David Macmillan Against T Leith Developments Limited (in Receivership And In Liquidation)
| Jurisdiction | Scotland |
| Judge | Lord Tyre |
| Neutral Citation | [2016] CSOH 19 |
| Date | 27 January 2016 |
| Published date | 27 January 2016 |
| Docket Number | CA222/14 |
| Court | Court of Session |
OUTER HOUSE, COURT OF SESSION
[2016] CSOH 19
CA222/14
OPINION OF LORD TYRE
In the cause
DAVID MacMILLAN
Pursuer;
against
T LEITH DEVELOPMENTS LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)
Defender:
Pursuer: McBrearty QC, Roxburgh; Kennedys Scotland
Defender: Sellar QC; HBJ Gateley
27 January 2016
Introduction
[1] In the twilight of the era of receivership, I am asked in this case to revisit the issue of ranking preference as between a floating charge holder and an inhibiting creditor, and to consider afresh the meaning of the phrase “effectually executed diligence” which has given rise to much comment since floating charges were introduced to the law of Scotland in 1961. Because of changes made in 2002 and 2007 to the law affecting floating charges and inhibitions respectively, the questions raised by these proceedings are of largely historical interest, although they are obviously still live so far as the parties are concerned.
Factual background
[2] The pursuer sues as an individual and as executor of his late wife, Susan MacMillan, who died on 22 April 2015. The defender is a company in receivership and liquidation which was incorporated in 2000 for the purpose of constructing a small housing development at Whitecraigs, Glasgow. On 30 November 2000, the defender granted a floating charge in favour of the Clydesdale Bank. In 2005, Mr and Mrs MacMillan purchased a plot of land from the defender and entered into a contract with the defender for the construction of a house on the plot. Entry to the house was taken on or about 28 July 2006. Mr and Mrs MacMillan soon discovered what they regarded as fundamental defects in the construction of the house. In September 2006 they raised proceedings against the defender in Paisley Sheriff Court for breach of contract. Warrant to inhibit on the dependence was granted and an inhibition was served on the company and duly registered. A notice of letters of inhibition was registered on 25 September 2006; this was accordingly the effective date of the inhibition.
[3] After the date of the inhibition, the defender entered into a series of facility agreements with the Clydesdale Bank, in terms of which overdrafts and other facilities were made available to it. On 30 November 2010, decree by default was granted against the defender for payment to Mr and Mrs MacMillan of the sum of £333,993.42 plus interest and expenses. An appeal by the defender to the sheriff principal was refused. On 18 February 2011, the bank appointed Kenneth Patullo and Paul Dounis as joint receivers under the floating charge (Mr Dounis has subsequently resigned). Thereafter, on the petition of Mr and Mrs MacMillan, Mr Colin Hastings was appointed as provisional liquidator on 20 May 2011 and as interim liquidator on 8 June 2011. The defender’s principal assets are two houses in the same development as the pursuer’s house.
[4] It is now common ground between the parties that the whole of the debt due by the defender to the bank at the date of receivership, when the floating charge crystallised, is to be regarded as having been incurred after the date of the inhibition.
[5] In this action the pursuer concludes firstly for decree that the inhibition is an effectually executed diligence in terms of the Insolvency Act 1986, section 60, and accordingly that the receiver is obliged, when distributing the sale proceeds of the two houses, to pay the sum due in terms of the sheriff court decree to the pursuer before making payment of any balance to the bank as floating charge holder. Failing decree as first concluded for, the pursuer concludes for declarator that the receiver is obliged to distribute the sale proceeds in the following order: (i) to the bank in respect of pre-inhibition debt; (ii) to the pursuer in respect of all sums due to him; and (iii) to the bank in respect of post-inhibition debt. In other words, the pursuer contends in the alternative that even if the inhibition is not an effectually executed diligence, it nevertheless ranks ahead of the floating charge with regard to debt incurred after the inhibition which, in the circumstances of this case, amounts to the whole of the bank debt.
Legislative history
[6] Floating charges were introduced to the law of Scotland by the Companies (Floating Charges) (Scotland) Act 1961. The 1961 Act did not introduce the concept of receivership, and accordingly floating charges attached only in the event of the company’s liquidation. Section 1(2)(a) of the 1961 Act provided that on commencement of winding up, a floating charge attached “to the property comprised in the company’s property and undertaking”, but subject to the rights of, inter alia, any person who had “effectually executed diligence on the property or any part of it”.
