is commonly done (eg Stewart: Diligence 557).  As has been said, all that an inhibition does is prohibit the debtor from dealing with his heritable estate to the prejudice of the inhibitor.  It does not of itself create any real right (Stewart: Diligence 551).  Its effect is nevertheless what has been described as a preference “by exclusion” (Bell: Commentaries 2, 407).  In any distribution of the estate, post inhibition transactions involving heritage would be discounted in the calculation of the sum due to the inhibitor (Stewart: Diligence 559).

[46]      Thus in Baird & Brown v Stirrat’s Trs (1872) 10 M 414, which was decided not long after the edition of Bell’s Commentaries cited (supra), the method of ranking on the heritage, over which an inhibition had been registered, was, first, to rank all the creditors pari passu and, secondly, to give the inhibiting creditor, “by way of drawback”, the difference between an equal dividend to all and the dividend which the inhibiting creditor would have obtained had there been no debts subsequent to the inhibition (see Lord Kinloch at 416-7, applying Erskine: Institutes (Nicolson ed) I, XII, 32 (p 627-8) and Bell: Commentaries 2, 402, 413 (the “canons of ranking”) and providing an arithmetical example more recently updated for decimalisation in Wilson: Debt (2nd ed) para 23.5).  This logically follows from the inhibiting creditor’s ability to reduce any prejudicial transaction affecting the heritage which is entered into after his inhibition has been registered (see LP (Inglis) at 419).  There is no need for the creditor to institute a formal process of reduction, when his right to a reduction is clear (Stewart: Diligence 555).  The fact that the inhibition creates no real right is, in this type of situation, of no moment. 

[47]      Not only the Scots lawyer, but also any person working in the field of debt recovery, including those customarily appointed as receivers or liquidators, would clearly understand the word “diligence” to encompass an “inhibition”.  It is the diligence executed in respect of the heritable property of a debtor, even if it creates no real right and would require an adjudication to provide the creditor with a heritable title.  Its practical effect, as creating a preference by exclusion, is considerable, especially upon bankruptcy or liquidation.

 

Lord Advocate v Royal Bank of Scotland 1977 SC 155
[48]      The analysis which now requires to be carried out involves understanding why, in Lord Advocate v Royal Bank of Scotland, the judges in the majority, whose opinions must be accorded considerable weight, decided that the words “effectually executed diligence” did not include an arrestment, since, on one view, arrestment is to moveables what inhibition is to heritage (see infra).  Having completed that task, the issue becomes whether the reasoning in Lord Advocate v Royal Bank of Scotland is sustainable.

[49]      Lord Advocate v Royal Bank of Scotland was argued by eminent counsel over four days, under reference to many of the authorities cited in this reclaiming motion.  The Lord Ordinary (Kincraig) had been the liquidation judge and was, to a degree, a specialist in the field.  He prefaced his Opinion (at 158-9) by noting the rule that arrestments within 60 days of a liquidation were not “effectual” (Companies Act 1948 s 327).  Thus, the Lord Ordinary commented, prior to the creation of receivership by the Companies (Floating Charges and Receivers) (Scotland) Act 1972, if it were correct to construe section 15(2)(a) of the 1972 Act as meaning that a creditor who had arrested had “effectually executed diligence” then, in order to make the receiver’s rights “effectual” over the arrested property, the receiver would require to liquidate in order to cut down such arrestments.  The Lord Ordinary did not consider that such a construction should be adopted “unless no other” was open.  This appears to have had a marked influence upon the Lord Ordinary’s subsequent reasoning.

[50]      The Lord Ordinary proceeded to consider the nature of arrestment.  He observed (at 159) that it was “not a complete diligence but merely a preliminary step towards securing the subjects arrested … Thus … Stewart (Diligence at 125) describes it as an inchoate and incomplete diligence”.  Quoting from Lucas’s Trs v Campbell and Scott (1894) 21 R 1096 (Lord Kinnear at 1103), “An arrestment and furthcoming is an adjudication preceded by an attachment and the essential part of the diligence is the adjudication”.  The Lord Ordinary noted that an arrestment “is not a diligence which is effectual to create a real right in the subjects arrested”.  He sustained (at 160) an argument, based also on Menzies v Murdoch (1841) 4 D 257, that “diligence cannot be said to be done until a decree of furthcoming has been obtained”.  An arrestment “was not an effectual diligence”.  It created “no right of real security”.  That being so, since the receiver “is statutorily placed in a position that his security becomes fixed on his appointment, his rights prevail … over any others who do not have similar fixed security rights over the subjects”.  The Lord Ordinary rejected (at 162) the arguments to the contrary, notably that the phrase “effectually executed diligence” could not mean that a decree of furthcoming was required, since such a decree would already have transferred title in the goods from the debtor to the creditor.  He noted (at 163) that the effect of his conclusion could be that no arrestments would be effectual, and not just those within 60 days (s 15(2) of the 1972 Act), but this simply meant that the legislature had placed a receiver in a more advantageous position than a liquidator.

[51]      The Lord President (Emslie) agreed in essence with the reasoning of the Lord Ordinary.  He recognised (at 169) the attraction of the reclaimer’s submissions, based on the fact that an “arrestment” is commonly referred to as a diligence, not only in the authorities but in several statutes, and that an arrestment, which was not followed by a furthcoming, had certain definite and important effects, notably the creation of a nexus over the property.  However, he placed great weight on Lord Kinnear’s dictum in Lucas’s Trs v Campbell and Scott (supra).  He accepted that an arrestment rendered the subjects litigious, but that did not involve a transfer of title.  The Lord President regarded it (at 170) as important that litigiosity did not prevent an arrestment from being defeated by other diligences, which had been carried to completion, and that a fixed security would provide a better right, namely one in rem. Since it was such a right that was created by the crystallisation of the floating charge, it followed that it prevailed.  It would, he reasoned (at 171), be surprising if the expression “effectually executed diligence on the property” were designed to cover rights established after the creation of the floating charge by diligences which were not comparable with those of a fixed security and were of a purely personal character, such as arrestment.  The floating charge, being a public fact by reason of its registration, put a creditor on notice that he would have to complete his “begun diligence”, if he were not to be faced with the counter effects of a receivership.

[52]      Lord Cameron’s Opinion is much to the same effect.  The reasoning is essentially that, because arrestment does not create a real right in the property, the crystallisation of the floating charge effectively superseded the arrestment and would win out in any competition (see 179).  An arrestment was not “diligence effectually executed on the property of the debtor company”. 

[53]      Lord Johnston’s dissent began (at 179) with a general observation that section 15(2)(a) of the 1972 Act was a “saving subsection and has as its object the protection of rights which have emerged prior to the appointment of the receiver”.  If the phrase had been intended to encompass only perfected diligence, the subsection would have no saving effect at all since the arrested property would not have been attached by the floating change.  Lord Johnston continued by agreeing with Lord Kinnear’s dictum in Lucas’s Trs v Campbell and Scott, but stating that this did not “alter the fact that ‘diligence’ meaning ‘arrestment’ has been in use for two hundred years and that arrestment is commonly referred to as diligence in the Institutional and other writers and in the statutes already noted”.  He said that “greater weight should be attached to the meaning given to the words by usage than that derived from a strict analysis”.  “Effectually executed” simply meant that the arrestment had proceeded upon a proper warrant and that the funds were properly fenced and arrested by the sheriff officer.

[54]      The task of the court was, and is, to seek the meaning of the words used; often described as ascertaining the intention of Parliament expressed in the statutory language in light of the particular context (R v Environment Secretary, ex parte Spath Holme [2001] 2 AC 349, Lord Nicholls at 396-7 citing Black-Clawson International v Papierwerke Waldhof-Aschaffenburg [1975] AC 591, Lord Reid at 613).  Although the courts may employ certain accepted canons of interpretation, “an appropriate starting point is that language is to be taken to bear its ordinary meaning in the general context of the statute” (ibid, Lord Nicholls at 397).  As the defenders submitted, if the terms were legal ones, they will be given their legal meaning.  Where there is an apparent ambiguity in the wording, however, reference can be had to certain internal or external aids, many of which were alluded to, and some founded upon, in the submissions to this court.

[55]      Although not strictly supported by the pursuer, Lord Johnston’s analysis has a certain attraction.  It gives the words in the statute their ordinary, legal meaning in the context of the statute as a whole, as it operates in the field of securities and insolvency.  This interpretation is consistent with that favoured in Sharp v Thomson 1997 SC (HL) 66, (Lord Jauncey at 76-77; Lord Clyde at 80).  It gives to the words a “practical and realistic” construction having regard to the context in which the words are placed.  It coincides with what a Scots lawyer, and all those working in the field of debt recovery, would understand a diligence, which was effectually executed, to be.

[56]      Arrestment is a diligence.  The adjective “effectually” qualifies “executed”, rather than “diligence”.  All that “effectually executed” means is that the arrestment is properly laid and, quantum valeat, not ultimately struck down by a liquidation within 60 days.  Had Lord Advocate v Royal Bank of Scotland come before the present court, the temptation to give the words their ordinary, legal meaning would have been irresistible.  In short, despite Lord Cameron’s view (at 173) that the language and structure of the 1972 Act were of “considerable obscurity … well designed to provide a rich variety of issues for decision in delicate and prolonged litigation”, the three words under consideration do not appear in the least ambiguous, thus requiring the employment of the canons of construction advanced as of being of assistance.  Upon this basis alone, it must be accepted that Lord Advocate v Royal Bank of Scotland was wrongly decided.

[57]      The problem with the reasoning of the majority and the Lord Ordinary in Lord Advocate v Royal Bank of Scotland is that it effectively drives a coach-and-four through the common law of diligence in circumstances in which the statutory wording was, as Lord Johnston described it, intended to be a saving provision designed to achieve the opposite effect.  It places too much emphasis on the creation (by section 14(7) of the 1972 Act) of a “fixed security over the property”, and thereby a real right in the relevant heritable and moveable property, in competition with a diligence which is essentially prohibitory in nature and does not give rise to real rights without further legal process (vide Wilson: “Effectively executed diligence” 1978 JR 253 at 254-5).  The whole purpose of sections 15(2)(a) and 20(1) of the 1972 Act was to preserve the rights of diligence holders notwithstanding the effect of the charge’s crystallisation.  This is no different, in relation to prior diligence, from the situation where sequestration or liquidation has followed an inhibition; each of which otherwise involve the creation of a real right in the relevant subjects (Bankruptcy (Scotland) Act 1985, s 37(1); Insolvency Act 1986, s 185(1)).  Were it to be otherwise, and as ultimately determined by the majority, the saving provision would have little or no practical meaning or effect.  It would give no content to the 60 day rule where receivership had preceded liquidation.

