Scottish Court of Session Decisions

At advising, on 14th July 1993:

Lord Justice-Clerk (Ross)—The special case has been presented because of a dispute which has arisen as to the priority of ranking between a standard security and a floating charge. Both the standard security and the floating charge were granted by Lothian Cars Ltd. Both deeds were executed on 19th December 1986; the standard security, which was granted in favour of the first party, was recorded in the Division of the General Register of Sasines for the County of West Lothian on 30th December 1986, and the floating charge, which was granted in favour of the second parties, was registered in the Register of Charges on 30th December 1986. The standard security was registered in the Register of Charges on 9th January 1987. On 14th March 1991 the third parties were appointed as joint receivers of the whole property and undertaking of Lothian Cars Ltd.

The floating charge in favour of the second parties includes inter alia the following provision (which is hereinafter referred to as "the restrictive clause"):

"[W]e [Lothian Cars Ltd.] are hereby and shall be prohibited from creating subsequent to the date hereof any fixed security or any other floating charge as defined by the Companies Act 1985 or any statutory modification or re-enactment thereof for the time being in force having priority over or ranking pari passu with the floating charge hereby created excepting any fixed security which may subsequent to the date of these presents be granted by us in favour of the bank [the second parties] which shall have priority over the floating charge hereby created."

As is made clear in the special case, the issues for determination are (i) whether the standard security was created subsequent to the date of execution of the floating charge for the purposes of the provisions in the floating charge above referred to, and (ii) whether the order of ranking of these deeds inter se is regulated by the said provisions in the floating charge for the purposes of sec. 464 (3) of the Companies Act 1985.

The contentions of the parties are set forth in the special case. On behalf of the first party counsel began his submissions by referring to the relevant statutory provisions in relation to floating charges which are to be found in the Companies Act 1985.

In terms of sec. 462 it is competent for a company to create in favour of the creditor in a debt or obligation a floating charge. Ranking of floating charges is dealt with in sec. 464, which provides inter alia as follows:

"464—(1) Subject to subsection (2), the instrument creating a floating charge over all or any part of the company's property under section 462 may contain—

"

(a) provisions prohibiting or restricting the creation of any fixed security or any other floating charge having priority over, or ranking pari passu with, the floating charge; or "

"(b) provisions regulating the order in which the floating charge shall rank with any other subsisting or future floating charges or fixed securities over that property or any part of it. "

"(2) Where all or any part of the property of a company is subject both to a floating charge and to a fixed security arising by operation of law, the fixed security has priority over the floating charge. "

"(3) Where the order of ranking of the floating charge with any other subsisting or future floating charges or fixed securities over all or any part of the company's property is not regulated by provisions contained in the instrument creating the floating charge, the order of ranking is determined in accordance with the following provisions of this section. "

"(4) Subject to the provisions of this section— "

"(a) a fixed security, the right to which has been constituted as a real right before a floating charge has attached to all or any part of the property of the company, has priority of ranking over the floating charge; "

"(b) floating charges rank with one another according to the time of registration in accordance with Chapter II of Part XII; "

"(c) floating charges which have been received by the registrar for registration by the same postal delivery rank with one another equally."

Section 410 deals with registration of charges. It provides inter alia as follows:

"410—(1) The following provisions of this Chapter have effect for the purpose of securing the registration in Scotland of charges created by companies.

"

(2) Every charge created by a company, being a charge to which this section applies, is, so far as any security on the company's property or any part of it is conferred by the charge, void against the liquidator or administrator and any creditor of the company unless the prescribed particulars of the charge, together with a copy (certified in the prescribed manner to be a correct copy) of the instrument (if any) by which the charge is created or evidenced, are delivered to or received by the registrar of companies for registration in the manner required by this Chapter within 21 days after the date of the creation of the charge. "

"(3) Subsection (2) is without prejudice to any contract or obligation for repayment of the money secured by the charge; and when a charge becomes void under this section the money secured by it immediately becomes payable. "

"(4) This section applies to the following charges— "

"(a) a charge on land wherever situated, or any interest in such land (not including a charge for any rent, ground annual or other periodical sum payable in respect of the land, but including a charge created by a heritable security within the meaning of section 9(8) of the Conveyancing and Feudal Reform (Scotland) Act 1970); … "

"(e) a floating charge. "

"(5) In this Chapter ‘company’ (except in section 424) means an incorporated company registered in Scotland; ‘registrar of companies’ means the registrar or other officer performing under this Act the duty of registration of companies in Scotland; and references to the date of creation of a charge are— "

"(a) in the case of a floating charge, the date on which the instrument creating the floating charge was executed by the company creating the charge, and "

"(b) in any other case, the date on which the right of the person entitled to the benefit of the charge was constituted as a real right …"

Section 415 deals with the duty of a company to register charges created by it. It is in the following terms:

"(1) It is a company's duty to send to the registrar of companies for registration the particulars of every charge created by the company and of the issues of debentures of a series requiring registration under sections 410 to 414; but registration of any such charge may be effected on the application of any person interested in it.

