Pursuer: Moynihan QC and Brown; DAC Beachcroft Scotland LLP

Defenders: I G Mitchell QC and Lindhorst: Blackadders LLP

11 September 2012

[1] This is an application under section 15K of the Debtors (Scotland) Act 1987 ("the 1987 Act") for the recall of diligence on the dependence.

[2] The pursuer ("Playfair") seeks, among other remedies, declarators that the shares in certain family companies, including Cordelt Limited ("Cordelt") are held in trust for it and that Mako Property Limited ("Mako") holds certain heritable properties in trust for it and an accounting for those assets. The defenders do not dispute Playfair's claim to an accounting as trust beneficiary but assert that Mr Michael Karus, who has a controlling interest in Playfair, and Mrs McElvogue, his sister, entered into an oral contract to have an equal interest in the companies, including Cordelt and Mako.

[3] On 11 August 2011 Playfair served inhibitions on Cordelt and Mako and then registered them. The defenders now seek recall of those inhibitions in respect of two properties. Cordelt and Mako assert that they had contracted to sell the properties before the inhibitions were served on them but the existence of the inhibitions prevents them from displaying a clear title to the purchasers.

[4] The application raises two legal issues, namely (i) whether section 160 of the Bankruptcy and Diligence (Scotland) Act 2007 ("the 2007 Act") altered the pre-existing law that an inhibition did not prohibit the conveyance of a property which the person inhibited was bound to convey under a prior contract and (ii) what amounts to a voluntary act by a seller where a contract of sale is delayed for a long time.

30-32 Canonmills, Edinburgh

[5] By missives dated 18 and 20 August 2010 Mako contracted to lease the shop premises at 30-32 Canonmills ("the premises") to JJB (Scotland) Limited ("JJB"). The missives contained a style back letter by which Mako gave JJB an option to purchase the premises on giving six months' notice for £300,000 if the option date was before 31 December 2011. Thereafter the price was to be the open market value and in any event not less than £300,000.

[6] The style back letter was in the form of an offer and acceptance. It contained a clause providing that it was an "essential, material and fundamental condition" that the purchase price be paid on the option date (cl 2.6). The style back letter also included an acceptance text in the following terms:

"We [ ] Limited hereby accept the terms of the foregoing letter dated by Mako Property Limited and agree to be bound by its terms.

Yours faithfully,

[ ] Limited"

[7] On 31 August 2010 Sturrock Armstrong & Thomson, who were JJB's solicitors, sent Macgregor Thomson, who were Mako's solicitors, the signed lease and guarantee and asked for confirmation that Mako had signed the back letter. Mako's solicitors wrote back on 2 September 2010 enclosing the principal back letter for JJB's signature and return. JJB did not return the back letter.

[8] On 27 May 2011 JJB's solicitors intimated their client's intention to exercise the option and asked to settle early, on 1 August 2011 if possible. Thereafter the parties' solicitors communicated by email to arrange the conveyancing. JJB was not able to complete the transaction on 1 August 2011 as planned after Mako's solicitors emailed on 31 July to ask about progress. On 2 September 2011 Mako's solicitors emailed to ask why there had been no response and raised questions about the payment of insurance premia, rent from 1 August 2011 and the legal costs if the premises were disponed in two parts to separate parties. The matter appears to have gone quiet until about 22 November 2011 when Mako's solicitors emailed JJB's solicitors and referred to JJB's request to settle the following week. In the email Mako's solicitors again raised the question of a contribution to its legal costs which Mako would incur in the splitting of the title to the premises. They attached the title sheet and plan but stated that they would instruct searches only once JJB's solicitors had confirmed that they were in funds and ready to settle. On 28 November 2011 JJB's solicitors intimated that they were in funds to settle the purchase of the shop part of the premises but not the flat (28 Canonmills). It appears that the shop and the flat were both part of the premises which had been separated at JJB's request into two units as JJB's solicitors sent two draft dispositions for revision.

[9] At about this time Mako's solicitors sought to address the inhibition which Playfair had served on their client by assembling evidence that the dispositions were not a voluntary alienation of the premises in breach of the inhibition. Their internal enquiries revealed that they did not have a signed version of the back letter. They wrote on 2 December 2011 to the Registers of Scotland to ascertain the Keeper's views. I have not seen that letter. On 14 December 2011 an adviser in the Registers of Scotland replied to the enquiry. She informed Mako's solicitors that the Keeper took the view that under section 160 of the 2007 Act one had to look to the date of delivery of the deed in which the right to the property is conveyed or otherwise granted to ascertain whether an inhibition struck at a transaction. Accordingly she intimated that the Keeper would have to exclude indemnity on registering the dispositions of the premises.

