Scottish Court of Session Decisions

At advising on 8th December 1950,—

LORD PRESIDENT (Cooper).—This is a petition brought under section 307 of the Companies Act, 1948,in which a liquidator asks us to determine a question which has arisen in the winding-up of a company. The company is a private company, registered in Scotland, which at the relevant date had a place of business and assets in England. On 24th December 1948 the company borrowed from the first respondent £15,000, and on 13th January 1949 a further £10,000, under two debentures executed in Scotland in English form, whereby the company purported to create in his favour a floating charge over its whole undertaking, property and assets. On 13th and 18th January respectively these debentures were registered in London in pursuance of Part III of the Act. In July 1949 the first respondent, having first obtained authority from the English Courts under the Courts (Emergency Powers) Act, appointed the second-named respondent as receiver of the property comprised in these debentures, but only in respect of the company's assets in England. Four days later the company went into liquidation.

In that situation the liquidator, the creditor and the receiver come before us, admitting that floating charges have no validity as regards property in Scotland, and asking whether "the said two debentures created a valid and effectual floating charge over the company's undertaking,

taking, property and assets in England." The Lord Ordinary has answered this question in the negative. The respondents now reclaim.

Taking the question as put to us, and reserving for later consideration its precise meaning, I note that there is no recorded decision suggesting the feasibility of a Scottish company creating a valid floating charge over its undertaking and assets in England or anywhere else. Considering the number of Scottish companies which have been liquidated by, or under the supervision of, the Scottish Courts as well as voluntarily, and the fact that many of them must have had assets in England, the silence of the reports is significant. In his Company Liquidation, Mr Wilton indicated that "it is conceivable" that such charges over English assets may be given, and Mr Lillie hazards the same view with the qualification "it is thought." Such cautiously worded speculations by experienced practitioners suggest that the experiment was worth trying but had never been tried. The explanation doubtless is that it is clear in principle and amply supported by authority that a floating charge is utterly repugnant to the principles of Scots law and is not recognised by us as creating a security at all. In Scotland the term "equitable security" is meaningless. Putting aside the rare and exceptional cases of hypothec, we require for the constitution of a security which will confer upon the holder rights over and above those which he enjoys in common with the general body of unsecured creditors of a debtor, (a) the transfer to the creditor of a real right in specific subjects by the method appropriate for the constitution of such rights in the particular classes of property in question, or (b) the creation of a nexus over specific property by the due use of the appropriate form of diligence. A floating charge, even after appointment of a receiver, satisfies none of these requirements.

But, however plain it is that Scottish companies (or individuals) cannot create floating charges which the Scottish Courts will recognise, it does not necessarily follow, the respondents argue, that Scottish companies cannot create floating charges as regards English assets. In this petition we are compelled for the first time to face this issue, and its implications.

To clear the ground I begin with the Lord Ordinary's opinion. It proceeded upon the views of Luxmoore, J., in The Anchor Line, Limited, which the Lord Ordinary read as laying down the general proposition that the validity of a floating charge falls to be determined by the law of the company's domicile. I shall return later to the lex domicilii, but I do not consider that Luxmoore, J., intended to lay down any general rule of private international law. In The Anchor Line, Limited, the company was an English company which was being compulsorily

wound up in England; and all that Luxmoore, J., did, as the liquidation Judge, was to reaffirm a proposition of English law that a floating charge is a valid "equitable charge" which the English Courts, in virtue of the Chancery jurisdiction in personam, may enforce even in regard to foreign land, when (as in that case) the mortgagor company is within the jurisdiction of the Court of Chancery, and when (as in that case) the equities, judged by English law, are in favour of enforcing the charge. All this is purely domestic to the Chancery Division and to the rules administered there. There is nothing in the judgment of Luxmoore, J., to indicate what would happen if the Courts of the country in which the foreign land was situated were invoked by competing interests. I consider that The Anchor Line, Limited is not an authority for the proposition which the Lord Ordinary deduced. Before us parties were agreed as to this, and adopted the line of approach of the principles of international private law, to which I now turn.