"

(2) Where registration is effected on the application of some person other than the company, that person is entitled to recover from the company the amount of any fees properly paid by him to the registrar on the registration. "

"(3) If a company makes default in sending to the registrar for registration the particulars of any charge created by the company or of the issues of debentures of a series requiring registration as above mentioned, then, unless the registration has been effected on the application of some other person, the company and every officer of it who is in default is liable to a fine and, for continued contravention, to a daily default fine."

Section 417 deals with the register of charges to be kept by the registrar of companies. It is in the following terms:

"(1) The registrar of companies shall keep, with respect to each company, a register in the prescribed form of all the charges requiring registration under this Chapter, and shall enter in the register with respect to such charges the particulars specified below ....

"

(3) In the case of any other charge, there shall be entered— "

"(a) if it is a charge created by the company, the date of its creation, and if it was a charge existing on property acquired by the company, the date of the acquisition of the property; "

"(b) the amount secured by the charge; "

"(c) short particulars of the property charge; "

"(d) the persons entitled to the charge; and "

"(e) in the case of a floating charge, a statement of any of the provisions of the charge and of any instrument relating to it which prohibit or restrict or regulate the company's power to grant further securities ranking in priority to, or pari passu with, the floating charge, or which vary or otherwise regulate the order of ranking of the floating charge in relation to subsisting securities. "

"(4) The register kept in pursuance of this section shall be open to inspection by any person."

At the heart of counsel's submission lay the proposition that in the Act of 1985 Parliament drew a distinction between provisions prohibiting or restricting the creation of fixed securities or other floating charges—commonly called a negative pledge—on the one hand and ranking clauses on the other hand. Putting the matter shortly, his submission was that the restrictive clause in this case was a negative pledge and not a ranking clause at all. Counsel also contended that it was necessary to determine when the standard security in this case had been created for the purpose of the restrictive clause; he submitted that the standard security was created on the date when it was executed by the grantor. All that the grantor had to do in relation to the standard security was to execute and deliver it. Before the creditor in the standard security could acquire a real right, the standard security required to be recorded (sec. 11(1) of the Conveyancing and Feudal Reform (Scotland) Act 1970), but it was the creditor and not the grantor who required to effect registration in the General Register of Sasines. Counsel further maintained that, unless that was so, serious practical difficulties might occur. For example, a debtor might grant a standard security, but time would necessarily elapse before it could be registered in the General Register of Sasines. Before it was registered and the creditor obtained a real right, the debtor might grant a floating charge with a negative pledge. If the argument put forward on behalf of the second and third parties was correct, the negative pledge granted after the date of the standard security would strike at the standard security even though the negative pledge did not exist when the standard security was executed and delivered, and even though the creditor under the standard security could not have had notice of it.

Counsel recognised that sec. 410 (5) defines "the date of creation of a charge" but he maintained that that definition was for the purposes of Chap. II of Pt. XII of the statute and was of relevance when considering whether there had been timeous registration of a charge created by a company. This was because sec. 410(2) provides for registration within 21 days after "the date of the creation of the charge". He accordingly submitted that the definition in sec. 410 (5) had no bearing on the construction to be placed on the restrictive clause in the floating charge. In these circumstances counsel contended that the standard security was not created subsequent to the date of execution of the floating charge since both had been executed on the same date.

Counsel also developed further his argument to the effect that the provisions in the restrictive clause of the floating charge did not regulate the order of ranking between the floating charge and the standard security for the purpose of sec. 464 (3) of the Companies Act 1985. His submission was that sec. 464 (3) refers only to ranking clauses and not to negative pledges. He emphasised that it was important to keep a distinction between ranking clauses and negative pledges and he maintained that his submission to that effect was strengthened by a consideration of sec. 140 of the Companies Act 1989. Although this section had not yet been brought into force, he maintained that the proper inference to draw from the alteration which was proposed to be made to sec. 464 (3) of the Act of 1985 was that at present the subsection did not refer to negative pledges but referred to ranking clauses only. In the circumstances, he submitted that the restrictive clause did not serve to regulate the order of ranking and that, accordingly, sec. 464(4)(a) applied. The standard security was recorded on 30th December 1986 and a real right then came into being (sec. 11(1) of the Conveyancing and Feudal Reform (Scotland) Act 1970); the third parties were appointed joint receivers on 14th March 1991 and the floating charge then attached the property of the company subject to the charge. He accordingly submitted that the standard security had priority of ranking over the floating charge. Counsel therefore invited the court to answer the three questions in the case in the negative.

Counsel for the second and third parties invited the court to answer the three questions in the case in the affirmative upon the basis that the floating charge ranked in priority to the standard security. He stressed that what the court had to do was to construe the restrictive clause. He submitted that a negative pledge could be effective to alter the order of ranking laid down in sec. 464(4). He stated that at first sight, when one looked at sec. 464(3), the impression might be gained that there was identity between it and sec. 464(1)(b) and not with sec. 464(1)(a). However, he maintained that negative pledges achieved ranking in a negative manner. Accordingly he contended that on a true construction of sec. 464(3) the subsection was intended to apply both to clauses under sec. 464(1)(a) and under sec. 464 (1) (b).

