Reclaiming Motion By David Macmillan Against T Leith Developments Ltd (in Receivership And Liquidation)
| Jurisdiction | Scotland |
| Judge | Lord Brodie,Lord President,Lord Menzies,Lord Malcolm,Lord Drummond Young |
| Judgment Date | 10 March 2017 |
| Neutral Citation | [2017] CSIH 23 |
| Court | Court of Session |
| Date | 10 March 2017 |
| Published date | 10 March 2017 |
| Docket Number | CA222/14 |
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...
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