[58]      Had it been necessary to do so, assistance could have been gained from the internal and external aids proffered.  First, there is the use of the word “effectual” in other statutes; the most important of which would have been its presence (at the time of Lord Advocate v Royal Bank of Scotland) in section 327 of the Companies Act 1948 and now section 185(1) of the Insolvency Act 1986, incorporating section 37(2) and (4) of the Bankruptcy (Scotland) Act 1985.  Section 37 refers to inhibitions and arrestments not being “effectual” if executed within the 60 day period.  All that is meant there is an inhibition or arrestment which has been properly, or put another way “effectually”, laid on the person or property concerned (see Dow & Co v Union Bank (1875) 2 R 459, LP (Inglis) at 462 referring to “effectual” in the Bankruptcy (Scotland) Act 1856, s 108; Johnston v Cluny Trs 1957 SC 184, LP (Clyde) at 191).  No issue relative to a diligence completed by adjudication or furthcoming arises (cf Menzies v Murdoch (1841) 4 D 257, LP (Boyle) at 261, Lord Fullerton at 264). 

[59]      Reference could also have been made, were the matter to have been analysed (as it is now) post Pepper v Hart [1993] AC 593, to the statements by the promoter of the Bill, namely Forbes Hendry MP, a solicitor in Stirlingshire.  It is clear that what he was referring to when talking about “effectually effected diligence” in the context of the Bill was a diligence within the ordinary legal meaning of the term, such as an arrestment duly executed, which was not within 60 days of liquidation.

 

Statutory Interpretation
 [60]     As has been explained, had this court been deciding Lord Advocate v Royal Bank of Scotland, it would have reached a different decision.  The difficulty which then arises is whether, given, first, the history of the legislation and, secondly, the settled nature of the law and practice, it is appropriate to overrule such a significant authoritative precedent now.  In this analysis, it is accepted that, if Lord Advocate v Royal Bank of Scotland was correctly decided in relation to arrestments, the ratio would apply equally to inhibitions.  Although an arrestment does attach to particular property, it does so in the same manner as an inhibition does to the owner of heritage, by prohibiting alienation or burdening by the arrestee.  It does not create a real right.  Although there was considerable discussion upon the matter in Lord Advocate v Royal Bank of Scotland, as with an adjudication following upon an inhibition, so it is that a decree of furthcoming at least is required before title (or possession) will transfer to the creditor.  An inhibition is no less incomplete or inchoate a diligence than an arrestment.  The concessions in Armour and Mycroft Petnrs 1983 SLT 453 (accepted by the Lord Ordinary (Kincraig) as valid at 455) and Taymech v Rush & Tompkins 1990 SLT 681 (at 682) were correct.

[61]      The starting point is no doubt the enactment of section 1(2) of the Companies (Floating Charges) (Scotland) Act 1961, which included the critical words “subject to the rights of any person who – (a) has effectually executed diligence on the property”.  This wording, no doubt influenced in part by section 327(1)(a) of the Companies Act 1948, was repeated in the same numbered section of the Companies (Floating Charges and Receivers) (Scotland) Act 1972.  To this was added sections 15 and 20, relative to the powers of receivers and the distribution of realised assets in the receivership.  Section 15(2)(a) rendered the receiver’s powers “Subject to the rights of any person who has effectually executed diligence on ... the property”.  Section 20(1) included the protection of the rights of, inter alia, “(b) all persons who have effectually executed diligence on ... the property”.  The re-enactment of section 1(2)(a) in, and the introduction of sections 15 and 20 to, the 1972 Act are themselves of little moment, in this context, given that Lord Advocate v Royal Bank of Scotland would not be decided for another five years.

[62]      The fact that Lord Advocate v Royal Bank of Scotland was the subject of academic criticism would have been clear to the legal profession as a result of the short reviews by Professor Wilson at the time (1976 JBL 257 and 1978 JR 253) and the later exchange between Professor Gretton (1983 SLT (news) 145) and Lord Hope (1983 SLT (news) 177).  Lord Hope had appeared in Lord Advocate v Royal Bank of Scotland and maintained a keen interest in its authority.  The significant re-enactments are sections 463(1)(a), 471(2)(a) and 476(1)(b) of the Companies Act 1985, repeating sections 1(2)(a), 15(2)(a) and 20(1)(b) of the 1972 Act.  As already noted, sections 471(2)(a) and 476(1)(b) rapidly became sections 55(3)(a) and 60(1)(b) of the Insolvency Act 1986, without textual alteration.  By the time of the 1985 and 1986 Acts, there had been several cases (eg Forth and Clyde Construction v Trinity Timber and Plywood 1984 SC 1) considering the meaning of the words “effectually executed diligence”, but the predominant authority remained Lord Advocate v Royal Bank of Scotland.  There had also been a number of later Scottish Law Commission Reports (eg nos 83, 87), but none had specifically considered this wording nor had there been any reference to it in the Parliamentary Debates.

[63]      In Barras v Aberdeen Steam Trawling and Fishing Co 1933 SC (HL) 21, Lord Macmillan stated (at 50) the principle whereby:

“... where the language of a statute has received judicial interpretation, and Parliament again employs the same language in a subsequent statute dealing with the same subject-matter, there is a presumption that Parliament intended that the language so used by it in the subsequent statute should be given the meaning which meantime has been judicially attributed to it.  Parliament, in short, is to be presumed to have given statutory effect to the judicial interpretation so as to render it as binding on the Courts as if it had been expressly enacted in an interpretation section.”

 

However, he continued:

“If this rule were to be treated as a canon of construction of absolute obligation, ... it might have very far-reaching and possibly undesirable consequences ...  I must be satisfied that it is the authentic voice and the authentic command of Parliament, and I find it rather a strain to have to believe that the reputed omniscience of Parliament extends to every decision of the Courts ...  [T]he rule of interpretation ... affords only a valuable presumption as to the meaning of the language employed in a statute.  Where a judicial interpretation is well-settled and well-recognised, the rule ought doubtless to receive effect, but it must ... be a question of circumstances whether Parliament is to be presumed to have tacitly given statutory authority, say, to a single judgment of a competent Court, so as to render that judgment, however obviously wrong, unexaminable in this House.  After all, there is another rule of statutory interpretation of not less, if not indeed of higher authority, of which Parliament must be equally taken to be aware – namely, Lord Wensleydale’s ‘golden rule’ (in Grey v Pearson (1857) 6 HL Cas 61 at 106, cited by Lord Blackburn in Caledonian Railway Co v North British Railway Co (1881) 8 R (HL) 23 at 30) that in construing statutes the grammatical and ordinary sense of the words is to be adhered to, unless it leads to some absurdity, repugnancy, or inconsistency.”

 

It is difficult to improve upon this expression of what is ultimately an aid to construction, even if it has subsequently been put differently by others.  Over time it was expressly approved in R v Chard [1984] AC 279 (Lords Scarman, Roskill and Templeman at 295).  The limits of the principle, when dealing with words having an ordinary meaning, were stressed in Haigh v Charles W Ireland 1974 SC (HL) 1 (Lord Diplock at 40, Lord Kilbrandon at 41) and Farrell v Alexander [1977] AC 59 (Lord Wilberforce at 74).

[64]      In R (N) v Lewisham LBC [2015] AC 1259, Lord Hodge (with whom Lords Clarke, Wilson and Toulson agreed) stated (at para 53) the principle in similar terms to the effect that, where Parliament had re-enacted a provision which has been the subject of “authoritative” judicial interpretation, “the court will readily infer that Parliament intended the re-enacted provision to bear the meaning that case law had already established”.  The generality of this was accepted by Lord Neuberger in his dissenting judgment (at para 144), but he too added some useful words of caution (at paras 144-147) about the lengths to which the principle could be taken.  Mere re-enactment of a previous statutory provision, which had been interpreted by the Court of Appeal, would not normally be enough.  Lord Carnwath was concerned about the scope of what Bennion (Statutory Interpretation 6th ed 661) called “tacit legislation”.  He examined the Commonwealth authorities but noted an absence of a settled or uniform approach.  Lady Hale (dissenting at para 167) pointed out the limitations of assuming anything positive from Parliamentary inaction.  The views of the UK Supreme Court justices in R (N) v Lewisham LBC take due account of several other previous cases cited in argument (eg A v Hoare [2008] 1 AC 844; Lowsley v Forbes [1999] 1 AC 329) and these do not require separate consideration.

[65]      Applying the dicta of Lords Macmillan and Hodge, and keeping in mind that the Barras principle is not one of absolute application in ascertaining the intention of Parliament, it would not be appropriate to assume from the legislative history of the Insolvency Act 1986, which is a United Kingdom statute, that Parliament intended to endorse Lord Advocate v Royal Bank of Scotland when it re-enacted the terms of the 1972 Act.  The reality appears to be that, although not technically purely a consolidation statute, and certainly not one proceeding under the auspices of the Consolidation of Enactments (Procedure) Act 1949, the Companies Act 1985 re-enacted the provisions of the 1972 Act without any prior substantial consideration by the Scottish Law Commission, any Government Department or Parliament, of the meaning of the words “effectually executed diligence” in Lord Advocate v Royal Bank of Scotland.

[66]      The extent to which Lord Advocate v Royal Bank of Scotland has been, and perhaps more important will be, applied in practice is neither a matter of agreement nor one of certainty.  It is reasonable to assume, however, that, in the context of receiverships, there will have been many cases in which the floating charge holder (presumably usually a bank or other financial institution) will have prevailed over an unsecured creditor who has inhibited or arrested in execution or security.  The extent to which this type of consideration should be regarded as of importance when a larger court re-examines the reasoning of a smaller bench is doubtful.  This was the subject of some debate in R (N) v Lewisham LBC.  As Lord Hodge (and the rest of the majority) put it (at para 53) “Inferences from Parliamentary inaction are more difficult. ... [T]he settled practice principle ... is available where there is ambiguity in a statutory provision”.  There was no relevant ambiguity in that case. 

[67]      Lord Carnwath dealt in detail with settled practice, referring (at para 94) to “two important but sometimes conflicting principles – legal correctness and legal certainty”.  Again, settled practice may, he continued (at para 95) be a legitimate aid in appropriate circumstances:

“Where the statute is ambiguous, but it has been the subject of authoritative interpretation in the lower courts, and where businesses or activities, public or private, have reasonably been ordered on that basis for a significant period without serious problems or injustice, there should be a strong presumption against overturning that settled practice in the higher courts ...  On the other hand it may be relevant to consider whether the accepted interpretation is consistent with the grain of the legislation as it has evolved ...”.

