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In the Twilight Hour? The Ranking of Floating Charges and Inhibitions

Document Cited authorities 6 Cited in Related
Vincent
Date01 September 2016
DOI10.3366/elr.2016.0366
Pages353-359
Published date01 September 2016
Author
<p><italic>MacMillan v T Leith Developments Ltd (in Receivership and in Liquidation)</italic> <xref ref-type="fn" rid="fn1"><sup>1</sup> </xref> is the latest case concerning the problematic ranking relationship between diligence and floating charges; it focuses upon an inhibitor's claim in receivership. Although the case partly deals with now-historic law, certain points in Lord Tyre's judgment may have ongoing significance.</p> FACTS AND DECISION

On 30 November 2000, T Leith Developments Ltd (“TLD”) granted a floating charge over all of its property and undertaking to Clydesdale Bank (“CB”). Some years later, Mr and Mrs MacMillan raised a breach of contract action against TLD in Paisley sheriff court and inhibited TLD (on the dependence), which was effective from 25 September 2006. Nevertheless, CB subsequently agreed to provide further financing facilities to TLD.2 The MacMillans obtained decree for £333,993.42 plus interest and expenses on 30 November 2010. A few months afterwards, on 18 February 2011, CB appointed joint receivers to TLD, which caused CB's floating charge to attach.3 The principal assets in TLD's estate were two houses.

Mr MacMillan4 firstly concluded for decree that his inhibition was “effectually executed diligence” under section 60 of the Insolvency Act 1986 and that, therefore, the receiver would be required to distribute proceeds to Mr MacMillan before CB.5 In the alternative, Mr MacMillan sought declarator that, inter alia, the receiver had to pay him ahead of all post-inhibition sums advanced by CB to TLD. Mr MacMillan would consequently rank entirely prior to CB, as the parties agreed that the whole debt due to CB arose from post-inhibition advances.

Lord Tyre rejected Mr MacMillan's first conclusion. He held that Lord Advocate v Royal Bank of Scotland Ltd6 (“RBS”) is “practically indistinguishable from binding authority” for a first instance court.7 In addition, despite ex proprio motu querying whether that case's ratio extends to inhibition, Lord Tyre considered that, even if inhibition is “effectually executed diligence”, this would not be sufficient, by itself, to prevail against an earlier-created floating charge.8 However, Mr MacMillan succeeded with his alternative conclusion. On the basis of the applicable law, Lord Tyre held that post-inhibition advances by a floating charge holder were postponed to an inhibitor.9

 IN WITH THE OLD LAW AND OUT WITH THE NEW

In relation to both receivership and inhibition, MacMillan featured historic law. CB was only able to appoint a receiver over all TLD's property because the floating charge had been created before 15 September 2003.10 Given the general prohibition of “administrative receivers” for floating charges created after this date,11 Lord Tyre's reference to the “twilight” of the receivership era is appropriate.12 Yet it is still possible for receivers to be appointed in certain circumstances.13 Therefore, the consideration of RBS and “effectually executed diligence” in MacMillan will have some continuing relevance for receivership. It may also have wider import, as “effectually executed diligence” is used in the provisions dealing with the attachment of floating charges upon liquidation.14

As regards inhibitions, the Bankruptcy and Diligence etc (Scotland) Act 2007 provides that they “do not confer any preference” in any ranking process, including receivership.15 Confusingly, this appears to extend much further than the corresponding Scottish Law Commission proposal to remove the inhibitor's ranking preference over post-inhibition debts.16 Regardless of how it is interpreted, the new rule does not apply where an inhibition had effect...

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