A study of the modern works on this subject, such as Dicey, Foote, Cheshire and Westlake, indicates that the theoretical problem is of extreme difficulty, and that generalisation is now totally impracticable. Distinctions are drawn between (i) universal or general assignments, under which the entirety of a person's property may pass to another, ex lege or by the act of the assignor, and (ii) specific or particular assignments affecting only specific subjects. Amongst specific assignments a further distinction is drawn between corporeal and incorporeal subjects; and amongst incorporeal subjects still further distinctions are drawn between (a) negotiable instruments, (b) shares, and (c) ordinary jura crediti or choses in action. Finally, different solutions are offered according as the question of the effect of an assignment arises (i) between the assignor and the assignee or persons deriving right from either, and (ii) between the assignee and a third party asserting an independent title to the subject assigned. Amid each and all of these bewildering permutations and combinations it is possible to find good authority for the lex domicilii, and for the lex situs, and for the lex actus; but the added questions then arise as to what is the actus and where is the situs;and in relation to some incorporeal subjects the last question is highly disputable.

Considerations such as these lead me to abandon the search for an overhead solution as suggested in argument, and, indeed, to doubt the wider validity claimed for many of the earlier decisions pronounced at a stage when private international law was less developed than it has since become. I prefer to particularise the problem more narrowly.

The question arises in the liquidation of a Scottish company and before a Scottish Court, which is the forum of the liquidation. It does not arise in the Chancery Division exercising an equitable jurisdiction in personam. The competition is between the liquidator, acting on behalf of the general body of unsecured creditors, and a

receiver asserting a right in one creditor to the assets in England by virtue of a floating charge. As granted, the floating charge was a universal or general assignment, and not limited to English assets nor to any specific or particular subjects, and it is as a universal assignment that its efficacy must be judged.

It is to my mind of special significance that the company is a Scottish company and not a foreign company, because both Scottish and English companies are regulated, subject to sundry adaptations, by the same code of company law, now embodied in the Act of 1948. The provisions of the Act on the subject of floating charges are noteworthy. Section 94, which requires payment of certain preferential debts to be made out of the assets subject to a floating charge in priority to claims under that charge, is limited to companies registered in England. The provisions of Part III relating to registration of charges (which includes floating charges) are limited to companies registered in England. There is no Register of Charges in Scotland. It is true that section 106 raises a momentary doubt by its reference to charges on property in England created by a company incorporated outside England; but the word "charges" covers a great deal besides floating charges, and in this provision was obviously confined to such charges as the company could competently create. Section 319 (5) (b) gives priority over debenture holders relying on a floating charge to certain privileged debts, but this provision is limited to a company registered in England. Section 372 and following sections provide an elaborate code of duties of receivers under floating charges, but these apply only in the case of companies registered in England. From these and other provisions the inference is irresistible that Parliament was subjecting the receiver under a floating charge to many exacting requirements, and was limiting in various respects the rights of the debenture holder who relied on a floating charge—reforms in the law which notoriously were effected because of the many criticisms which have been directed against the injustices capable of being inflicted on the trade creditors by the use of floating charges. That all this protective machinery, contained in a statute applicable to both Scotland and England, should have been expressly confined to companies registered in England seems to me to be unthinkable except upon the view that companies registered in Scotland and subject to Scots law could not create floating charges. The law which determines the nature and extent of the powers of any corporation is the law of the country in which it is incorporated—in this case Scots law, which for present purposes means our common law of the transfer of property rights, read along with the Companies Act, 1948. The answer given by that law is plain. "The whole method of creating a floating charge … is absolutely foreign to our law." "This is a case of bungled conveyancing which has not

successfully created any right of security in any part of the property, either in the uncalled capital or in anything else."

I am accordingly prepared to affirm that, when the Scottish Courts are asked by the liquidator of a Scottish company to state what effect he is to give to a universal assignment of the company's undertaking, property and assets by way of a floating charge, the answer is "None." The law of Scotland does not empower Scottish corporations to create securities by such methods, which, in the words of Lord Dunedin, are to us "absolutely unmeaning."The matter is dealt with on similar lines in Graham Stewart on Diligence with reference to "universal assignments," to which I equate a floating charge. Moreover the Scottish Courts, or a liquidator acting under their direction, have no means of applying English equity in personam for the enforcement of an "equitable charge."