Counsel further submitted that even if that were not so, the negative pledge as described in sec. 464 (1) (a) standing alone was fully effective to displace the normal ranking laid down in sec. 464(4). He also submitted that the date of registration of the floating charge did not enter into the consideration for present purposes. No question arose as to prior notice or prior registration of the floating charge as a requirement for effective ranking.

Both counsel were agreed that there was no judicial authority on the subject of ranking. Counsel for the second and third parties referred to the history of floating charges in Scotland. That history reveals that the concept of a floating charge was repugnant to the principles of Scots law and was not recognised under the common law. Floating charges were introduced into the law of Scotland by the Companies (Floating Charges) (Scotland) Act 1961. Section 5 of the Act of 1961 dealt with the ranking of floating charges and counsel pointed out that sec. 5(2)(c) referred to a negative pledge. He accordingly submitted that in the Act of 1961 negative pledge was seen as affecting ranking. He next referred to the Companies (Floating Charges and Receivers) (Scotland) Act 1972. He submitted that this Act had made changes to the ranking of floating charges. Section 5 of the Act of 1972 deals with the ranking of floating charges and is in substantially the same form as sec. 464 of the Act of 1985. Counsel pointed out that in the Act of 1972 the law relating to the ranking of floating charges had been altered in two principal respects. Firstly, whereas sec. 5 of the Act of 1961 was concerned with a provision prohibiting the company from subsequently creating any fixed security having priority over the floating charge, in sec. 5 of the Act of 1972 the reference was to provisions prohibiting or restricting the creation of any fixed security or any other floating charge having priority over the floating charge. Secondly, sec. 5 (3) of the Act of 1972 made it plain that the order of ranking of the floating charge with any other subsisting or future floating charges or fixed securities may be regulated by provisions contained in the floating charge in question.

Counsel for the second and third parties next referred to a number of textbooks and reports which he maintained demonstrated that sec. 464 (3) was not intended to apply to provisions as described in sec. 464(1)(b) only but was also intended to apply to negative pledges as described in sec. 464(1)(a). In this connection he referred to the report of the Scottish Law Commission (No. 14 of 1970) Cmnd 4336; Palmer's Company Law (25th edn.), vol. II, 13.216; Halliday, Conveyancing Law and Practice in Scotland, vol. III, 41–42 and 41–25; McDonald's Conveyancing Manual,23.6; Gloag and Henderson's Introduction to the Law of Scotland(9th edn.), 25.27; and The Laws of Scotland: Stair Memorial Encyclopaedia, vol. 4, para. 664.

It is unnecessary to examine these books in any detail. I accept that in all these works, when ranking of floating charges is being dealt with, reference is made to inter alia provisions in the nature of negative pledge. The textbook writers appear to me to do little more than paraphrase the language used in sec. 464, and there can be no doubt that sec. 464 is dealing with the ranking of floating charges and that it includes a reference to negative pledges. Likewise, in the Scottish Law Commission Report under the heading of "Conventional Ranking Clauses" reference is made to what is in effect a negative pledge.

Under reference to Pepper v. Hart [1993] AC 593 counsel invited us to consider the Hansard Report of Proceedings in the House of Lords when the Bill which became the Act of 1972 was introduced. I am doubtful whether in this instance it is legitimate to consult the Hansard Report because I do not accept that there is ambiguity or obscurity in the statute. In any event, the report does no more than to show that when the subject of ranking of floating charges was being described, reference was made to inter alia what is in effect a negative pledge.

Counsel further submitted that, on any view, it was clear that the negative pledge was intended to affect ranking. He maintained that the practical difficulty which counsel for the first party had apprehended when considering the terms of sec. 410 did not really exist. He maintained that when counsel for the first party referred to difficulties which would arise where the creditor of a standard security had no notice that a floating charge had been created with a negative pledge, what he was really saying is that there ought to have been a provision in sec. 464 dealing with notice. Counsel also contended that the court should not look at the provisions of sec. 140 of the Act of 1989, which had not yet been brought into force, for the purpose of construing the provisions of the earlier Act of 1985. Under reference to Craies, Statute Law (7th edn.), p. 148, he submitted that the rule was that resort to a later Act for the interpretation of an earlier Act could rarely be justified. In any event, he submitted that sec. 140 of the Act of 1989 merely clarified what was plain from the Act of 1985. His submission at the end of the day was that a negative pledge was capable of affecting the order of ranking.

On the subject of whether the standard security in this case was created subsequent to the floating charge, he submitted that it clearly was. He founded on the provisions of sec. 410(5) of the Act of 1985 for the purpose of showing what was meant by creation. He contended that the definition in that subsection was not confined to the part of the Act where it appeared. He pointed out that the reference to "in this Chapter" in sec. 410(5) did not exclude the definition for present purposes. He further maintained that there was nothing to indicate that "creation" in sec. 464 had a different meaning from sec. 410. He stressed that in sec. 464(4)(b) and in sec. 464(5) express reference is made to Chap. II of Pt. XII where sec. 410 appears. He accordingly contended that the clear implication was that Parliament intended that the definition should be applied in sec. 464 when reference was made to "creating a floating charge".

