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Floating Charges and Trust Property in Scots Law: A Tale of Two Patrimonies?

Document Cited authorities 8 Cited in Related
Vincent
DOI10.3366/elr.2018.0453
Date01 January 2018
Published date01 January 2018
Author
Pages1-28
INTRODUCTION

In Scots law, the trust and the floating charge are two institutions that have been notably influenced by English law.1 They are also comparable in a number of other respects. All types of property, capable of being owned, can be secured by a floating charge or held in trust. A trust constitutes a “fund” in which one asset is replaced by another through real subrogation and this also applies to the fluctuating property encompassed by a floating charge.2 In addition, like a floating charge, a trust can be used as a security device.3 Yet there are also significant differences between them. The ways in which they arrived and developed in Scots law are markedly divergent.4 And there are also contrasts regarding their integration within the legal system, and with respect to the legal relationships of the parties involved with each.5

Understanding the respective natures of trusts and floating charges, and how they operate obviously assists with determining the content of their interaction. That is certainly true in the present article, which contains an extensive doctrinal analysis of floating charges and trust property in Scots law. It uses the dual patrimony approach of trust law to interpret the floating charge's creation, attachment and enforcement, and thereby demonstrates that it is not possible under the current law to effectively charge property held by a company in trust. Although this conclusion aligns with the orthodox view regarding floating charges over trust property in Scots law, following Tay Valley Joinery Ltd v CF Financial Services Ltd,6 that view is often expressed with minimal discussion and explanation.7 By contrast, this article identifies the application of the dual patrimony theory as a broader foundation explaining the current legal position.

The article also serves an additional purpose. It diagnoses issues that would need to be resolved if the law were to be successfully reformed to enable the charging of trust property. Indeed, the Scottish Law Commission has previously identified certain problems involving floating charges and trust property that would require attention in a reform context, and these are discussed in more detail in this paper. The Scottish Law Commission proposed that such problems would be considered further in the context of their review of the law of trusts.8 However, that project has now concluded without any recommendations regarding the charging of property held in trust.

It is unclear how popular allowing a company to create a floating charge over its trust property would actually be, but it would certainly command some support.9 And there is undoubtedly a policy argument that can be made in favour of doing so.10 Despite floating charges having received much criticism from certain quarters,11 they remain widely used and are popular among many practitioners and their clients. A trustee company, without being able to create a floating charge, is highly restricted in terms of the security it can grant over trust property in Scots law (including in comparison to English law).12 A common view is that the more security a party can grant over its assets, the greater the likelihood that another party will be willing to lend, and at more favourable rates than would otherwise be the case.13 As such, the power to create a floating charge over trust property could allow a trustee to access additional funding, which might help fulfil the trust purposes (the Scottish Law Commission's proposal to introduce a new non-possessory form of real security over moveables would also assist in this regard).14 In the present writer's view, allowing a professional trustee company to charge its trust property when borrowing for trust purposes would be a broadly acceptable outcome; however, the present article shows that this is not realisable under the current law and highlights doctrinal impediments to the charging of trust property. It also suggests that a prime objective of any reform ought to be coherence with the wider law, and especially with the dual patrimony approach.15

 TRUST PROPERTY

In a trust, there are three parties: (1) the truster(s);16 (2) the trustee(s); and (3) the beneficiary (or beneficiaries). The truster creates the trust and transfers property into it. The trustee holds that property for the benefit of another, the beneficiary, who has a “beneficial interest” in the property. In Scots law a range of views have been advanced over time as to which of the truster,17 trustee18 and beneficiary19 owns the trust property. The established modern view is a formalistic one: the trustee is owner.20 Doctrinally, Scots law relies upon personal and real rights to explain the trust, whereas English law uses the divided ownership arising from law and equity; the trustee has legal ownership of trust property while the beneficiary has equitable ownership.21 As property must be transferred into trust to become trust property, it is impossible for the truster to own such property in Scots law, unless they are also a trustee. The beneficiary, meanwhile, has personal rights exercisable against the trustee.22 It is clear that if a beneficiary creates a floating charge, its personal rights are part of its property which may be covered and attached by the floating charge.23 However, for the purposes of this article, trust property is the property owned (or held) in trust by a trustee.