 

Lord Neuberger, albeit in his dissent, made the strong point (at para 148) that “a court should not lightly decide that a statute has a meaning which is different from that which the court believes that it has”, since that “could be said to be a breach of the fundamental duty of the court to give effect to the will of Parliament as expressed in the statute” (see also Lady Hale at para 168 citing In re Spectrum Plus [2005] 2 AC 680).

[68]      The short answer to this point is the same as that given by the majority in R (N) v Lewisham LBC.  There is no ambiguity in the provision.  In these circumstances, settled practice cannot convert the ordinary legal meaning of the words used into something conveying a different sense.  It would be odd indeed if this court considered that Lord Advocate v Royal Bank of Scotland had been wrongly decided as a matter of law, but declined to overrule it because of subsequent practice.

 

Post Inhibition Debts
[69]      The foregoing analysis leaves the final point; being whether, in any event, the inhibition prevented the floating charge holder from gaining a priority in respect of post inhibition debts falling under the security of the floating charge.  The analysis is somewhat repetitive, having regard to what has already been said about the effect of inhibition generally.  If the reasoning of the majority in Lord Advocate v Royal Bank of Scotland is correct, the occurrence of receivership may be seen as converting all the property of the company, other than that already the subject of a fixed security, into a secure cocoon for the benefit of the charge holder, given the latter’s ability to take possession of, and to sell, that property (Insolvency Act 1986, s 55, Sch 2 paras 1 and 2).  If section 60 of the 1986 Act were to be regarded as an exhaustive code regulating the distribution of moneys realised, which the Lord President (Emslie) considered it to be (Forth and Clyde Construction v Trinity Timer & Plywood Co (supra) at 11), then there would be no room for a preference by exclusion in favour of inhibitors or arresters.

[70]      Section 60 of the 1986 Act does set out a code, but it cannot be a complete one since it expressly states that it is “(1) Subject ... to the rights of ... (b) all persons who have effectually executed diligence on any part of the property”.  Once it is accepted that the pursuer falls into that category, his right is to strike down, or more accurately to reduce, any transactions occurring after the inhibition which have prejudiced his claim.  As Gretton puts it (Inhibition and Adjudication at 1) the inhibition strikes not only at voluntary deeds but also post-inhibition debts affecting the debtor’s heritage to the inhibitor’s prejudice (Bell: Commentaries 2, 139; Stewart: Diligence 551, 559).  The effect of that is that the inhibitor is entitled to rank in any distribution as if these debts had not been incurred (Bell: Commentaries 2, 413-4; Baird & Brown v Stirrat’s Tr (supra)). 

[71]      The indebtedness, arising after the inhibition is regarded as being created under new contracts, voluntarily entered into and thus struck at by the inhibition.  This is based upon the analogous situation in Union Bank of Scotland v National Bank of Scotland (1886) 14 R (HL) 1 in which it was determined (reversing the 8-5 majority view of the Court of Session (1885) 13 R 380)) that notification of an assignation of a reversionary interest, after the execution of an ex facie absolute disposition with a back-letter, meant that the debts secured by the disposition were limited to those extant at the point of notification (see Lord Watson’s succinct judgment at 5).  By analogy, public notice of the inhibition will “freeze” the secured indebtedness at the point of registration.  In these circumstances there is no need to construct an independent, and somewhat circular, argument based upon diligence not being “effectually executed” yet rendering the subjects “litigious” (ie Iona Hotels v Craig 1990 SC 330).  For the reasons already stated, these two terms ought to go together and it is difficult to see how the latter can exist without the former or vice versa.

 

Conclusion
[72]      For these reasons, in practical terms, the reclaiming motion fails and the cross appeal succeeds.  This will require recall of the Lord Ordinary’s interlocutor of 10 February 2016 which repels the pursuer’s first plea-in-law and sustains the second, thereby granting decree in terms of the second conclusion.  The pursuer’s first plea-in-law should be sustained, the defenders’ first and second pleas-in-law repelled and decree granted in terms of the first conclusion.  In that situation there is no need for the pursuer’s alternative plea to be sustained or for decree to be granted in terms of the second conclusion.


Web Blue CoS

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2017] CSIH 23

CA222/14

Lord President

Lord Menzies

Lord Brodie

Lord Drummond Young

Lord Malcolm

OPINION OF LORD MENZIES

in the Reclaiming Motion by

DAVID MacMILLAN

Pursuer and Respondent

against

T LEITH DEVELOPMENTS LTD (in receivership and liquidation)

Defenders and Reclaimers

Pursuer and Respondent:  McBrearty QC, Roxburgh; Kennedys

Defenders and Reclaimers:  Sellar QC, Parratt; HBJ Gateley

10 March 2017

[73]      I have had the advantage of reading in draft the opinion of your Lordship in the chair; I am in complete agreement with the reasoning and conclusions therein, and there is nothing that I can usefully add.  I agree that this reclaiming motion should be refused and the cross appeal allowed for the reasons which your Lordship gives.


Web Blue CoS

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2017] CSIH 23

CA222/14

Lord President

Lord Menzies

Lord Brodie

Lord Drummond Young

Lord Malcolm

OPINION OF LORD BRODIE

in the Reclaiming Motion by

DAVID MacMILLAN

Pursuer and Respondent

against

T LEITH DEVELOPMENTS LTD (in receivership and liquidation)

Defenders and Reclaimers

Pursuer and Respondent:  McBrearty QC, Roxburgh; Kennedys

Defenders and Reclaimers:  Sellar QC, Parratt; HBJ Gateley

10 March 2017

[74]      I respectfully agree, for the reasons given by your Lordship in the chair, that the reclaiming motion should be refused and the cross appeal allowed.  There is nothing that I can usefully add.


Web Blue CoS

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2017] CSIH 23

CA222/14

Lord President

Lord Menzies

Lord Brodie

Lord Drummond Young

Lord Malcolm

 

OPINION OF LORD DRUMMOND YOUNG

in the Reclaiming Motion by

DAVID MacMILLAN

Pursuer and Respondent

against

T LEITH DEVELOPMENTS LTD (in receivership and liquidation)

Defenders and Reclaimers

Pursuer and Respondent:  McBrearty QC, Roxburgh; Kennedys

Defenders and Reclaimers:  Sellar QC, Parratt; HBJ Gateley

10 March 2017

[75]      I agree with your Lordship in the chair that this reclaiming motion should be refused and that the cross-appeal should succeed.  In view of my previous involvement in this area of law, I propose to write a separate opinion setting out my reasons in detail.  As you Lordship has indicated, two principal issues require to be determined.  The first, and more general, is whether by registering an inhibition the pursuer had effectually executed diligence on the property of the defenders for the purposes of sections 55(3)(a) and 60(1)(b) of the Insolvency Act 1986.  This requires the court to determine whether Lord Advocate v Royal Bank of Scotland Ltd, 1977 SC 155, was correctly decided.  The second, more specific, issue is only relevant if the pursuer fails on the first issue: it is whether in a ranking the defenders’ debts due to the Clydesdale Bank PLC were postponed to the debts due to the pursuer because they were incurred after the date on which the inhibition became effective.  This requires consideration of the effect of an inhibition, and in particular the effect that an inhibition has in relation to a debt incurred after its date but secured by a floating charge that precedes the inhibition.  In addition, if the first of the principal issues is decided in favour of the pursuer, to the effect that Lord Advocate v Royal Bank of Scotland Ltd was wrongly decided, it becomes necessary to consider two subsidiary matters: first, whether the substantial re-enactment of section 15(2)(a) of the Companies (Floating Charges and Receivers) (Scotland) Act 1972, the statutory provision founded on in that case, in section 55 of the Insolvency Act 1986 has the effect of giving legislative approval to the decision, thus placing it beyond the power of this court to reverse it; and secondly, whether in view of settled practice relying on the decision in Royal Bank the court should decline to reverse it.  I will deal with each of these issues in turn.

 

Effectually executed diligence:  Lord Advocate v Royal Bank of Scotland

[76]      I am in agreement with your Lordships that Lord Advocate v Royal Bank of Scotland Ltd was incorrectly decided, and that both an arrestment and an inhibition are effectually executed diligence, in the sense in which that expression is used in section 55(3)(a) of the Insolvency Act 1986 and previously in section 15(2)(a) of the Companies (Floating Charges and Receivers) (Scotland) Act 1972.  The wording in section 60(1)(b) of the Insolvency Act 1986 is the same.  The expression “effectually executed diligence” was not in general use before the enactment of the Companies (Floating Charges) (Scotland) Act 1961, the statute that introduced the floating charge into Scots law.  The concept of “effectual” diligence had been employed in bankruptcy statutes (for example, section 37(2) of the Bankruptcy (Scotland) Act 1985), but it was used in relation to the cutting down of diligence within 60 days prior to sequestration.  That is theoretically distinct from the use of “effectually executed diligence” in relation to floating charges and receivers.  The meaning of the latter expression was not obvious, as the discussion in Royal Bank indicates.  The difficulty was perhaps compounded by the fact that in Scots law the floating charge is an entirely statutory creation, modelled on an institution developed in English equity.  The English institution has created difficulties in the field of insolvency: its history and the meaning of the concept of a “floating” charge are discussed in Re Spectrum Plus Ltd, [2005] 2 AC 680, by Lord Scott at paragraphs 95 et seq.  In the same case Lord Walker states that, although the institution had developed with great rapidity during the late 19th century, it was ultimately found to have become “a cuckoo in the nest of corporate insolvency”.  The translation of such a concept into statutory form in Scots law, a legal system that lacks anything akin to the conceptual structures of English equity, would inevitably be difficult, and those difficulties became very apparent in integrating the floating charge with diligence, a distinctive concept of Scots law that has no direct equivalent in either law or equity in England.

[77]      The essence of a floating charge is that it is a form of security that subsists over the whole assets of a company, or a specified class of those assets, but in such a way that the granter is able to use the secured assets and to dispose of them for normal business purposes until the occurrence of certain specified future events, in particular winding up and the appointment of a receiver; in both Royal Bank and the present case the critical event is the appointment of a receiver.  Until one of the specified events occurs, however, the company granting the charge is entitled to use and dispose of its assets as it wishes.  This includes granting fixed securities over those assets.  If nothing more is said such a security will take priority over the floating charge, although in normal commercial practice the voluntary granting of a fixed security taking priority will be prohibited by a negative pledge created under section 464(1) of the Companies Act 1985.  In the absence of a negative pledge, however, the granter of a floating charge is free to create security rights over its property.