Counsel maintained that, having regard to the terms of sec. 410(5), the floating charge was created on the date upon which it was executed, namely 19th December 1986. The standard security on the other hand was created on the date on which the creditor's right became a real right, namely 30th December 1986.

The question remains as to whether the standard security had been created by Lothian Cars Ltd. Counsel for the first party had maintained that registration was the responsibility of the creditor and, accordingly, could not be regarded as a step taken by Lothian Cars Ltd. Counsel for the second and third parties maintained that that was not so and that all steps in the creation of the charge must be taken as the acts of the creator. He pointed to sec. 410(2), sec. 410(5), sec. 415 and sec. 417(3)(a), in all of which reference is made to the creation of a charge by a company. He submitted that both execution and recording are to be treated as emanating from the grantor. In this connection he founded on the provisions of sec. 415(1) which place upon the company a duty to send to the registrar of companies for registration the particulars of "every charge created by the company". In terms of sec. 410(5) in the case of a standard security, the charge would not be created by the company until it was recorded, and he maintained that this showed that recording should properly be regarded as an act of the company even though it was effected by the creditor.

Finally he contended that the prohibition in the restrictive clause was against creating any subsequent fixed security or any other floating charge. The restrictive clause also provided for an exception in respect of a subsequent fixed security granted by Lothian Cars Ltd. in favour of the bank. He maintained that the use of the word "creating" in the main part of the clause and the use of the word "granted" in the exception clearly showed that "creation" involved something more than mere granting. Counsel accordingly invited us to answer the three questions in the case in the affirmative.

The questions which arise in this case require the court to construe the provisions of the restrictive clause and the court can only do that against the background of the relevant statutory provisions. Although there is obvious attraction in the emphasis of counsel for the first party upon the distinction in sec. 464(1) between (a) negative pledges and (b) ranking clauses, I have come to be of opinion that both negative pledges and ranking clauses can affect the ranking of floating charges. It is clear that from the Act of 1961 onwards negative pledges have been included under the general description of the ranking of floating charges. In my opinion counsel for the second and third parties is well founded in his assertion that a negative pledge does achieve ranking albeit in a negative manner.

I am accordingly satisfied that the present case is one where the order of ranking of the floating charge and the standard security is regulated by provisions contained in the floating charge. The restrictive clause is effective to alter the order of ranking otherwise laid down in sec. 464(4). On a proper construction of sec. 464(3) I am satisfied that the order of ranking in sec. 464(4) can be displaced by either a negative pledge (sec. 464(1)(a)) or by a ranking clause (sec. 464(1 )(b)). I agree with counsel for the second and third parties that the legislation since 1961 dealing with the ranking of floating charges has made it clear that a negative pledge is recognised as affecting ranking.

In any event, even if that were not so, I would still hold that without relying on sec. 464(3) at all a negative pledge of the kind described in sec. 464(1)(a) would be effective to displace the normal order of ranking. The ordinary order of ranking is laid down in sec. 464(4). That subsection begins with the words "Subject to the provisions of this section". That accordingly means that sec. 464(4)(a) is subject to inter alia sec. 464(1)(a) and sec. 464(2). Section 464(1) is stated to be "Subject to subsection (2)". Accordingly, what sec. 464(1) is providing is that, subject to sec. 464(2), there can be a negative pledge and that shows that a negative pledge can have an effect upon ranking (except for a fixed security arising by operation of law). I also agree with counsel that what sec. 464(3) refers to is the provisions of the deed creating the floating charge and it is unnecessary to consider when notice was given or what the state of knowledge of the parties was. Counsel for the first party in the course of his argument referred to the matter of notice, but nothing is said about notice in the statement of facts in this case and, accordingly, it does not require to be considered so far as this special case is concerned.

As already observed, in the course of his argument counsel for the first party sought to rely upon the provisions of sec. 140 of the Companies Act 1989 which amends sec. 464. That section, however, is not yet in force and, in my opinion, it has no bearing on the present case. I am not persuaded that it is legitimate in the present case to consider the terms of the Act of 1989 when endeavouring to interpret the provisions of the Act of 1985. What one requires to do so far as the Act of 1985 is concerned is to ascertain Parliament's intention at the time when that legislation was enacted.

When one has regard to the terms of the restrictive clause, the critical question is whether the standard security was created subsequent to the floating charge. This raises the question of what is meant by "creating" in the restrictive clause. I appreciate that sec. 410(5) opens with the words "In this Chapter". However, various tenses of the verb "create" are used in the earlier subsections of sec. 410 and in various other sections of the Act of 1985, including sec. 462 and sec. 464. In my opinion there is no reason to think that the verb "create" in sec. 464 should have any different meaning from the meaning which it has in sec. 410. It is also significant that in sec. 464(4)(b) and sec. 464(5) there is express reference to Chap. II of Pt. XII of the Act of 1985. I am also of opinion that in the restrictive clause, when the word "creating" is used, it must be used in the same sense in which that word is used in secs. 410 and 464 of the Companies Act 1985.