The established position in Scots law, that a trustee owns the trust property, has been expanded upon in recent times, especially by Professors Gretton and Reid, to explain some of the characteristics of the trust, not least that trust property is protected from the personal creditors of the trustee.24 This increasingly accepted view25 provides that although a trustee owns trust property it does so in a special trust patrimony, and the beneficiary has personal rights against the trustee in relation to that patrimony. As Carey Miller contends, this special patrimony analysis is used “to preserve the unititular dogma of Scots property law”.26 It also moves the legal doctrine beyond a simple sui generis description of the rights of parties in a trust.27 Identifying a separate patrimony of trust assets and liabilities in addition to a trustee's general (private) patrimony (i.e. the dual patrimony approach) can be helpfully applied when analysing the floating charge's relationship with trust property. And, in terms of integrating the floating charge into wider Scots law, there is, of course, considerable merit in the charge's interaction with trusts aligning with trusts law generally.

As this article progresses, it is useful to have in mind two particular scenarios regarding floating charges and trust property:

Scenario 1: X Ltd grants a floating charge over its property and undertaking to B Bank, to secure a loan. X Ltd then creates a trust, appointing Y Ltd as trustee and designating Z Ltd as beneficiary. X Ltd transfers property into the trust. Subsequently, B Bank's floating charge attaches to X Ltd's property and undertaking.

Scenario 2: X Ltd creates a trust, appointing Y Ltd as trustee, and designating Z Ltd as beneficiary. X Ltd transfers property into the trust. Subsequently, Y Ltd grants a floating charge over its property and undertaking to B Bank, to secure a loan.28 This floating charge later attaches.

 THE CHARGING OF TRUST PROPERTY The law of trusts

Trustees in Scots law can generally grant security rights over trust property where the corresponding borrowing is for the purposes of the trust. This can be specified as a power in the trust deed but is also a statutory default power.29 There is, therefore, no general rule in the law of trusts which prohibits security rights, including floating charges, from being granted. Indeed, the statutory power refers to the ability to use the “trust estate or any part thereof, heritable as well as moveable” as security. The fact that the whole estate or parts of it can be utilised in this way, rather than only particular items of property, also supports the view that trust law does not preclude the creation of a floating charge over trust property. The wide default powers to borrow and grant security mean that creating security rights is considered a tool to help the trustees fulfil the trust purposes. It would, of course, be possible for a trust deed to exclude the power to create a floating charge. However, a floating charge purportedly created by a trustee, such as in Scenario 2, would be protected from challengers contending that the creation was “at variance with the terms or purposes of the trust”.30 But neither this nor the express trust purposes are relevant where a charge is created over property by a non-trustee company before that property is transferred into a trust, i.e. a Scenario 1 case.31 That is true even if the chargor itself becomes a trustee after the charge's creation.

 The law of floating charges

There is no common law power that enables legal or natural persons to create floating charges in Scots law. It is only due to statutory provision that they can be created by companies and certain other entities. Therefore, only such entities acting as trustees could have the power to grant floating charges over trust property. The Companies Act 1985, s 462(1), provides that a company may create a floating charge “over all or any part of the property… which may from time to time be comprised in its property and undertaking”. Consequently, in determining if trust property is chargeable, the fundamental question is whether trust property is “property… in [the company's] property and undertaking”. Trust property certainly falls within the first usage of “property” in s 462(1); the things (or rights) which can be held in trust are the same things (or rights) which can be property outside the trusts context. The difficulty with s 462(1) is whether trust property falls within the second part of the quoted term.32 On...

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