 

Diligence in security

[78]      Diligence on the dependence of an action is a form of security created as an adjunct to court proceedings.  The expression “right in security” is described in Gloag and Irvine, Law of Rights in Security, pages 1-2, as denoting “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”.  That description applies in my opinion to all the common forms of diligence on the dependence, and in particular to inhibition and arrestment.  Both inhibition and arrestment create rights over the debtor’s property which can be enforced by the creditor in such a way that the payment or satisfaction of his debt is made more secure, and such rights are additional to the standard right to raise an action for payment of the debt, to proceed to decree and to enforce that decree.  The likelihood that enforcement will yield something is improved by the diligence, which is the essential feature of a security.  Consequently diligence on the dependence is invariably treated as a particular form of security, and the same is generally true of diligence proceeding on a document of debt: see, for example, Maher and Cusine, The Law and Practice of Diligence, 4.01, 4.02 and 4.64.

[79]      Inhibition on the dependence is a negative or prohibitory diligence which strikes against subsequent debts and voluntary conveyances incurred or granted by the person inhibited which are in any way prejudicial to the inhibitor: Graham Stewart, The Law of Diligence, 551.  Both gratuitous and onerous debts and conveyances are covered: ibid.  Until section 154 of the Bankruptcy and Diligence etc (Scotland) Act 2007 came into effect (on 22 April 2009), inhibition had two primary effects.  First, it rendered the debtor’s heritable property litigious; this meant that it froze the heritable estate, preventing the debtor from granting any future voluntary deeds that were prejudicial to the inhibitor: ibid; Gretton, The Law of Inhibition and Adjudication, at page 1.  This extended to the whole of the debtor’s heritable property in Scotland.  Secondly, if any debts were contracted by the debtor after the date of the inhibition, they were postponed to the claims of the inhibiting creditor to the extent that they reduced the heritable estate that was available for the inhibitor:

“The inhibitor is in no way affected by creditors whose debts were contracted subsequent to the registration of the inhibition, or the notice thereof; and he is therefore entitled to draw the same dividend he would have drawn if these debts had not existed.  Anterior creditors are in no way affected by the inhibition.  The act complained of may not, strictly speaking, be the creation of a new debt, but if it is so in effect it will be struck at” (Graham Stewart, op.  cit., 559-560).

 

It is the latter effect that was abolished by section 154 of the Bankruptcy and Diligence etc (Scotland) Act 2007.  The first effect is significant for present purposes: it restricts the debtor’s ability to deal with his heritage in any way that may diminish the inhibitor’s rights, and is thus plainly of the nature of a security.  Furthermore, a set of rules, the canons of ranking, has been developed to determine how inhibiting creditors rank with other creditors, including creditors who hold real securities and those who have other forms of preference, and also those who are unsecured: the canons of ranking are set out in Bell, Commentaries, 2, 413 (7th ed); 519 (5th ed), and are the subject of helpful commentary in chapter 7 of Gretton, Inhibition and Adjudication.  The canons of ranking were expressly approved in Baird and Brown v Stirrat’s Trustee, 1872, 10 M 414, and they clearly assume that an inhibition confers security in an insolvency.

[80]      Arrestment on the dependence is not strictly relevant to the present case, but it is the form of diligence that was considered in Royal Bank, and it is accordingly necessary to consider the precise effect of an arrestment in order to determine the correctness of that decision.  Arrestment is a diligence whereby moveable property that is not in the possession of the debtor himself is attached, and in the case of arrestment on the dependence it amounts to a form of security: see Graham Stewart, op. cit., 13 and 125 et seq.  It is described as an inchoate or incomplete diligence, conferring on the arresting creditor no right of real security in the subject arrested.  Nevertheless arrestment on the dependence prohibits the arrestee from parting with the subject to the prejudice of the arrester, and confers on the latter a preference over the subject arrested so long as it remains with the arrestee.  It does not confer protection against rights conferred on a bona fide onerous third party.  It does, however, make the subject arrested litigious from its date, so that its effect cannot be defeated by any posterior voluntary deed of the common debtor under which the assignee has not obtained actual possession of the subject at the time when a competition arises: ibid, at 125.  While no right of real security is created by an arrestment, the diligence does confer on the arrester rights that make the payment or satisfaction of his debt more secure.  Consequently an arrestment, by itself, can properly be characterized as a form of security.

[81]      What is distinctive about diligence, as against other forms of security right, is that it is created not by the act of the debtor but by the act of a creditor.  The only voluntary act of the debtor that is required is the creation of a debt owed to the inhibiting or arresting creditor.  Consequently diligence will not be prohibited by a negative pledge.  Nevertheless, both inhibition and arrestment entail the creation of security rights affecting the debtor’s property, and giving effect to those security rights, is wholly consistent with the nature of a floating charge: the granter of a floating charge may alienate or grant security rights over his property as he wishes until the charge attaches on receivership or winding up.  Thus it would be expected that inhibition or arrestment effected against the estate of a company that had granted a floating charge would prevail over that floating charge at the time of attachment.

 

Lord Advocate v Royal Bank of Scotland Ltd

[82]      That is not, however, what was held in Lord Advocate v Royal Bank of Scotland Ltd.  I think it necessary to examine the reasoning of the First Division in that case to consider why a different result was reached.  The general effects of an arrestment were accepted (LP Emslie at pages 168-169); these included various preferences over a subsequent assignation in security and certain forms of diligence.  Nevertheless, arrestment was merely an “inchoate” diligence.  Quoting the opinion of Lord Kinnear in Lucas’s Trustees v Campbell & Scott, 1894, 21 R 1096, at 1103, it was said that:

“An arrestment and furthcoming is an adjudication preceded by an attachment and the essential part of the diligence is the adjudication”.

 

LP Emslie continued (at 169-170):

“What an arrestment does, and all it does, is to render the arrested subjects litigious.  It is in this sense and this sense only that an arrestment is said to ‘attach,’ or create a nexus over, the property in the arrestee’s hands.  By rendering the subject matter litigious it constitutes or transfers no right in the subject matter arrested.  What litigiosity involves is in the first place a prohibition addressed to the arrestee ‘to alter the condition of the thing arrested nor to pay or deliver the same to the arrester’s debtor but that it remain in his hand for the satisfaction of the debt arrested for’….  In the second place it involves that the arrester’s advantage cannot be defeated by the subsequent voluntary act of the debtor himself… The sole virtue of this diligence, and it is not insignificant, is the resulting litigiosity which constitutes a double prohibition, both being personal in their nature”.

 

This, it was said, explained the characteristic features of an arrestment.  Further reference was made to the opinion of Lord Kinnear in Lucas’s Trustees.

[83]      Moreover, litigiosity did not protect an arrestment from being defeated by other diligences carried to completion (page 170).  It was noted in passing that an arrestment laid on within 60 days of sequestration or liquidation was deprived by statute of any efficacy in a ranking (page 171).  It followed that, when the nature and effects of arrestment were understood,

“a right of the nature of a fixed security, not tainted by any voluntary act of the debtor, would not be affected by litigiosity and would be a better right, for it would be a right in rem in security”.

 

When a receiver was appointed, the floating charge attached to the property of the debtor, which amounted to “the high right of a fixed security”.  Consideration was then given to the language of section 15(2)(a) of the Companies (Floating Charges and Receivers) (Scotland) Act 1972, which was said to have introduced for the first time to the law of Scotland the expression “effectually executed diligence on the property” of a company; in fact essentially the same expression had been used in section 1(2)(a) of the Companies (Floating Charges) (Scotland) Act 1961, although only in relation to winding up, as receivers were then unknown to the law.  A diligence such as arrestment was said to be not truly comparable with rights of fixed security, but involved “lesser rights of a purely personal character” (page 171).  The registration of the floating charge gave warning to an arrester that if he did not proceed speedily to complete the diligence that he had begun he was at risk of the appointment of a receiver.  It was further suggested that, if the appointment of a receiver did not defeat prior arrestments, those who had executed arrestments within 60 days of the receiver’s appointment, where the company was not wound up at that point, would be in a superior position to those who had executed arrestments within the same time frame but the company was wound up at the time of the receiver’s appointment.  This, it was suggested, would be a strong incentive to a receiver to put the company into liquidation to defeat any arrestments that might have been used against the company.

 

Criticism of Lord Advocate v Royal Bank of Scotland Ltd

[84]      In my opinion several major difficulties arise out of the foregoing reasoning.  First, great emphasis is placed on the fact that an arrestment does not confer real rights over the subjects attached.  That is technically correct so far as it goes, but arrestment still confers important rights in favour of the arresting creditor: the arrested property is rendered litigious; in other words it is attached so that the arrestee cannot dispose of it to the prejudice of the arrester.  Those rights are properly characterized as security rights, and for that purpose the fact that they do not amount to a real right in the strictest sense does not seem relevant.  The rights can still affect third parties, and to that extent they can be considered “real”.  If other types of security right are created by the granter of a floating charge prior to its attachment, they prevail on attachment.  It is not obvious why the security rights conferred by an arrestment should be treated any differently.  Moreover, it is difficult to understand why the existence or otherwise of a real right should have any bearing on whether the diligence has been “effectually executed”, which was the expression under consideration in Royal Bank.  Exactly the same considerations would apply to an inhibition.  An inhibition does not confer real rights in the strictest sense, but it still creates important rights in favour of the inhibitor.  In particular, it permits the inhibitor to take action to prevent prejudice to him from future voluntary deeds, and prior to 2009 it conferred priority over subsequently contracted debts.  Those are clearly rights in security, in the normal sense of the latter expression.  They can affect third parties.  Thus, as with an arrestment, it is not clear why the security rights created by an inhibition should be treated differently from other forms of security right created by the granter of a floating charge before it has attached, and it is in any event not clear why that should have the result that the diligence is not “effectually executed”. 

[85]      In Royal Bank the court placed considerable stress on the expression used in section 15(2)(a) of the 1972 Act, “effectually executed diligence on the property” of a company.  Nevertheless the manner in which both arrestment and inhibition function as a security, even before they proceed to furthcoming or adjudication, has well-defined effects on the property of the debtor company and in particular the extent to which that company is able to alienate or otherwise dispose of its property.  In my opinion that must be regarded as diligence “on” the property of the company.