A question then arises as to whether the standard security was created by Lothian Cars Ltd. and, if so, whether it was subsequent to the floating charge. As I understood it, counsel for the first party's contention was that the real right under the standard security which came into being when the standard security was recorded could not be regarded as the act of Lothian Cars Ltd. since it was the first party and not Lothian Cars Ltd. who recorded the standard security and thus brought the real right into existence. I am not persuaded that this is so. Even though it was the first party who recorded the standard security, the language used in the Companies Act 1985 makes it clear that a charge such as a standard security is regarded as having been created by the grantor. Thus, in sec. 410 (2), which is dealing with registration of charges, the charge is described as "created by a company". That must mean created by the grantor of the security. The same is true of secs. 415 and 417.

In my opinion in the present case the standard security can properly be described as created by Lothian Cars Ltd. although it was recorded in the General Register of Sasines by the first party and it is the date of such recording which is the date of creation of the charge in terms of sec. 410(5)(b). Section 417 deals with registration of charges and sec. 417(3)(a) shows that what requires to be entered in the register is the date of the creation of the charge if it is a charge created by the company. This makes it perfectly clear that even though the date of creation may depend, in the case of a standard security, upon the date upon which the standard security was recorded in the General Register of Sasines, the charge is still to be regarded as having been created by the company. I am confirmed in this conclusion by reference to the later provisions of the restrictive clause which contain an exception in favour of any fixed security subsequently granted by Lothian Cars Ltd. in favour of the second parties. The use of the verb "granted" shows that something different from creation was intended. This is consistent with creating a security being something more than merely granting the deed.

I am accordingly satisfied that Lothian Cars Ltd. did not merely grant the standard security; they also created it. In terms of sec. 410(5)(b), the date of creation of the standard security is the date when the creditor recorded the standard security and thus obtained a real right. That was 30th December 1986. In terms of sec. 410(5)(a), the floating charge was created on the date it was executed, namely, 19th December 1986. It follows that the floating charge ranks in priority over the standard security.

In general I am of opinion that the approach of counsel for the second and third parties is to be preferred. I would accordingly move your Lordships to answer all three questions in the case in the affirmative.

LORD MURRAY —The substance of this special case for the opinion of the Court of Session is to determine which of two charge-holders on the property of a company in receivership is entitled to prior ranking of their respective charges. The first party is A.I.B. Finance Ltd. (hereinafter referred to as "A.I.B."). The second parties are the Governor and Company of the Bank of Scotland ("B.O.S."). The third parties are the joint receivers of Lothian Cars Ltd. ("L.C.").

The agreed facts are that on 19th December 1986, in respect of a loan from A.I.B., L.C. granted a standard security to A.I.B. over heritable property belonging to them. On the same date L.C. granted a bond and floating charge to B.O.S. On 30th December 1986 the standard security was recorded by A.I.B. in the Register of Sasines. On the same date B.O.S. recorded their floating charge in the register of charges kept by the registrar of companies. On 9th January 1987 A.I.B. recorded their standard security in the register of charges. On 14th March 1991 joint receivers were appointed to L.C.'s whole property and undertaking.

It was further not disputed that a floating charge comes into existence when it is executed and that it is held, under sec. 410(5)(a)of the Companies Act 1985, to have been created, for purposes of registration as a charge, on that date; that, for purposes of registration as a charge, a standard security is held to be created when the right of the charge-holder is constituted as a right in rem; and that B.O.S.'s floating charge did not attach to L.C.'s property until 14th March 1991.

The issues between the parties are centred on the following clause in the instrument creating the floating charge in favour of B.O.S.:

"[W]e [Lothian Cars Ltd.] are hereby and shall be prohibited from creating subsequent to the date hereof any fixed security or any other floating charge as defined by the Companies Act 1985 or any statutory modification or re-enactment thereof for the time being in force having priority over or ranking pari passu with the floating charge hereby created excepting any fixed security which may subsequent to the date of these presents be granted by us in favour of the bank [the second parties] which shall have priority over the floating charge hereby created."

A.I.B. and B.O.S. construe this clause differently in the context of the relevant statutory provisions. The third parties take their stand with B.O.S. and were represented by the same solicitors and counsel.

For A.I.B. it is contended that the clause does not provide for regulation of ranking of charges nor does it regulate ranking as between itself and A.I.B.'s standard security. Further, the standard security was not created by L.C. after the floating charge, for L.C. granted it on the same date and played no further part in bringing it into force as a registrable charge. That was done by A.I.B. recording it in the General Register of Sasines on 30th December 1986. By sec. 11(1) of the Conveyancing and Feudal Reform (Scotland) Act 1970 a right in rem thereby vested in A.I.B. as grantee.

For B.O.S. it is contended that the standard security could not be said to have been created until after the floating charge was created on 19th December 1986. For while under sec. 410(5)(a) reference to the date of creation of a floating charge was to the date on which the instrument creating the floating charge was executed, namely 19th December 1986, under (b) in any other case it was the date on which the right of the charge-holder was constituted as a real right, which was 30th December 1986 for A.I.B.'s standard security.