[7] The effect of liquidation of a Scottish company on the rights of creditors who had done diligence against it was at that time governed by the Companies Act 1948, section 327, which provided inter alia that no arrestment or poinding executed within 60 days prior to the date of winding up was effectual, although the arresting or poinding creditor was given a preference for expenses incurred by him in such diligence. Section 327 echoed the terms of earlier bankruptcy legislation, and in Dow & Co v Union Bank of Scotland (1875) 2R 459 it had been held that “effectual”, in relation to arrestment, meant effectual in securing a preference for the arresting creditor.
[8] The Companies (Floating Charges and Receivership) (Scotland) Act 1972 introduced the concept of receivership to Scots law by entitling a floating charge holder to appoint a receiver to realise the property subject to the charge. Section 1(2)(a) of the 1961 Act was re-enacted in the same terms as section 1(2)(a) of the 1972 Act. Section 15 of the 1972 Act conferred wide powers on a receiver, but in terms of subsection (2)(a) those powers were exercisable subject to the rights of any person who had effectually executed diligence on all or any part of the company’s property prior to the receiver’s appointment. Section 20(1) of the 1972 Act specified the ranking of the floating charge holder as follows:
“Subject to section 21 of this Act and to the rights of any of the following categories of persons, namely-
(a) the holder of any fixed security which is over property subject to the floating charge and which ranks prior to, or pari passu with, the floating charge;
(b) 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;
(c) creditors in respect of all liabilities, charges and expenses incurred by or on behalf of the receiver;
(d) the receiver in respect of his liabilities, expenses and remuneration; and
(e) the preferential creditors entitled to payment under section 19 of this Act,
the receiver shall pay monies received by him to the holder of the floating charge by virtue of which the receiver was appointed in or towards satisfaction of the debt secured by the floating charge”.
[9] The provisions of the 1972 Act were repealed and replaced by Part XVIII of the consolidating Companies Act 1985, with sections 463(1)(a), 471(2)(a) and 476(1)(b) thereof respectively re-enacting sections 1(2)(a), 15(2)(a) and 20(1)(b) of the 1972 Act. Sections 467 to 485 of the 1985 Act were then in turn repealed and replaced by Chapter II of Part III of the Insolvency Act 1986, in which sections 55(3)(a) and 60(1)(b) re-enacted the former sections 471(2)(a) and 476(1)(b). Those provisions, together with section 463 of the 1985 Act, remain in force.
[10] Two subsequent legislative developments require to be noted. Firstly, the Enterprise Act 2002, section 250 prohibited the appointment of a receiver by the holder of a floating charge created on or after 18 March 2003. Secondly, the Bankruptcy and Diligence etc (Scotland) Act 2007, section 154 removed, with effect from 22 April 2009, the “second” common law effect of inhibition, namely a preference in any insolvency proceedings over debts contracted by the debtor after the date of the inhibition, leaving intact the “first” common law effect, namely the prohibition of the inhibited debtor from alienating (including the granting of a security over) any part of its heritable property. (I mention in passing that the 2007 Act also abolished the diligence of adjudication for debt, but the relevant provisions are not yet in force.)
The first issue: effectually executed diligence
The decision in Lord Advocate v Royal Bank of Scotland
[11] Lord Advocate v Royal Bank of Scotland 1977 SC 155 concerned a competition between a floating charge holder and a creditor who had arrested funds but had not raised an action of furthcoming before the date of appointment of a receiver by the charge holder. The question was whether the arresting creditor had effectually executed diligence on the debtor’s property so as to obtain a ranking in preference to the charge holder in terms of what was then section 20(1) of the 1972 Act. By a majority, the Inner House held that it had not. Lord President Emslie observed (page 169):
“The accurate description of an arrestment, however, is that it is merely an ‘inchoate’ diligence [Stair III.I.42] a ‘step’ of diligence or an ‘inchoate or begun’ diligence [Erskine III.VI.11 and 15]. It has never been held otherwise and is succinctly described in Lucas’s Trs v Campbell & Scott (1893) 21 R 1096 by Lord Kinnear – a master in this field of law – in these terms: ‘An arrestment and furthcoming is an adjudication preceded by an attachment and the essential part of the diligence is the adjudication’ (p. 1103). It is accordingly part but not the essential part of a diligence consisting of arrestment and furthcoming.”
At page 170, Lord President Emslie applied the following further dictum of Lord Kinnear in Lucas’s Trs v Campbell & Scott:
"[Arrestment] is not a diligence directly affecting the...
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