[10] Thereafter in January 2012 Mako applied to the court unsuccessfully for the recall of the inhibitions over several properties, including those with which this action is concerned, on the ground that the continued inhibition was oppressive. It renewed its motion in late March 2012 but on a continued motion restricted the application to the two properties which this motion addresses. On 4 April 2012 I refused the motion in hoc statu.

[11] On 5 April 2012 JJB's solicitors wrote to Mako's solicitors to confirm that they were ready to complete the transaction and asked them to implement the terms of the missives. They stated that JJB required a clear Form 12/13 report and clear Companies Office/charges search reports disclosing no entries prejudicial to Mako's ability to deliver a marketable title. Those solicitors had also sent a letter in the same terms to Mako dated 2 April 2012. JJB paid one half of the rent due on the premises between 1 August and 27 November 2011 but has retained the balance and not paid rent since then.

[12] Mr Richard Godden, the solicitor acting for the defenders, produced an affidavit dated 25 June 2012 in which he explained that he had read the solicitors' correspondence files in this transaction and in the Cowgatehead transaction which I describe below. He confirmed that neither party to each transaction had rescinded the contracts and that the bargains appeared to be still live.

3 Cowgatehead, Edinburgh

[13] By agreement dated 3 and 16 May 2011 Cordelt agreed to sell and Bruce Taverns Limited ("BTL") agreed to purchase Bar Salsa at 3 Cowgatehead, Edinburgh ("Bar Salsa") at a price of £300,000. The date of entry was specified as 1 June 2011 or such other date as might be agreed in writing. The contract included the following standard clause (cl 13(d)):

"If the price remains unpaid in whole or in part at any time more than two weeks after the due date, the seller will be entitled to rescind the missives, and to payment from the purchaser, at the seller's option, of one but not both of:

(i) ordinary damages in respect of all proper and reasonable losses arising out of the non payment of the price and failure of the missives (which will include wasted expenditure); or

(ii) liquidated damages, payable on the end date, calculated as the amount of interest which would have run on the amount of the price outstanding at the prescribed rate from the due date until the end date (under deduction of any amount by which the price obtained by the seller on a re-sale of the property exceeds the price)."

[14] The defenders lodged a string of emails between Mr McElvogue, who was giving instructions on behalf of Cordelt, Kevan Fullerton on behalf of BTL and MacGregor Thomson, the solicitors who were acting for both parties. The emails suggest that, because BTL had had difficulty in obtaining the funds for the purchase, Cordelt agreed to postpone the date of entry initially to 9 June 2011. When the funds were not made available, it was agreed on 10 June that, on BTL's payment of a £5,000 deposit, the date of entry would be extended until 31 August 2011. BTL paid the non-refundable deposit on 13 June 2011.

[15] Mr Fullerton sent Cordelt a letter on behalf of BTL dated 30 March 2012 in which he referred to the agreement and stated that BTL was ready to complete the transaction. He called on Cordelt to implement the agreement and requested a clear Form 12/13 disclosing no entries prejudicial to Cordelt's ability to transfer title. As mentioned above Mr Godden confirmed in his affidavit that neither party had rescinded this contract.

Discussion

(i) The 2007 Act and the voluntary conveyance

[16] The first issue is whether the 2007 Act has altered the historic law of inhibitions so that the diligence strikes at the conveyance of a property which implements a contractual obligation which the inhibited person entered into before the date of the inhibition.

[17] The view that it does appears to arise from an interpretation of sections 150 and 160 of the 2007 Act. Section 150 provides:

"(1) Subject to section 153 of this Act, inhibition may affect any heritable property.

(2) Any enactment or rule of law by virtue of which inhibition may affect other property ceases to have effect.

(3) For the purposes of subsection (1) above and section 157 of the 1868 Act, a person acquires property at the beginning of the day on which the deed conveying or otherwise granting a real right in the property is delivered to that person."

[18] I agree with Mr Nicholas Grier, the annotator of the 2007 Act in Current Law Statutes, that subsection (3) has the effect that if a deed of conveyance is delivered to the acquirer and later that day he is inhibited, the inhibition catches the newly acquired heritable property although the acquirer has not yet obtained a real right in that property through registration. Section 157 of the Titles to Land Consolidation (Scotland) Act 1868, to which section 150 of the 2007 Act refers, provides that an inhibition does not have effect against acquirenda. Section 150 of the 2007 Act in my view is concerned only with setting a date at which the inhibited person acquires property and has no wider import.