It is not necessary in this case to determine what would have been the position if these floating charges had been initially limited to assets in England. They were not; and their radical vice cannot be purified by restricting their use. But it is only fair to say that, even if they had been so limited, my line of reasoning would have led to the same result, upon the view that Scottish companies cannot create floating charges, and that to hold otherwise would reduce company law and practice to chaos. For the Scottish Courts to introduce unrestricted floating charges by Scottish companies over English assets at a time when Parliament has just subjected floating charges by English companies to material restrictions would indeed be a remarkable effort in judicial legislation. Next, I do not found upon the circumstance that these debentures were executed in Scotland, for in this matter the lex actus does not impress me as of significance. It would never do to allow Scottish companies to create unrestricted floating charges over English assets by the simple expedient of sending two directors and the secretary across the border to sign the relative documents. Finally, like the Lord Ordinary, I am unimpressed by the alleged equities of the case. A creditor who advances money on the faith of an expedient of which the best that has been said is that its efficacy is "conceivable" cannot expect much sympathy if his bold experiment fails.

I am for refusing the reclaiming motion.

LORD CARMONT .—The question put by the liquidator in this liquidation of a Scottish company is whether two debentures create a valid and effectual charge over the company's undertaking, property and assets in England. At first blush this is a strange question to put to a Scottish Court. It would appear, however, that what the liquidator wants to know is whether a Scottish company can validly create by debenture executed in Scotland a floating charge over the

company's whole undertaking, property and assets wherever these may be.

The answer seems to me to admit of no doubt when judged by legal principle. The law of Scotland does not recognise and can attach no meaning to a floating charge. The powers of a Scottish company in the matter of its general obligations are different from those of companies registered in other countries. Those differences are fixed by the law of Scotland as the domicile of the company. It may be that on certain matters the problem has to be approached from the standpoint of the lex rei sitœ. For example, a Scottish company having a heritable subject in France may validly mortgage or bond that subject by an instrument executed to that end. But not only would the instrument have to be executed according to the law of France but also the Scottish company would require to show a power in its memorandum and articles of association so to execute mortgages before the home Court would recognise the propriety of what had been done. It might be that the French Court would exercise effective control in regard to the heritage there by reason of situs, but I have little doubt but that the Scottish Court would examine closely the action of directors who had mortgaged or lost heritage belonging to the company unless they had acted properly and within the terms of the powers of the company as detailed in the memorandum and articles, and in this way the law of the domicile would claim and obtain attention.

In the case of the present company, if there appeared in the memorandum a general power to charge the company's assets in England and a floating charge was created by execution, this power might be held to justify the execution in England of a floating charge over company assets in England, which knows such charges. I do not commit myself to the view that it would do so, but in any event difficult questions would arise, particularly if an English Court insisted on exercising its jurisdiction and could do so effectively. But that question is not before us now and, whatever might be done in such a case by the Court in Chancery recognising a particular charge over assets in England executed by the company in England, I can hardly think that it would do so in the case of an attempted general charge over all the company's assets even as an equitable mortgage if, as is the case, the law of the domicile of the company does not recognise such general charges. While I agree with what your Lordship in the chair says about Mr Justice Luxmoore's views as expressed in The Anchor Line case, the fundamental statement he makes that the validity of a floating charge falls to be determined by the law of the company's domicile supports the view I am now stating in regard to a Scottish company. However restricted are the differences between companies registered in Scotland as compared with those registered in England, each recognises the other's domicile. A company's domicile is created

by registration; it is, so to say, born in Scotland, and however widespread its activities and contacts with other legal systems in the days of its vigour, to Scotland it must come to be laid to rest when its days are done, and according to Scots law should its affairs be wound up.

I agree that this reclaiming motion should be refused.

LORD RUSSELL .—I have had the opportunity of considering the opinion delivered by your Lordship in the chair, and I desire to express my concurrence therein, subject to one qualification, viz., that I wish to reserve my opinion on the question as to the validity and effect of a floating charge created by a Scottish company (having express or implied powers of borrowing for the purposes of its business) in terms which bear to charge only company assets situated furth of Scotland. That question does not arise for decision in the present case, and I prefer to express no opinion on it.