The parties are divided essentially about the construction to be put on the foregoing clause of the instrument creating the floating charge in the context of sec. 464 of the Companies Act 1985. The material subsections of that section are as follows:

"464—(1) Subject to subsection (2), the instrument creating a floating charge over all or any part of the company's property under section 462 may contain—

"

(a) provisions prohibiting or restricting the creation of any fixed security or any other floating charge having priority over, or ranking pari passu with, the floating charge; or "

"(b) provisions regulating the order in which the floating charge shall rank with any other subsisting or future floating charges or fixed securities over that property or any part of it .... "

"(3) Where the order of ranking of the floating charge with any other subsisting or future floating charges or fixed securities over all or any part of the company's property is not regulated by provisions contained in the instrument creating the floating charge, the order of ranking is determined in accordance with the following provisions of this section. "

"(4) Subject to the provisions of this section— "

"(a) a fixed security, the right to which has been constituted as a real right before a floating charge has attached to all or any part of the property of the company, has priority of ranking over the floating charge; "

"(b) floating charges rank with one another according to the time of registration in accordance with Chapter II of Part XII; "

"(c) floating charges which have been received by the egistrar for registration by the same postal delivery rank with one another equally."£

The questions of law are in substance:

1. (1) Was the standard security created after the creation of the floating charge?

2. (2) Does the clause of the floating charge instrument regulate the order of ranking of the floating charge and the standard security?

3. (3) Does the floating charge have priority?

Counsel for A.I.B. argued with great cogency and persuasive force that the prohibition of L.C. from creating any fixed security or floating charge subsequent to 19th December 1986 must be read as being a prohibition from granting any such deed. The word "create" in this context did not have the technical meaning it had in relation to sec. 410 of the 1985 Act. In the latter's sense of creation the standard security was not fully in existence until the grantee had registered it in the General Register of Sasines. As regards sec. 464(1)(a)and (b), (a) covered negative pledges and did not deal with regulation of ranking at all. Only (b) dealt with regulation. The clause under consideration dealt in terms with (a) and not (b).

Counsel for B.O.S. argued with equal cogency and persuasiveness that the word "create" could not have one meaning in sec. 410, dealing with registration of charges, and a different meaning in sec. 464, dealing with ranking of charges. As the standard security had been created, in the sense of the 1985 Act, after 19th December 1986, it was struck at by the floating charge clause. In any event, that clause regulated the order of ranking of the floating charge and the standard security, since its prohibition and restriction affected ranking. Section 417(3)(e) equiparated the contents of sec. 464(1)(a) and (b) as both involving regulation. The clause was sufficient to exclude operation of the provisions of subsec. (4)(a). Without the latter the standard security enjoyed no priority.

Counsel for A.I.B. invited the court to answer all three questions of law in the negative. Counsel for B.O.S. invited the court to answer all three questions in the affirmative.

As regards the issue raised by the first question of law, I have come to the conclusion, not without difficulty, that the interpretation of the floating charge clause for which A.I.B. contend is to be preferred. On the argument for B.O.S., if the standard security had been granted by L.C. on 18th December 1986, the day before the floating charge was created, it would not have predated the floating charge, which appears rather a startling assertion. Similarly, if it had been granted two months before 19th December 1986, but had not yet been registered, it would still not have predated the floating charge. This anomaly and associated anomalies are avoided by A.I.B.'s interpretation, which proceeds on the view that "creation" in sec. 410 (5) means becoming a registrable charge. It is intelligible to say that a standard security is made by the grantor executing it and is created a registrable charge when recorded (normally, as here, by the grantee) in the Register of Sasines. There must already be a right in terms of sec. 410(5)(b) for it to be constituted later as a real right. The date which the deed bears has then some meaning and effect instead of no meaning or effect. The floating charge clause's prohibition against "creating" subsequent securities is therefore to be read as a prohibition against granting them subsequently. It cannot forbid what L.C. have already done or what they cannot prevent. I therefore answer the first question in the negative.

In respect of the second question, neither of the contending versions of the meaning of sec. 464 is wholly satisfactory. It is not surprising then that material amendments to the section have been enacted by sec. 140 of the Companies Act 1989. But these have not yet been brought into force by statutory instrument. I do not think that sec. 140 can properly be used as an aid to interpretation of the original section, if only because the amendments may never be implemented. Prima faciesec. 464(1 )(b) appears to contemplate provisions regulating the ranking of all charges and securities, not just some of them; and (a) appears limited to provisions excluding or restricting the granting of subsequent ones. Counsel for B.O.S. strongly urged that a subpara. (a) provision would affect ranking and so would regulate it, particularly when regard was had to the change between the 1961 Act version and that of 1972 when power of restriction was added to power of prohibition. I find that view persuasive, particularly having regard to the provisions of sec. 417(3)(e), but the difficulty will prevail where the order of ranking "is not regulated" by provisions in the floating charge instrument. As this floating charge clause is silent about other than subsequent fixed securities, and I have already reached the view that A.I.B.'s standard security was not subsequent to the date of the floating charge, it follows that ranking priority between them is not in fact regulated by this clause. Accordingly, I would answer the second question in the negative. It follows then that question (3) would also be answered in the negative.