[19] Where I respectfully part company from Mr Grier is that I do not consider that the Scottish Parliament in enacting this provision and other sections in Part 5 of the 2007 Act intended to alter the nature of diligence to create a hybrid diligence in personam and in rem. The 2007 Act was a significant reform of the law of inhibition. In particular section 154 removed the exclusionary preference that inhibition conferred in insolvency over subsequent debts which gave rise to the complicated canons of ranking (Bell's Commentaries vol 2 p. 413 para 519; Baird and Brown v Stirrat's Trustee (1872) 10 M 414). But it did not alter fundamentally the nature of the diligence as a prohibitory diligence which affected the inhibited person's ability to convey, otherwise dispose of or burden heritable property. No nexus over the property is created.

[20] Section 160 of the 2007 Act, which defines a breach of inhibition, provides:

"An inhibited debtor breaches the inhibition when the debtor delivers a deed -

(a) conveying; or

(b) otherwise granting a right in,

property over which the inhibition has effect to a person other than the inhibiting creditor."

This provision defines the date of the breach as the date of delivery of the deed rather than the date of conclusion of missives for the transfer or the subsequent registration of that transfer. It does not in my view alter the well-established rule that an inhibition does not strike at the execution and delivery of a deed implementing an obligation to convey or burden a property which pre-dates the execution of the inhibition. If the advice from the Registers of Scotland is construed as suggesting otherwise, I respectfully disagree. I doubt that that was the Keeper's advice. I have not seen the letter to which the adviser replied; and there may, as I discuss below, have been other grounds for the proposed exclusion of indemnity.

[21] I am fortified in my view of the law by consideration of the work of the Scottish Law Commission ("the SLC") which contributed to the policy that gave rise to relevant provisions of the 2007 Act, although unusually it did not prepare draft legislation in its report. Mr Mitchell helpfully took me through the relevant parts of the discussion paper, "Diligence against Land" (SLC DP No 107, October 1998) and the "Report on Diligence" (SLC report No 183, May 2001). In the former, the SLC (at para 3.22) proposed that:

"An inhibition should continue to prohibit the inhibitee from granting any future voluntary deed relating to the heritable property affected by the inhibition to the prejudice of the inhibitor."

In relation to the date when the purchaser acquires lands for the purposes of inhibition the SLC discussed the options in paras 3.119 to 3.129 of the discussion paper. It discussed the date when an inhibited person breached an inhibition between paras 3.130 and 3.136.

[22] The SLC returned to those proposals in its report. Its recommendation no. 79 (that property in respect of which inhibition has effect should be heritable property which can be attached by land attachment or an attachment order) led to section 150(1) and (2) of the 2007 Act. In its discussion of the pre-2007 Act law, it confirmed (in para 6.40) that

"Post-inhibition deeds or debts which the inhibitee is bound to grant or incur as a result of pre-inhibition obligations do not contravene the inhibition."

Its recommendation no 85, which was given effect in section 154 of the 2007 Act, was:

"An inhibition, while continuing to render reducible future voluntary deeds, should cease to confer a preference by exclusion over debts voluntarily incurred after the date of the inhibition ..."

Recommendation 86, which sought to define the date on which lands should be treated as having been acquired, was given effect in section 150(3) of the 2007 Act. Its recommendation 91, which led to section 160 of the 2007 Act, was:

"An inhibition should be treated as breached on the date when the inhibitee delivers to a third party a voluntary deed relating to heritable property affected by the inhibition."

[23] I am satisfied that it is appropriate to look to the documents which the SLC produced when interpreting the provisions of 2007 Act which relate to inhibition as the policy memorandum on the Bill which led to that Act stated (in para 112) that it was implementing the SLC's recommendations in relation to, among others, inhibition. The policy memorandum also stated (in paras 633 and 665) that the delivery of a voluntary deed would breach an inhibition.

[24] I conclude that an inhibition does not strike at a transaction which the inhibited person is bound to carry out as a result of a pre-inhibition obligation. The reforms of the 2007 Act did not create a statutory code which excluded that common law characteristic of the diligence. Had the 2007 Act had that effect it would have created a diligence which forced the inhibited person either to breach the inhibition or break his contract. That would not have been good law reform.