LORD KEITH .—The Lord Ordinary's judgment, in my opinion, takes too simplified a view of the principle on which this question submitted to us by the liquidator falls to be decided. He first of all accepts as sound the judgment of Luxmoore, J., in The Anchor Line, Limited, that a company registered in England and accordingly having its domicile there can create a valid floating charge upon the whole assets and property of the company wherever situated. Next, applying the ratio of that decision, he holds that a company registered in Scotland cannot create a floating charge over its assets and property anywhere in the world, and in particular over assets situated in England. In the first place, I should say that, if Luxmoore, J., was purporting to lay down a principle of international law, I cannot agree with it. In the Anchor Line casethe question arose with regard to assets both heritable and moveable which at the commencement of the liquidation were situated in Scotland, but which had since been reduced by the liquidator into his possession in England, and I say nothing about the soundness of the decision as a matter of domestic law (on which in any event I am not competent to express an opinion), or on the power of the Chancery Court, on the principle of effectiveness, to enforce a floating charge over assets which had come within its jurisdiction. Further it seems to me a non sequitur to apply the decision conversely to Scotland, as the Lord Ordinary seems to have done, to the effect of saying that a Scottish company cannot effectively create a floating charge over assets situated outside of Scotland.

Counsel for the liquidator of the company expanded what seems to be the ratio of the Lord Ordinary's judgment by maintaining that, as I understood his argument, this was a universal assignment and that the validity and effect of such an assignment must be determined by the law of the company's domicile, in this case Scotland. As Scots law did not recognise floating charges, the deed here was ineffective to create a

floating charge in England or elsewhere. To begin with, I do not regard the debentures here as universal assignments at all. They are acknowledgements of debt with an undertaking to pay principal and interest and containing, inter alia, a charge of the company's whole assets in security of the covenants contained in the debentures. Each debenture is declared to be "a single debenture for securing the principal sum of £15,000 (or £10,000) and is to rank as a first charge on the property and assets hereby charged and such charge is to be a floating security provided that the company is not to be at liberty to create any mortgage or charge on any of its property or assets ranking in priority to or pari passu with this debenture without the previous consent in writing of the registered holder or holders for the time being of this debenture." This is not, in my opinion, a universal assignment (of which examples are a sequestration or a transmission by death), but the creation of a charge, albeit over the whole assets of the company. I do not know whether, according to English conceptions, such a charge is an assignment in security or the creation of an obligation which entitles the creditor to levy distress on the assets charged. But if it is an assignment I should assimilate it to a special assignment. Further, even if this were a general assignment, that does not, in my opinion, conclude the question of the effect of that assignment as authorising the transference to the assignee of goods situated abroad.

The debentures here were executed in Scotland. They comply with all the formalities of execution in Scotland, and, as it is not suggested that there is anything in the company's memorandum that makes the documents ultra vires, I assume that they give to the debenture holder, the first-named respondent in this petition, a good title to assert his rights under these debentures quantum valeant. One thing is at once clear. They can give him no right by way of floating charge over any of the company's assets in Scotland. But the question in this case is, Do they give him any such right over company assets in England ? In my opinion, that is a question which must be determined by the law of England where the assets are situated. I know of no principle on which it can be asserted that, because Scots law does not recognise a floating charge, a deed which attempts to constitute a floating charge over assets outside Scotland is essentially invalid. It is true that the debentures here purport to create a floating charge over the whole of the company's assets wherever situated, but that does not, in my opinion, make the floating charge fundamentally null. It leaves the creditor with the right to enforce the charge wherever it can be made effective. To take another example; if a domiciled Scotsman by a deed executed in Glasgow purported to hypothecate to a creditor goods situated in London in a manner recognised by the law of England but not by the law of Scotland, it could hardly be maintained in Scotland that the deed was essentially invalid. The English Courts, if the matter became litigious before them, would presumably satisfy themselves that the deed was properly executed according to the law of Scotland (the lex loci actus) and gave the creditor a good title, but the effect of the deed would be judged by the law of England (the lex loci rei sitœ).

Once objections to the formal validity of the deed constituting the security, or to the title or capacity of the granter to grant the deed, are overcome, or are absent, the effect of a security over foreign assets falls, in my opinion, to be determined by the lex loci rei sitœ. In this respect the position, I think, is the same as arises when the effect of diligence or distress taken by a creditor abroad falls to be considered. In the one case a voluntary, in the other an involuntary, transference in security is claimed. Thus any process of attachment, or diligence, over a debtor's assets abroad must receive effect according to the law of the place where the diligence is exercised. Questions may arise as to whether assets claimed to have been attached have their situs in the place of attachment, but that again is a question for the law of the place of attachment and in the main will depend on the power of the Court to make them furthcoming to the attaching creditor. This, in my opinion, is clear by the decision, which is binding on us, in the case of Inglis v. Robertson & Baxter . That was the case where a Scottish creditor of a domiciled Englishman, who owned whisky in a Glasgow warehouse, had arrested the whisky in the hands of the Glasgow warehouse-keeper. Prior to the arrestment the owner of the whisky had hypothecated the whisky to an English merchant in security of a loan, with power of sale. Lord Watson in the House of Lords said:

"It would, in my opinion, be contrary to the elementary principles of international law, and, so far as I know, without authority, to hold that the right of a Scottish creditor when so perfected [by arrestment] can be defeated by a transaction between his debtor and the citizen of a foreign country which would be according to the law of that country, but is not according to the law of Scotland, sufficient to create a real right in the goods."

So also in In re Queensland Mercantile and Agency Co., where a company registered in Queensland had issued debentures to an English company in which it charged the capital uncalled on its shares, it was held that a later arrestment in Scotland of unpaid calls in the hands of Scottish shareholders had priority of ranking according to Scots law. Lastly, in Connal & Co. v. Loder and Others the same principle was applied in the case, not of diligence, but of a security over moveables in Scotland effected by a transaction between Englishmen outside of Scotland. That case is very much the converse of the present case. The security was given by way of blank endorsement of delivery warrants for goods stored in a Glasgow warehouse, which was intimated to the warehouse-keepers by the holder. In a competition between the holder and the mortgagor's inspectors in bankruptcy it was held that the effectiveness of the security fell to be determined by the law of Scotland.

Reference was made to various sections of the Companies Act,

1948, as supporting the contentions of one side or the other. I do not find the provisions of this Act very helpful to a solution of the question presented to us. It is not to be expected that this Act would attempt to meet the repercussions that might arise in the field of international private law from the creation of floating charges by companies incorporated outside of England. Nor is it surprising that in the case of companies registered in England provision is made by the Act dealing with a form of security recognised by English law. It is, however, significant that section 106 makes provision for charges on property in England of a company incorporated outside of England but having an established place of business in England. For a converse recognition of foreign law in the case of an English company reference may be made to subsection (2) of section 327 which prescribes that the provisions of this section shall, so far as relates to any estate or effects of the company situate in Scotland, apply in the case of a company registered in England as it applies in the case of a company registered in Scotland. Subsection 5 (b) of section 319 was founded on as being adverse to the idea of a floating charge over English assets of a company incorporated in Scotland. I can make no such inference. The subsection gives certain preferential debts a priority in a winding-up of a company registered in England over the claims of holders of debentures under any floating charge created by the company. The omission of any reference to a company registered in Scotland can, in my opinion, yield no inference that the Legislature intended that a floating charge could not be created by a Scottish company over assets situated in a country whose law recognised that type of security. The results in a question with preferential debts it is not for us here to consider. The conclusions reached from a perusal of the sections of the Companies Act are, in my opinion, mainly negative and I should be surprised in a question of this kind if it were otherwise. I have referred to the statute only because it forms a partial basis of the Lord Ordinary's judgment and was referred to in argument by contending counsel.

In the result, then, the floating charges in this case, whether regarded as securities or as diligences, in my opinion, fall to receive effect so far as assets in England are concerned according to the law of England. I would answer the question in the petition accordingly. Nor do I see how any decision in a contrary sense could have any effect in reaching the assets in England. In reaching this conclusion, however, I wish to make it clear that in the converse case of the liquidation of an English company with assets in Scotland a floating charge over the whole assets of the company would receive no recognition in Scotland, and I reserve my opinion whether a liquidator should be permitted, except under strict conditions and undertakings, to ingather such assets and remove the proceeds to England in the face of opposition by Scottish creditors who might be prejudiced by having such proceeds, if removed, affected by a floating charge in England. I do not think

Luxmoore, J., appreciated in The Anchor Line case the effect of section 270 of the Companies Act, 1929 (now section 327 of the Act of 1948). That section operated as a general diligence for the whole body of creditors over every asset of the company in Scotland. There was thus created over the Scottish assets an equalising diligence at the date of the winding-up which necessarily took precedence over any floating charge, which was not a recognised form of diligence at all. This preference should have been preserved to the general body of creditors, not only on principles of international law, but under the express terms of the statute. Section 270, in my opinion, was directed to much more than a mere "collection of assets by the liquidator," as held by Luxmoore, J. The section, in my opinion, raised a question of Scots law and should have been determined as such.