LORD McCLUSKEY —The issues in this special case, as formulated in the statements of facts, issues and contentions and also in the questions of law, arise from the terms of the bond and floating charge granted on 19th December 1986 by Lothian Cars Ltd. in favour of the second parties (referred to as "the floating charge") and from sec. 464(3) of the Companies Act 1985. The researches of counsel discovered no case-law that assists greatly in resolving the issues; and although we were referred to various texts by living authors concerning the general effect of the relevant statutory provisions, I agree with your Lordship in the chair that none of them seems to be consciously and expressly addressing any point of statutory construction that we may have to decide. Nonetheless I have found it valuable to adopt the approach suggested by counsel for the second and third parties, and to consider the legislative history which led to the enactment of sec. 464 of the Companies Act 1985. This appears to me to be clearly the correct course as the floating charge is a purely statutory creature in Scotland and of fairly recent origin.

We are concerned here with two concepts which occur in that section or in the floating charge and have an important bearing upon the correct understanding of the provisions which the floating charge contains. There is the concept of the "creation of" or "creating" a fixed security; and there is the concept of "regulating" the order of ranking among securities. So I propose in examining the terms of the earlier legislation to pay particular attention to any light that may be shed thereby upon these two concepts.

The power to create a floating charge in Scotland was introduced by the Companies (Floating Charges) (Scotland) Act 1961. Section 1(1) made it competent for an incorporated company to "create in favour of the creditor a charge, in this Act referred to as a floating charge, over all or any of the property, heritable and moveable, which may from time to time be comprised in its property and undertaking".

The floating charge was to take effect on the commencement of the winding up of the company by attaching to the company's property, but subject inter alia to the rights of any person then holding a fixed security over any part of the property and ranking in priority to the floating charge. Section 8 (1) defined "fixed security" as meaning "any security, other than a floating charge or a charge having the nature of a floating charge, which on the winding-up of the company in Scotland would be treated as an effective security over that property …".

Clearly when Pt. II of the Conveyancing and Feudal Reform (Scotland) Act 1970 came into force and allowed the creation of a standard security, that definition would have been apt to include a standard security of the kind granted by Lothian Cars Ltd. on 19th and recorded on 30th December 1986. Section 2 of the 1961 Act enacted that a floating charge might be "created … only by the execution, under the seal of the company, of an instrument of charge as nearly as practicable in the form set forth in the First Schedule to this Act" or by certain other types of written instrument. It is abundantly plain from the whole provisions of sec. 2 that it was to be the execution of the appropriate instrument that was to "create" the floating charge. Section 3 declared that a floating charge was to have effect "notwithstanding that it is not recorded in the Register of Sasines" in relation to any heritable property in Scotland. Section 5 of the 1961 Act was the first precursor of sec. 464 of the 1985 Act. It contained provisions about ranking: a fixed security arising by operation of law to have priority over any floating charge (subsec. (1)). Subsection (2) contained provisions about the priorities as between a floating charge and a fixed security not arising by operation of law. Again, the fixed security was to have priority unless three conditions were fulfilled. They included:

"(b) the floating charge was registered before the right of the creditor in the fixed security was constituted as a real right"

and "(c) the instrument creating the floating charge prohibited the company from subsequently creating any fixed security having priority over, or ranking equally with, the floating charge".

Subsection (3) contained further provisions which regulated ranking as between several floating charges: they were to rank according to the time of their registration. This provision, including the proviso, further illustrates that, in the case of a floating charge, creation preceded registration. Section 6 provided for registration with the registrar of companies. There is, in my opinion, no room for doubt that the provisions in sec. 5 of the 1961 Act were provisions designed to enable the grantor of the instrument creating the floating charge to regulate the ranking inter se of the floating charge and any fixed security to which subsec. (2) applied. Condition (c) of sec. 5 (2) allowed the instrument creating the floating charge to contain a prohibition on the subsequent creating by the company of any fixed security having priority over or ranking equally with the floating charge; accordingly, if such a provision was included in the instrument, the effect (provided the other conditions were also met) was to reverse the ranking as between any fixed security and any floating charge affected. The Companies (Floating Charges and Receivers) (Scotland) Act 1972 effectively re-enacted most of these provisions. Section 3 of that Act was new. It read:

"For the avoidance of doubt, it is hereby declared that a floating charge shall, subject to the Act of 1948, have effect in accordance with this Act in relation to any heritable property in Scotland to which it relates, notwithstanding that the instrument creating it is not recorded in the Register of Sasines."

Section 5, like its predecessor, sec. 5 of the 1961 Act, dealt with ranking of floating charges both in competition with fixed securities and with other floating charges. It reiterated the notion of creating a fixed charge by written instrument and, along with sec. 7, envisaged and sanctioned an instrument of alteration. Section 5(1) enabled either such instrument to contain "(a) provisions prohibiting or restricting the creation of any fixed security or any other floating charge having priority over, or ranking pari passu with, the floating charge" which was the subject of the instrument; or "(b) provisions regulating the order in which the floating charge shall rank with any other subsisting or future floating charges or fixed securities over that property or any part of it".

Section 7 allowed a company to execute an instrument of alteration; and subsec. (3) thereof applied the registration provisions in the amended 1948 Act to any such instrument which "(a) prohibits or restricts the creation of any fixed security or any other floating charge having priority over, or ranking pari passu with, the floating charge; or

"(b) varies, or otherwise regulates the order of, the ranking of the floating charge in relation to fixed securities or to other floating charges …".