[86]      Secondly, both the opinion of LP Emslie and the concurring opinion of Lord Cameron rely substantially on the earlier decision in Lucas’s Trustees v Campbell & Scott, where the opinions were delivered by Lord Kinnear.  Lord Kinnear states that arrestment is a diligence in personam which can only be carried into effect by the operation of a decree for payment or delivery against the arrestee; essentially the same point is made in another way, that an arrestment and furthcoming is an adjudication preceded by an attachment and the essential part of the diligence is the adjudication.  I agree that these are important statements of law by a judge who was particularly expert in this area (he had been senior counsel for the liquidators of the City of Glasgow Bank).  Nevertheless, it is necessary to put the statements in context and to have regard to precisely what they mean.

[87]      Lucas’s Trustees was a decision on unusual and somewhat complex facts.  The plant in the quarry at Ballachulish was declared to be the joint property of the landlord and the tenant, and at the conclusion of the lease the landlord was obliged to pay one half of the value to the tenant.  Creditors of the landlord used arrestments over the plant in the hands of the tenant and then raised an action of furthcoming against the tenant and the landlord’s trustee.  It is important to note that the arrestment was an arrestment in execution, not in security, and that the proceedings were designed to obtain payment of the debt due by the landlord from the joint property of the landlord and tenant.   The fact that the plant was joint property caused difficulty, in that the court held that the pursuers had to work out their diligence in such a way as to make the debtor’s (landlord’s) interest available without prejudice to the rights of the co-owner, the tenant.  The original summons failed to deal with that question, and an opportunity was given to amend.  The amended summons contained a conclusion that the court should ordain the moveable plant to be sold and the price to be paid to the arresting creditors, so far as necessary to satisfy their debt.  Lord Kinnear’s remarks were aimed at that situation.  The critical point was that for execution of the diligence furthcoming was necessary, and the amended conclusion was wholly inadequate for that purpose; it contemplated a decree which would use the whole of the joint property to pay the debt of one of the proprietors, in such a way that the independent right of the arrestee (the tenant) was disregarded.  For obvious reasons, that was not considered permissible.

[88]      The critical feature of the case, however, is that it was a case on diligence in execution, not in security.  The very purpose of the pursuers was to obtain execution in such a way that their debt was paid.  It was at that stage that furthcoming was essential because, as Lord Kinnear stated (at 1106):

“[Arrestment is] 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.  It is only as a consequence of the creditor’s right as against the arrestee to have the goods made forthcoming that he can have a decree for sale”.

 

Thus the crucial passage relied on in Royal Bank must be read in the context of an attempt by the arrester to have properties sold to satisfy a debt.  Arrestment by itself obviously does not bring about a sale; furthcoming is required to achieve that result.

[89]      Thirdly, it can be said that the decision in Royal Bank fails to give proper effect to the true nature of a floating charge.  The essence of a floating charge is that, until it attaches to the property of the company on winding up or receivership, the company is free to do as it wishes with its property, and can alienate such property or create other forms of security over it.  When it disposes of property, whether absolutely or in a more limited manner such as in security, that property, or the relevant rights in the property, cease to be part of the property and undertaking of the company.  When, therefore, a creditor of the company exercises a common law right, such as arrestment or inhibition, that results in the creation of rights adverse to the company, it is difficult to understand why these should not simply fall outwith the company’s property and undertaking in the same way as any other security rights.  This is in my opinion a fundamental problem with the decision in Royal Bank.

[90]      Fourthly, on the court’s construction, it is difficult to understand what content is left in the expression “effectually executed diligence”.  In the case of diligence against debts, the effect of the decision in Royal Bank is that there can be no effectually executed diligence until arrestment on the dependence has been followed by furthcoming.  For that to happen, however, decree must be obtained in the action on which the diligence proceeds.  Consequently arrestment on the dependence will be of little or no value, as it would be defeated if a receiver is appointed at any time prior to decree: see Wilson, “Effectually executed diligence”, (1978) JR 253, at 255-256.  The same point is made in Lord Johnston’s dissenting opinion in Royal Bank.  The Lord President touched on this matter (at page 172), indicating that on the court’s construction section 15(2)(a) of the 1972 Act was not left without content.  It could not include a decree of furthcoming proceeding upon the arrestment of a debt, because the decree transfers to the arrester the debtor’s title.  Nor could it include a poinding which had been completed by a sale.  It would, however, include a decree of furthcoming proceeding on arrestment of corporeal movables, and also a warrant of sale proceeding upon a poinding, as the effect of both of these is to adjudicate the moveables in security so that they may be sold to satisfy the creditor’s debt.  That is correct so far as it goes, but these are relatively unusual cases, and the exception for effectually executed diligence is still left with little practical content.  In my view that is unlikely to have been what Parliament intended by section 15(2)(a).

[91]      In Royal Bank the Lord President further stated (at page 171) that a floating charge was a public fact because of its registration, and that it would therefore be surprising if diligences such as arrestment creating purely personal rights were to prevail over it.  The registration of a floating charge gave warning to a creditor who subsequently arrested that, if he did not proceed speedily to a completion of the “begun” diligence, he was at risk of being faced with the appointment of a receiver; the remedy thus lay in his own hands.  While that is technically correct, it ignores the fact that many companies traded for most of their existence with a floating charge, usually granted in favour of their banker.  That meant that in practice the diligence of arrestment was of no practical utility.  The same would be true of inhibition if it were held to fall under the court’s reasoning.

[92]      Fifthly, the court’s reasoning in Royal Bank has given rise to a number of conceptual problems.  These have been discussed in a series of articles, notably Wortley, Squaring the circle: revisiting the receiver and “effectually executed diligence”, 2000 JR 325.  For present purposes it is sufficient to note the most significant of these problems.  The example given in the article is of the creditor of a trading company who raises proceedings and arrests in the hands of the company’s largest debtor.  Meanwhile the company factors its larger debts, including that due from the largest debtor, to a factoring company, and in pursuance of that agreement assigns all of those debts to the factoring company.  Intimation of the assignation to the largest debtor is made the day after the arrestment.  Thereafter the company’s bank appoints a receiver.  The arresting creditor is preferred over the factoring company, the assignee, because the arrestment was effected before the assignation was completed by inhibition.  The assignee, however, is preferred to the receiver, because the assignation was intimated and thus fully effected before the receiver was appointed.  Under the Royal Bank decision, however, the receiver is preferred to the arresting creditor.  The result is circularity.

[93]      Against the foregoing it can be said that, if the decision in Royal Bank is wrong, a different circle of priorities may be created, in cases where an arrestment is followed by receivership which in turn is followed by a liquidation within 60 days of the execution of the arrestment.  On that basis the arrestment would confer no priority over general creditors in the winding up, but the floating charge would rank before the general creditors and after the arrester: see Wortley, op. cit., pages 335-336; and Birrell, “Floating Charges and Receivers”, Stair Memorial Encyclopaedia, Vol 4, paragraph 663.  That circularity is avoided, however, if the expression “effectually executed diligence” is interpreted to signify diligence that has not been struck down by the statutory provisions equalizing diligence within 60 days of winding up (Bankruptcy (Scotland) Act 1985, section 37(2)).  Nevertheless, the first circle of priorities, discussed in paragraph [92] above, indicates the fundamental inconsistency between the rule adopted in Royal Bank and the rules that govern the interaction of diligence with assignations.  This inconsistency is perhaps surprising, because an assignation creates real rights in the traditional sense in favour of the assignee; the assignee becomes the “owner” of the debt in question.  Those rights are stronger than the rights of a floating charge holder prior to the attachment of the charge.  Thus it might be expected that the assignee would in all cases prevail over the floating charge holder.  In my view this is yet a further reason for holding that Royal Bank is not correctly decided.

 

Meaning of “effectually executed diligence on… the property of the company”

[94]      For the foregoing reasons I am of opinion that the arguments accepted by the majority of the court in Royal Bank are not correct.  In his dissenting opinion Lord Johnston held that an arrestment would fall within the expression “effectually executed diligence on the property of the company” in all cases.  That, however, would cause difficulties of its own.  In particular an arresting creditor who did diligence within 60 days of winding up would obtain a priority over the floating charge holder and receiver that he would not have over other creditors who had done diligence within that period of 60 days, as all diligence done within 60 days before winding up falls to be equalized in terms of section 37(2) of the Bankruptcy (Scotland) Act 1985 as applied to winding up by section 185 of the Insolvency Act 1986.

[95]      Nevertheless, a third possible meaning can be given to the expression “effectually executed diligence… on the property of the company”, and it is this meaning that should in my opinion have been adopted in Royal Bank.  This meaning is that the expression “effectually executed diligence on… the property of the company” means any diligence that has not been the subject of equalization in accordance with section 37(2) of the Bankruptcy (Scotland) Act 1985 as applied by section 185 of the Insolvency Act 1986.  This avoids the difficulty with Lord Johnston’s interpretation referred to in the last paragraph.  It is in my opinion supported by a number of important considerations.

[96]      In the first place, meaning must be given to the words “effectually executed”.  The majority of the court in Royal Bank construed these words, taken together with “on the property of the company”, as signifying that the “inchoate” diligences of arrestment (and possibly inhibition) was excluded, whereas the “completed” diligence of furthcoming (and presumably adjudication) were included.  It is not obvious, however, what this has to do with “effectual” execution.  The word “effectual” had for many years been used in the insolvency legislation.  At the time of the events giving rise to the present litigation the corresponding provision was section 37(2) of the Bankruptcy (Scotland) Act 1985, applied to corporate insolvency as stated above, which provides as follows:

“No inhibition on the estate of the debtor which takes effect within the period of 60 days before the date of sequestration shall be effectual to create a preference for the inhibitor and any relevant right of challenge shall, at the date of sequestration, vest in the permanent trustee as shall any right of the inhibitor to receive payment for the discharge of the inhibition”.

 

At the time when Royal Bank was decided the corresponding provision was section 104 of the Bankruptcy (Scotland) Act 1913, which also used the word “effectual”.

[97]      The corresponding provision in the Bankruptcy (Scotland) Act 1856 (section 108) was construed in Dow & Co v Union Bank, 1875, 2 R 459.  The critical question in that case was whether a creditor who had used an arrestment within 60 days of the bankruptcy of his debtor ought to have put a value upon it.  The court held that the creditor was under no such obligation because, under the 1856 Act, the arrestment was not “effectual”.  LP Inglis explained

“But that means effectual to the arresting creditor, and the only way in which it could be effectual to him is by securing him a preference”.