(ii) Whether the proposed conveyances are voluntary

[25] In relation to the sale of the Canonmills premises Mako faces the difficulty that there is no signed back letter to establish the option agreement and thus the prior obligation to convey which could defeat the inhibition. Mr Mitchell accepted that he could not demonstrate that there was a binding option agreement in the missives but submitted that the parties' acts since the service of the option letter on 27 May 2011 had created a contract, which obliged Mako to convey the premises, before the inhibition came into effect. He submitted that the parties' acts were sufficient to create a binding agreement under section 1(3) and (6) of the Requirements of Writing (Scotland) Act 1995.

[26] I am not persuaded that I should act on the basis of the emails which have been produced to give effect to that submission. It is unlikely that they present the whole picture. Further, as Mr Moynihan submitted, the parties negotiated over the splitting of the premises and the payment of the legal fees which that split would involve. Those negotiations were not resolved at the time the inhibition took effect and entailed a voluntary alteration of the pre-existing contract if there was one. That may well be correct. I am therefore not satisfied that the proposed conveyance of the premises would be a involuntary deed.

[27] Cordelt allowed BTL time after the contracted date of entry because the purchaser did not have funds to complete the transaction. BTL did not offer to complete the transaction by proffering the funds after Cordelt was inhibited until it wrote on 30 March 2012 (paragraph [15] above).

[28] Mr Moynihan submitted that the allowance of time by the seller after the inhibition took effect amounted to a voluntary act. He argued that once the seller was inhibited, it should have terminated the contract as it was entitled to do because otherwise a conveyance in implement of that contract would be a voluntary act. In any event the documents which the defenders had produced did not demonstrate that the proposed conveyance was involuntary.

[29] It is well established that a breach of contract does not automatically bring the contract to an end. The aggrieved party has an option to rescind the contract and thereby excuse himself from further performance. Cordelt has not rescinded the contract. BTL offers to perform its part of the contract by paying the price, although late.

[30] I do not think that there is a general rule that a seller, who is entitled to rescind a contract of sale because of a purchaser's delay in payment of the price but who chooses or overlooks to do so, breaches an inhibition if he thereafter implements the extant contract. But there may be circumstances in which the delay is such that the purchaser's tender of the price and the demand for performance would involve the seller in a transaction which was fundamentally different from that for which the parties had originally contracted. This might call into question the inhibited person's good faith if he sought to implement such a contract. In those circumstances it could be argued that the delivery of the conveyance was a voluntary act. I reserve my judgement on that issue.

[31] I prefer to decide the matter on another basis. It is not clear from the material before me what, if anything, occurred between 31 August 2011 and 30 March 2012 in the Bar Salsa transaction. I observe that the letter of 30 March 2012, like those from JJB's solicitors (paragraph [11] above), was produced in the context of the defenders' motion for recall of inhibition which I heard at that time. I do not have the whole picture and therefore cannot be satisfied that the delivery of the conveyance would be a voluntary act.

(iii) The exercise of discretion

[32] The court has a discretion under section 15K(7)(b) of the Debtors (Scotland) Act 1987 to recall an inhibition if it is satisfied that it is reasonable to do so.

[33] Mako and Cordelt are property development companies. Their businesses are seriously hampered by the continued effect of the inhibitions. They seek to reduce their borrowings and gain access to further funds. Mr Mitchell referred me to an email from Allied Irish Banks plc dated 4 July 2012 which stated that it would allow the sale of the Canonmills premises on condition that £287,000 of the sale price would be used to reduce Mako's loan facility and that Mako's borrowings were then £23,923.32 over their limit. He also referred to an email of the same date from Clydesdale Bank plc which stated that it would take £200,000 of the sale proceeds of Bar Salsa to reduce Cordelt's loan facility.

[34] I am not persuaded that it is reasonable to recall the inhibitions over the two properties. I reach this view for the following five reasons. First, it appears that the proposed delivery of the two conveyances might be voluntary acts which would breach the inhibitions. Secondly, the banks' email messages do not suggest that either company is facing immediate demands for repayment of its borrowings. Thirdly, I take account of the nature of Playfair's admitted claim as the beneficiary of a trust. Fourthly, the financial dealings between the various family companies are complicated and may make it difficult to give a proper accounting. Finally, I observe that the defenders are principally responsible for the continued delay in the resolution of this family dispute by their late assertion of the oral contract as a partial defence to the claim and their approach to the preliminary proof about that alleged contract which caused it to be discharged.

[35] I therefore refuse the motion for recall of the inhibitions.