Thus these provisions made it clear that a company could restrict as well as totally prohibit the creation of any fixed security which might compete with the floating charge created. It is, in my opinion, clear that sec. 5 of the 1972 Act re-enacted the provisions in sec. 5 of the 1961 Act, which I have earlier characterised as "provisions designed to enable the grantor of the instrument creating the floating charge to regulate the ranking inter se of the floating charge and any fixed security". In the 1972 Act, the provisions about prohibition and restriction in secs. 5 and 7 were provisions which enabled the grantor of the instrument to determine which should rank first, the floating charge created (or altered) by the instrument, or any future fixed security. Indeed as the power to restrict was expressly conferred, it appears to me that an instrument under that Act could contain quite a complicated regulation of the competitive ranking as between a floating charge and some future fixed security. Provisions of an instrument which derived from these sections of the 1972 Act would, in the ordinary use of language, be fairly described as provision "regulating" the order of ranking of the floating charge with any other fixed security. The ordinary meaning of "regulates" in these sections is well illustrated by sec. 7(3)(b) which referred to an instrument of alteration which "varies, or otherwise regulates the order of, the ranking": the use of the word "varies" as a synonym for "regulates" makes it clear that "regulates" was being used in one of its ordinary senses as meaning controlling things by placing them in some relative order. I now come to sec. 5 (3) of the 1972 Act. It read:

"Where the order of ranking of the floating charge with any other subsisting or future floating charges or fixed securities over all or any part of the company's property is not regulated by provisions contained in the instrument of alteration, the order of ranking shall be determined in accordance with the following provisions of this section."

Subsection (4) then laid down the rules as to the order of ranking being rules which were to apply unless the grantor chose to exercise his right to regulate the order. As he could influence, vary or determine the order by various methods, including the use of "prohibiting or restricting" provisions of the kind specified in sec. 5(1)(a), it would, in my opinion, be entirely proper and sensible to speak of an instrument containing such provisions as one where the order of ranking was regulated by provisions contained in it. Subsections (1) and (3) of sec. 464 of the Companies Act 1985 are in virtually the same terms as sec. 5(1) and (3) of the 1972 Act, though without any reference to instruments of alteration. Accordingly, I consider that sec. 464 (3) also treats prohibiting or restricting provisions in an instrument (sec. 464(1 )(a)) as provisions which regulate the order of ranking. These considerations would lead me to answer the second question in the affirmative purely on the basis of what I considered to be the clear meaning of sec. 464 (3) of the Companies Act 1985. In so doing, I seek no help from the proceedings in Parliament to which we were referred. I doubt if they provide any real help anyway; but on the view I have formed of the meaning of sec. 464 from its terms alone, in the light of the legislative history, I do not think that the conditions necessary for resort to such methods (as summarised by Lord Browne-Wilkinson in Pepper v. Hart [1993] AC 593 at p. 640C) obtain. I do not consider it legitimate to look at the terms of sec. 140 of the 1989 Act (not yet in force) to determine the meaning of differently worded provisions in the 1985 Act or indeed of the similar provisions in the 1972 Act which I consider were effectively re-enacted in 1985.

I can deal more briefly with the first question and the "creation" issue it raises. The expression in the floating charge quoted in art. 3 is:

"creating subsequent to the date hereof any fixed security or any other floating charge … having priority over or ranking pari passu with the floating charge hereby created excepting any fixed security which may subsequent to the date of these presents be granted by us in favour of the bank …"

Much of the language here echoes the statutory language. That is hardly surprising given the statutory origin of floating charges and of all the rules governing their relationship with fixed securities. The idea of "creating" a floating charge is statutory and, in the light of the statutory provisions, the only possible date of creation for such an entity is the date of execution of the instrument containing it. However, the word "creation" fits less well with a standard security, especially in a context such as this, when the authors were plainly dealing with and seeking to regulate competitive ranking. So the floating charge itself uses the term "granted" and the original Act (1961) used, in its ranking provisions, the phrase "before the right of the creditor in the fixed security was constituted as a real right". It appears to me, given the terms of Pt. II of the Conveyancing and Feudal Reform (Scotland) Act 1970, that, for ranking purposes, the creation process of a standard security is not complete until the standard security has been recorded. Thus sec. 9 (2) uses the phrase "grant and record", this follows sec. 9 (1) which enables a standard security to be "created"; and the effect of these provisions is to say that, in this context, a standard security may be created by being granted and recorded. Accordingly, on the agreed dates here, the standard security was created subsequent to the date of the floating charge. On that basis it would follow that question (1) must be answered in the affirmative.

I am conscious that in my reasoning I have not dealt seriatimwith all the submissions advanced by counsel in relation to these matters. But that is because your Lordship in the chair has done so comprehensively and I agree with your Lordship's conclusions on each of them. Nor have I anything to add regarding the issue as to whether or not it was Lothian Cars Ltd. that created the standard security in this case; I agree with your Lordship's reasoning on that issue as well.

In the circumstances, I agree with your Lordship in the chair that all three questions fall to be answered in the affirmative.