 

Thus the word “effectual” was regarded as denoting whether or not the diligence conferred a preference in the insolvency.  In the case under consideration, such a preference was struck down by the equalization provision, and for that reason it was not effectual.  It seems clear, however, that but for those provisions the arrestment would have been effectual.  While the expression used in the legislation governing receivership is “effectually executed” diligence “on… the property of the company”, I consider it likely that those words were intended to achieve the same result as in Dow & Co v Union Bank, so that an arrestment (or inhibition) on the dependence of an action would be effectually executed diligence on the property of the company.  The reasoning in that case seems to be directly applicable.

[98]      In the second place, the foregoing construction is strongly supported by the Parliamentary material bearing on the original enactment of section 1(2)(a) of the Companies (Floating Charges) (Scotland) Act 1961, where the expression “effectually executed diligence on the property” of a company was first used.  Since the court’s decision in Royal Bank it has been established that courts may use clear Parliamentary statements made by the promoters as a guide to the construction of legislation that is ambiguous or obscure, provided that such material clearly discloses the legislative intention underlying the ambiguous or obscure words: Pepper v Hart, [1993] AC 593, at 634D-E.  For reasons discussed previously, I am of opinion that the expression under consideration satisfies the test of being ambiguous or obscure; moreover, the amount of controversy in academic and professional journals following the decision in Royal Bank provides eloquent testimony to the same effect.  Consequently it is permissible to examine the relevant Parliamentary material.

[99]      The Parliamentary material explaining the purpose of section 1(2)(a) of the 1961 Act was made available to us; the material is found in Hansard, Scottish Standing Committee, 20 June 1961, columns 3 to 16.  During the committee stage of the Bill that became the 1961 Act Forbes Hendry MP promoted an amendment to clause 1(2) which included the wording ultimately found in the Act.  He was asked by Bruce Millan MP (column 14) to explain the amendment dealing with effectually executed diligence on the property of the company.  He replied (column 16) by referring to the statutory rule that equalized diligence done during 60 days prior to liquidation and ranked those who had done such diligence with the ordinary creditors.  He then stated

“If one has done one’s diligence more than 60 days before liquidation, one very properly stands to benefit, but if one is in the queue of creditors at the last minute and has done one’s diligence within the 60 days, one ranks equally with the other creditors.  Those diligences are not affected by a floating charge because a floating charge does not take effect until the winding up actually starts, that is, when the bankruptcy axe has fallen”.

 

That comment makes it clear that the reference to effectually executed diligence was intended to ensure that the system of priority that applied to diligences in an ordinary liquidation would apply equally to a liquidation where the company had granted a floating charge.  It was not intended to cause a floating charge that crystallized following the appointment of a receiver, or indeed a winding up order, to defeat an arrestment or inhibition that had been validly made on the property of the company, provided that the diligence was done more than 60 days prior to the receivership or winding up.

[100]    In 1961 the system of priority was found in section 327 of the Companies Act 1948.  That section provided that, on winding up of a company registered in Scotland, the winding up should at its commencement be equivalent to inter alia an arrestment in execution and decree of furthcoming, and that no arrestment executed on or after the sixtieth day prior to the commencement of the winding should be “effectual”.  This is the equivalent provision to that considered by the Court in Dow & Co v Union Bank, supra, and at the time of the events giving rise to the present litigation a similar provision had effect by virtue of section 37(2) of the Bankruptcy (Scotland) Act 1985 as applied by section 185 of the Insolvency Act 1986.  The expression “effectually executed diligence on the property” was used in section 1(2)(a) of the 1961 Act as eventually enacted, and it was repeated in section 1(2)(a) of the 1972 Act and section 15(2)(a) of the same Act; section 15(2)(a) is the provision that was considered in Royal Bank, and it was substantially re-enacted in section 55(3)(a) of the Insolvency Act 1986, the provision that is relevant to the present case.  Similar wording is used in section 60(1)(b) of the Insolvency Act 1986.

[101]    In view of the foregoing legislative background, I am of opinion that the expression “effectually executed diligence on… the property of the company” refers to diligence that has not been deprived of its effect by the equalization provisions.  I consider that a clear and coherent meaning, which makes sense in the context of the general scheme of priorities on insolvency.  In this respect, the factors discussed at paragraphs [79], [80], [84], [89] and [90] above seem pertinent.  This construction fits better with the scheme of the insolvency legislation than that adopted by the court in Royal Bank.  Both an inhibition and an arrestment create rights that are properly characterized as security rights, and these should prevail against a floating charge, in the same way as other security rights.  The nature of a floating charge assumes that such rights may validly be created during its subsistence.  Furthermore, this construction gives proper content to the expression “effectually executed diligence”.  For these reasons I am of opinion that the decision in Royal Bank should not be followed.

[102]    Before leaving this part of the case, I should note the value of Parliamentary material in a case such as the present, where the import of the expression used in technical legislation is unclear, or allegedly unclear, in the context of existing law.  The advantage of using such material is to enable the courts to move to a purposive construction, that has regard to the core objective or objectives of the statutory provision.  This is not to say that Parliamentary material should be used indiscriminately; before such material can be used, it must appear that the statutory provision in question is either obscure or ambiguous.  In such cases, however, the use of Parliamentary material permits the court to apply the provision with much greater confidence that it is actually achieving the purposes that Parliament (as an abstraction) had in mind in enacting the legislation.  The alternative is an intellectual process akin to speculation, which is scarcely a sensible way to proceed.

 

Inhibition
[103]    Lord Advocate v Royal Bank of Scotland Ltd involved the relationship of an arrestment to a floating charge that had proceeded to receivership.  The present case concerns an inhibition.  In my opinion it is clear that the above reasoning must apply equally to inhibition.  The proposition that an inhibition not followed by an adjudication is governed by the decision in Royal Bank and is therefore not effectually executed diligence was accepted in the course of argument in Armour and Mycroft, Petitioners, 1983 SLT 453, at 455, and in subsequent cases it was assumed that that concession was correctly made, although it had never been the subject of express judicial decision.  An academic argument has been put forward to the effect that, whatever the position may be in relation to an arrestment, an inhibition is effectually executed diligence: diligence complete in itself, which is effectually executed upon registration: see Gretton, Inhibition and Adjudication, 2nd ed, at pages 169-170.  Nevertheless, it has generally been accepted in practice that for the purposes of the expression “effectually executed diligence” inhibition should be treated in the same way as arrestment.  In view of the Court’s decision in the present case, it is unnecessary to resolve this question.  It is sufficient to hold that an inhibition without adjudication is certainly in no weaker a position than arrestment without furthcoming; I do not understand that that proposition has ever been disputed.  Consequently, in view of the Court’s disapproval of Lord Advocate v Royal Bank of Scotland Ltd, the inhibition registered by the pursuer in the present case must be treated as effectually executed diligence for the purposes of section 55(3)(a) of the Insolvency Act 1986.  Exactly the same is true of section 60(1)(b) of the same act, which requires a receiver, in distributing funds attached by his appointment, to give priority to certain categories of creditor, the second of which is “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”.

 

Effect of re-enactment: the Barras principle
[104]    The so-called Barras principle, named after the decision of the House of Lords in Barras v Aberdeen Steam Trawling and Fishing Co, [1933] AC 402, is to the effect that, if a statutory provision has been the subject of judicial interpretation and is re-enacted by Parliament without revision or modification, Parliament must be taken to have endorsed the judicial interpretation of the section.  The most extreme statement of such an approach is perhaps that of Viscount Buckmaster in Barras (at page 411):

“It has long been a well established principle to be applied in the consideration of Acts of Parliament that where a word of doubtful meeting has received a clear judicial interpretation, the subsequent statute which incorporates the same word for 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”.

 

I have described that as an extreme statement because even in Barras other members of the court adopted a more nuanced and reasonable statement of the principle.  Thus Lord Macmillan (at pages 446-447) referred to the relevant principle as being that, where statutory language has received judicial interpretation and is re-enacted, Parliament should be presumed to have given statutory effect to the judicial interpretation.  He qualified this, however, by stating that if the rule were to be treated as a canon of construction of absolute obligation it might have very far-reaching and possibly undesirable consequences.  Consequently the rule was no more than “a valuable presumption as to the meaning of the language employed”.  The presumption was strong where the judicial interpretation was well settled and well recognized, but it might have to yield to other rules of construction, such as the rule that in construing statutes the grammatical and ordinary sense of the words is to be adhered to unless it leads to absurdity, repugnance or inconsistency.

[105]    The Barras principle has been considered in subsequent cases.  Thus in Farrell v Alexander, [1977] AC 59, Lord Wilberforce stated (at page 74F-G)

“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”.

 

In the same case Lord Simon took a similarly sceptical view (at pages 89F-91C).  He pointed out that, taken to its logical conclusion, it could be said that “On this doctrine Parliamentary endorsement has transmuted judicial error into juristic authenticity” (page 90B).  He continued (at page 91A-C):

“The sovereignty of Parliament is fundamental constitutional law; but courts of law have their own constitutional duties, important amongst which is to declare the meaning of a statutory enactment.  To pre-empt a court of construction from performing independently its own constitutional duty of examining the validity of a previous interpretation, the intention of Parliament to endorse the previous judicial decision would have to be expressed or clearly implied.  Mere repetition of language which has been the subject of previous judicial interpretation is entirely neutral in this respect – or at most implies merely the truism that the language has been the subject of judicial interpretation, for whatever (and it may be much or little) that is worth”.

 

[106]    Further statements of the import of the Barras principle are found in cases such as Lowsley v Forbes, [1999] 1 AC 329, at paragraph 15, and A v Hoare, [2008] 1 AC 844, at paragraph 15.  In the former case Lord Lloyd stated the rule as being, like other rules of construction, not in any way conclusive.  “It is an aid: no more”.  More recently, the rule was considered at some length by the UK Supreme Court in R (on the application of N) v Lewisham LBC, [2015] AC 1259.  The discussion of the law by the individual members of the court does not, generally speaking, provide any support for a strong version of the Barras principle.  Lord Hodge (at paragraph 53) accepted that where Parliament re-enacts a statutory provision which has been the subject of authoritative judicial interpretation the court will readily infer that Parliament intended the re-enacted provision to bear the meaning that case law had already established.  On the other hand inferences from parliamentary inaction were more difficult.  Lord Carnwath discussed the principle at some length (at paragraphs 81 et seq), and declined to apply it to a case where the most that could be said was that Parliament had failed to take what might have seemed an obvious opportunity to legislate: Lord Hodge’s case of “parliamentary inaction”.  Lord Neuberger (at paragraphs 144 and 147) endorsed the views expressed in Farrell v Alexander and A v Hoare, and stated that before the court could invoke the Barras principle it would almost always require something more than the mere re-enactment of a previous statutory provision that had been interpreted by the Court of Appeal.  (In the later case of Haile v Waltham Forest LBC, [2015] AC 1471, Lord Neuberger seems to have endorsed the approach taken by Lord Hodge in Lewisham (paragraphs 72-75)).  In Lewisham Lady Hale expressed views similar to Lord Neuberger in that case (at paragraph 167).

[107]    For my part, I am impressed by the reservations expressed by Lords Wilberforce and Simon in Farrell v Alexander and by members of the UK Supreme Court in the Lewisham case.  In my opinion it cannot be supposed that, merely because Parliament has re-enacted a statutory provision that has been the subject of judicial interpretation, that confers quasi-legislative status upon the earlier decision.  Court decisions are always subject to reconsideration by a higher or larger court, and the House of Lords and UK Supreme Court have held that in appropriate cases they may consider their own earlier decisions.  To the extent that re-enactment of a statutory provision can be said to endorse an earlier decision on the provision in question, it is the endorsement of a decision that is subject to reconsideration in certain circumstances.  As Lord Simon stated in Farrell v Alexander (at [1977] AC 91A-C), courts have their own constitutional duties, and in fulfilling those duties it may be necessary to reconsider the validity of a previous interpretation of an Act of Parliament.  Mere repetition of language previously used is normally neutral, or at most endorses a previous judicial interpretation according to the status of that interpretation in the court system.  It does not oust the responsibilities of the courts.

[108]    Furthermore, I consider that the application of the Barras principle must be tempered by practical considerations.  Circumstances may change in a manner that calls for reconsideration of the earlier decision.  In such a case the earlier interpretation should not in my view be applied in a mechanistic manner.  It is also important not to underestimate the difficulty, when a statute is drafted, of evaluating prior court decisions.  This is a function generally performed by those responsible for policy rather than the parliamentary draftsman.  What is done can vary greatly.  At one end is perhaps a Scottish Law Commission report, which is the subject of lengthy consideration with expert advisory groups and consultation with the public, including professional bodies.  At the other end is the re-enactment of a complex statute or series of statutes in which relatively little time can be given to considering the correctness of previous interpretations of the statutory provisions.  What is likely to happen in the latter case is that the existing provision is re-enacted, leaving it to the courts to determine whether the previous interpretation was correct.  In doing this, the courts will have the great advantage of argument from counsel, which those who formulate the statutory policy do not have.  For these reasons I consider that the Barras principle may be a useful aid to construction, but it is not conclusive.

[109]    In the present case the provisions considered in Lord Advocate v Royal Bank of Scotland Ltd were re-enacted as sections 55 and 60 of the Insolvency Act 1986 through a process of consolidation in the Companies Act 1985 and the Insolvency Act 1986 itself.  In both cases the statute was a consolidation statute, which means that the scope for amendment was extremely limited; the function of a consolidation statute is to reproduce what is already in the statute book, and it is impossible to make any significant alterations of substance to the existing statute law.  (On the history of the present legislation, which is well known to those practising in the field, see Wortley, Squaring the Circle, pages 339-340).  It has been held that the Barras principle does not apply to consolidation Acts: Haigh v Charles W Ireland Ltd 1974 SC (HL) 1, at 40 per Lord Diplock.  That view is in my opinion clearly correct.  If all that Parliament is doing in a consolidation statute is to reproduce the existing law, with no scope for significant change, it cannot be said that there is any genuine endorsement of any cases interpreting the statutes concerned.  There is no power to do so.  In these circumstances I am of opinion that the Barras principle has no application to the present case.

 

Settled practice on faith of earlier interpretation

[110]    A further principle of statutory interpretation that is potentially relevant to the present case is that, in general, a court should be slow to reverse an earlier decision where a settled commercial or other practice has developed in reliance on the decision.  This principle represents common sense: a court will normally be anxious to avoid disturbing settled commercial or other practice unless there is good reason to do so, and for this purpose it is not even necessary that there should be a prior court decision.  The significance of settled practice was considered by the UK Supreme Court in R (N) v Lewisham LBC, supra.  Lord Carnwath stated the principle as follows (at paragraph 95):

“[S]ettled practice may, in appropriate circumstances, be a legitimate aid to statutory interpretation.  Where the statute is ambiguous, but it has been the subject of authoritative interpretation in the lower courts, and where businesses or activities, public or private, have reasonably been ordered on that basis for a significant period without serious problems or injustice, there should be a strong presumption against overturning that settled practice in the higher courts.… On the other hand it may be relevant to consider whether the accepted interpretation is consistent with the grain of the legislation as it has evolved, and subsequent legislative action or inaction may be relevant to that assessment”.

 

It should be noted that the settled practice principle is merely one factor in interpretation, and it could not be decisive if a court thought that there were good reasons for deciding the law to the contrary.  In this connection, the comments of Lord Neuberger in Lewisham LBC (at paragraph 148) are relevant:

“[A] court should not lightly decide that a statute has a meaning which is different from that which the court believes that it has.  Indeed, so to decide could be said to be a breach of the fundamental duty of the court to give effect to the will of Parliament as expressed in the statute”.

 

I would respectfully agree with that statement of the law. 

[111]    So far as the facts of the present case are concerned, I think that it is important to draw a distinction between two types of “settled practice”.  The first occurs where a section of the public – for example those involved in a particular line of business, or as in Lewisham local authorities performing particular functions – order their affairs in a manner that is fundamentally dependent on the proposition that a previous court decision is correct.  While such practice is not conclusive, a court reconsidering the earlier decision should have regard to the fact that contracts may have been drafted or transactions structured in a specific way to reflect the law as laid down in that decision, and unravelling those transactions may be a very difficult matter.  This should be contrasted with the second type of case, sometimes described as “settled practice”, which occurs where cases coming before courts (or arbitrators) have been decided in reliance on an earlier decision, in accordance with the ordinary doctrine of precedent, or where cases have been settled in reliance on that decision, but there is no wider impact on commercial or professional or administrative practice.  All that has happened is that those engaged in litigation have observed the doctrine of precedent.

[112]    In my opinion the distinction between these two categories is important.  In the first category, the substance of commercial transactions has been arranged in reliance on the earlier decision, and the practical difficulties that result may be significant.  In the second category, by contrast, the consequences are merely those of the court’s reaching a different view on a particular principle of law.  That has happened frequently in the past, and it has not been suggested that there is anything unfair or unreasonable in such a result.  To take a well-known example, the rule applied by a majority of the Inner House in Mullen v Barr & Co, 1929 SC 461, was reversed by the House of Lords in Donoghue v Stevenson, 1932 SC (HL) 31, on almost identical facts, but no one would suggest that the earlier decision was an example of “settled practice”.  What happened was simply that a court reversed a previous decision because it thought that it was wrong.

[113]    The present case in my opinion falls into the second of these categories.  A number of court decisions dealing with the effect of receivership on diligence have proceeded on the basis that Lord Advocate v Royal Bank of Scotland Ltd was correctly decided.  Armour and Mycroft, Petitioners, supra, is an example of this.  Even in cases where Royal Bank was distinguished, for example such as Iona Hotels Ltd v Craig, 1990 SC 330, the court’s reasoning proceeds on the basis that the earlier case was correctly decided and therefore had to be distinguished if a different result were to be reached.  In all of these cases, all that was involved was a straightforward application of the doctrine of precedent.  The same is true of claims that have been settled on the basis that Royal Bank was correct.  What did not happen, however, is any significant alteration in commercial practice in reliance on the decision.  Creditors of a company that had granted a floating charge might have been discouraged from using diligence, but once again that is merely a recognition of the binding nature of judicial precedent.  Parties did not structure contracts or security documents or other legal acts on the faith of Royal Bank; there was nothing that could be altered in the light of that decision.

[114]    I am accordingly of opinion that the settled practice principle has no application to the present case.  It is now recognized that the remedy of repetition may be based on an error of law, and not merely an error of fact.  If a claim has been settled on the faith of Royal Bank, it might be said that the settlement proceeded on an error of law, and that therefore the party enriched by the transaction, normally the receiver or floating charge holder, should compensate a creditor who agreed to give up the value of its diligence.  I do not express a view on whether such a claim would be well founded; we did not hear argument on the matter.  Nevertheless I do not think that this is likely to be a significant problem.  Any such claim will be subject to the short negative prescription, which applies to claims based on unjustified enrichment.  In such cases there could not normally be either fraud or error induced by the act of the debtor.  Consequently any claim based on unjustified enrichment will only apply to events that occurred during the last five years.  The court is obviously unable to know how many such cases might exist, but for my part I suspect that the number is small.

 

Advances post-inhibition
[115]    The alternative argument for the present pursuer was that, even if Lord Advocate v Royal Bank of Scotland Ltd was correctly decided, it should be distinguished on the ground that all of the debts owed by the first defender to the Clydesdale Bank at the date of the receivership arose from advances made by the bank after the date of registration of the pursuer’s inhibition.  On that basis, it is said that the whole of the indebtedness secured by the floating charge consists of post-inhibition debts and that as a matter of general law, in so far as such debts are payable out of the heritable property of the debtor, they are postponed to the inhibition.  For this purpose, it is said, it is irrelevant that the floating charge predated the pursuer’s inhibition.  In the present case the first defender’s principal assets consisted of heritable property, in the form of two houses in the same development as the pursuer’s house, and accordingly for practical purposes the whole of the first defender’s debts, including that due to the pursuer, are payable from proceeds of its heritable property. 

[116]    In Iona Hotels Ltd v Craig, 1990 SC 330, the court required to consider the relative priorities of an arrestment on the dependence of an action and a floating charge under which a receiver had been appointed, but in a situation where the arrestment had been effected prior to the granting and registration of the floating charge.  It was held that the rights of the arrester prevailed over those of the floating charge holder, notwithstanding the appointment of the receiver.  The decision was based on the principle of litigiosity (see LP Hope at 335); arrestment, although merely a step in diligence (on the assumption that Royal Bank was correct), rendered the subjects litigious as soon as it was used.  The result was that the common debtor (the granter of the floating charge) could not defeat the arrestment by any posterior voluntary deed.  The floating charge had the effect of a prohibition, addressed to the arrestee, so that the property arrested might remain in his hands for the satisfaction of the debt: ibid.

[117]    The present case concerns an inhibition rather than an arrestment.  The most significant difference from Iona Hotels is that the registration of the present inhibition followed the granting of the floating charge.  Nevertheless the registration of the inhibition preceded the making of the advances that remained outstanding at the date when the floating charge crystallized on receivership.  Does this distinguish the case from Iona Hotels? In my opinion it does not.  The two fundamental legal principles are those set out at paragraph [79] above, including the quotation from Graham Stewart, Diligence, at pages 559-560.  The second of the relevant principles is that debts contracted by the debtor after the date of the inhibition are postponed to the claims of the inhibiting creditor, so far as they reduce the debtor’s heritable estate.  In the present case the first defender contracted all outstanding debts owed to the Clydesdale Bank following the date of the inhibition.  The result is that those are postponed to the claims of the pursuer as inhibiting creditor.  That is a straightforward application of the general principles applicable to the registration of an inhibition.

[118]    This result is not affected in my opinion by the fact that a floating charge was created and registered prior to the date of the inhibition.  A floating charge is a security.  The purpose of the security is to ensure the payment or satisfaction of a debt, in a manner distinct from and in addition to the right of action and execution against the debtor under the latter’s personal obligation: Gloag and Irvine, op. cit., at pages 1-2.  Unless a debt exists, the security is nothing more than a legal abstraction.  It achieves no practical result.  It is only when a debt has been contracted that the security has practical effect, to provide the creditor with an additional means of ensuring the satisfaction of his debt.  Thus when the present floating charge was granted by the first defender in favour of the Clydesdale Bank, it only had practical effect to the extent that sums were due by the first defender to the Bank.  The sums that remain due by the first defender to the Bank all postdate the registration of the inhibition.  The floating charge had no practical effect so far as those sums were concerned until the indebtedness was contracted.  It follows that the obligation to pay owed by the first defender to the Bank can only have effect from a date after the registration of the inhibition, notwithstanding the existence of the floating charge.  Consequently that the first defender’s obligation to the Bank cannot prejudice the rights of the pursuer against the first defender’s heritable estate.  That by itself is sufficient to decide the present case in favour of the pursuer.

 

Conclusion

[119]    The Lord Ordinary decided the case on the latter basis, holding that because the debts owed to the Bank all postdated the inhibition, the inhibition prevailed over those debts.  In my opinion his reasoning cannot be faulted.  For obvious reasons at first instance he was compelled to assume that Lord Advocate v Royal Bank of Scotland Ltd was correctly decided; it has been necessary to convene a full bench in the Inner House to hold otherwise.  Consequently, although our primary ground of decision has been that Lord Advocate v Royal Bank of Scotland Ltd was wrongly decided, in my opinion the Lord Ordinary reached a correct decision on the only ground that was open to him. 

[120]    Nevertheless, for the reasons already given, I am of opinion that the reclaiming motion should fail and that the cross-appeal should succeed.  The practical result is as indicated by your Lordship in the chair.

[121]    In conclusion, I would add the following observations.  The introduction of the floating charge into Scots law, and subsequently the concept of receivership, have created significant practical problems.  A large part of the difficulty has, I think, been an attempt to reproduce concepts of English equity in a legal system that has no similar institution.  The conceptual structure of English equity is distinctive, being based, in its original form, on a series of general principles that can be adapted to produce justice in individual cases.  It is difficult to translate the institutions of English equity into another legal system, especially one based on the more rigorous conceptual structure of Roman law, as is the case with Scots law and most other European legal systems other than English law.

[122]    It is noticeable that in the English-speaking world, in systems which are for the most part based on English law (and equity), the modern tendency has been towards the systematic codification of property and security rights.  This produces greater certainty and has generally superseded the traditional form of floating charge.  Such a tendency towards systemization can be seen in the provisions of Article 9 of the Uniform Commercial Code in the United States and the Personal Property Security Acts, based on the UCC, found in the Canadian provinces, New Zealand and most recently Australia.  These statutes provide a clear and coherent structure for property rights and for systematic registration so that property rights are at all times a matter of public record.  The Scottish Law Commission’s current project on Moveable Transactions is attempting to follow the route set out in the Uniform Commercial Code and the Personal Property Security Acts.  That, in my opinion, is a much more satisfactory basis for the law governing rights in security than the relatively incoherent notion of the floating charge as it has existed in Scotland since 1961.  It must be hoped that future Scottish legislation will clarify and codify this area of law in the manner that is being developed by the Law Commission.  If this is done the result will in my opinion be to reduce substantially the uncertainty, and indeed incoherence, of the law relating to floating charges as it has developed over the last half-century.


Web Blue CoS

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2017] CSIH 23

CA222/14

Lord President

Lord Menzies

Lord Brodie

Lord Drummond Young

Lord Malcolm

OPINION OF LORD MALCOLM

in the Reclaiming Motion by

DAVID MacMILLAN

Pursuer and Respondent

against

T LEITH DEVELOPMENTS LTD (in receivership and liquidation)

Defenders and Reclaimers

Pursuer and Respondent:  McBrearty QC, Roxburgh; Kennedys

Defenders and Reclaimers:  Sellar QC, Parratt; HBJ Gateley

 

10 March 2017

[123]    I agree with your Lordship in the chair as to the proper disposal of this reclaiming motion, and that essentially for the reasons given in your Lordship’s opinion.  I wish to add only a few words of my own. 

[124]    In what is at heart a question of the interpretation of a relatively straightforward phrase – “subject to the rights of any person who has effectually executed diligence on all or any part of the property of the company prior to the appointment of the receiver” – it is somewhat surprising that it has caused any difficulty.  An inhibition is a free-standing form of diligence complete in its own right.  For centuries it has been a powerful weapon in a creditor’s armoury.  The pursuer has the benefit of a properly executed and registered inhibition over all of the defenders’ heritable property, something which is deemed to be known by all.  It seems clear that the purpose of the relevant statutory provisions was to preserve whatever rights flow from a valid and effective diligence. 

[125]    At root the difficulty appears to have arisen from a notion that, absent a real right in the debtor’s heritage, or some equivalent in respect of diligence over moveable property, the holder of an attached floating charge must prevail.  (A similar line of thinking was corrected by the House of Lords in Sharp v Thomson 1997 SC (HL) 66.)  This involves an unlikely interpretation of the phrase under consideration.  It is hard to imagine that in 1961, when a floating charge crystallised on the winding up of a company, or in 1972, 1985 or 1986, Parliament chose this wording as a method of signalling that floating charge holders were to be treated more favourably than liquidators, trustees in sequestration, and heritable creditors.  For example, is it plausible that it was intended that, pending further diligence, a receiver could simply ignore an inhibitor’s arrestment of the free proceeds of the sale of the debtor’s heritable property carried out to enforce his preference in respect of the ranking of post inhibition advances? 

[126]    The courts have long since abandoned an absolute insistence upon unnecessary procedures in this area of the law.  Simply by way of illustration, reference can be made to Bell: Commentaries, 7th ed 2, 139-40 and the reference to an opinion of the Lord President, Sir Ilay Campbell, in McLure v Braid, 19 November 1807:

“Adjudication by the inhibitor was therefore, though competent, not necessary, because he was sure of payment out of the price of the estate, in preference to all other creditors.”

 

The inhibition was described as a “real incumbrance” on the debtor’s heritable estate.  The decision in McLure was referred to with approval by Lord President Inglis in Baird & Brown v Stirrat’s Trustee (1872) 10 M 414 at 419.  Stewart (Diligence at 561) refers to Horsburgh v Davidson 1750 M 6985 where similar remarks can be found.  Sheriff Principal Caplan’s observations in Halifax Building Society v Smith 1985 SLT (Sh Ct) 25 treating an inhibition as a “security” for the purposes of section 27(1) of the Conveyancing and Feudal Reform (Scotland) Act 1970 can be regarded as a modern example.  (In the context of an arrestment attaching without a furthcoming, see Bell: Commentaries, 2, 62 and Stewart: Diligence at 225.)

[127]    Well before the passing of the 1961 Act, and for various reasons, not least its unsatisfactory nature, adjudication had more or less disappeared from the scene as a method of securing an inhibitor’s claim.  Should it prove necessary, and often it will not be necessary, inhibitions are enforced by one or more of a number of other remedies, including reduction (so far as is required in order to prevent prejudice caused by posterior voluntary acts), liquidation, sequestration, multiplepoinding and arrestment.  In any event, adjudication is an independent form of diligence available to any creditor, not just to an inhibitor.  There is no logic in treating an inhibition as an effectually executed diligence on the property of the company only if followed by an adjudication.  According to Bell (Principles 10th ed 2306) to make an inhibition “effectual”, all that is required is execution and registration.  Bankton (Institute: 1.7.138) notes that after publication an inhibition is “effectual against posterior voluntary debts and deeds.”  (It should be noted that an inhibitor’s preference in respect of posterior debts has been removed by statute (Banruptcy and Diligence Etc (Scotland) Act 2007, s 154), however this took effect after the pursuer registered the inhibition.)  At the hearing mention was made of the decision in Menzies v Murdoch (1841) 4 D 257.  In this regard I agree with the submission of Mr McBrearty QC that it turned on the particular context of the Act of 1661, cap 24. 

[128]    Contrary to the commercial judge (paragraphs 32/33), I would accept that the statutory provisions were designed as a self-contained code to govern the ranking of an attached floating charge in a competition with creditors holding diligences, securities or prior floating charges.  I base my opinion in the present case on the pursuer having “effectually executed diligence” on the heritable property of the company.  If that is incorrect, and an inhibition falls outwith the saving provisions in the Act, in my view both of the declarators sought by the pursuer should be refused.  The commercial judge’s approach was influenced by the outcome in Iona Hotels Ltd v Craig 1990 SC 330; however, as the present ruling demonstrates, that case, though correctly decided, proceeded on the basis of, if not erroneous, at least incomplete reasoning.

[129]    None of this causes difficulty when it is understood that the rights of an inhibitor are merely saved, not improved.  To regard an inhibition as an effectually executed diligence for these purposes involves no innovation on the common law rule that it has no effect on pre-inhibition advances or deeds, nor on posterior non-voluntary acts.  Furthermore, on one view it is only if an inhibition falls within the statutory provisions that an inhibitor enters the distribution ranking process – see MacPherson, Edinburgh Law Review, vol. 20 (2016), 353 at 359.  All of this does mean that a subsequent floating charge will be vulnerable to an inhibitor’s right not to be prejudiced by post-inhibition voluntary deeds, but, given the publication of all inhibitions, there is nothing unfair or problematic in this.