Bank Of Ireland v Bass Brewers Ltd & Ors [2000] ScotCS 234 (23 August 2000)

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[1] In this action the pursuers seek rectification of a letter of consent granted by the first defenders, Bass Brewers Limited ("Bass"), on 27 December 1997 in terms of which Bass, who held a floating charge over the property and undertaking of Lewis Lloyd Holdings Limited ("the company"), consented inter alia to the granting by the company in favour of the pursuers of a standard security over subjects at Hazelburn, Campbeltown ("the subjects"). Bass are the only compearing defenders. Following a debate, I pronounced an interlocutor on 1 June 2000 allowing a proof before answer.

[2] One of the submissions made on behalf of Bass at the debate was that the action should be dismissed because the rectification sought, if granted, would achieve no practical purpose. One basis on which that submission was made at that stage was that, having regard to the terms of sections 464 and 466 of the Companies Act 1985, a mere letter of consent by Bass, even if expressed in the way the letter of 27 December 1997 would be expressed if rectified in the manner concluded for, could not give the pursuers' standard security ("the BI security") priority of ranking over the Bond and Floating Charge in favour of Bass dated 29 August 1996 ("the Bass charge"). I declined to decide that issue at that stage.

[3] Following the allowance of a proof before answer the case was put out By Order for the purpose of discussing future procedure. At the By Order hearing on 19 June 2000 it appeared that the only issue on which the parties remained in dispute was the one mentioned above. Thereafter there was lodged a Joint Minute (No. 25 of process) in which the parties recorded that they were agreed:

The effect of that agreement is to render it unnecessary to hear evidence. The defenders accept, without the need for proof, that the requirements of section 8(1)(b) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 are satisfied in relation to the proposed rectification of the letter of consent. Consequently, at the diet of proof before answer, I simply heard further submissions by the parties on the remaining issue as defined in the Joint Minute.

[4] The relevant facts may be summarised as follows. The Bass charge was granted by the company on 29 August 1996 and registered with the Registrar of Companies on 5 September 1996. It is No. 6/2 of process. Also on 29 August 1996, the company granted in favour of the Royal Bank of Scotland ("RBS") a Bond and Floating Charge ("the RBS charge") which was registered with the Registrar of Companies on 9 September 1996. On 4 September 1996 Bass, RBS and the company entered into an instrument of alteration regulating the ranking inter se of the Bass and RBS charges.

[5] The Bass charge, after expressing the grant of the floating charge by the company in favour of Bass, contained the following passage:

The BI security is, of course, a fixed security within the meaning of section 70(1) of the Insolvency Act 1986. Such a security is "created" upon being recorded (AIB Finance Limited v Bank of Scotland 1993 SC 588). In the pleadings in the present case reference is made only to Undertaking (B) of the Bass charge, which is described as "the Bass negative pledge". Both counsel, however, in the course of their submissions treated the whole of the passage which I have quoted as encompassed within that expression, and I propose to do likewise. The RBS charge contained a provision expressed in somewhat different terms. In the pleadings that provision is referred to as "the RBS negative pledge".

[6] In late 1996 the company wished to purchase the subjects. The pursuers made funds available to the company to enable it to do so. One of the conditions on which the funds were made available was that the company grant in the pursuers' favour a first ranking security over the subjects.

[7] In 1994 the company's predecessors in title as owners of the subjects had obtained certain grant monies from Argyll and Islands Enterprise Limited ("AIE"), and in respect of certain monetary obligations arising out of the conditions of the grant had granted a standard security over the subjects in favour of AIE. As part of the transaction for the purchase of the subjects the company agreed to grant in favour of AIE a new standard security over the subjects ("the AIE security"), postponed to the BI security. The ranking of the BI security and the AIE security inter se was regulated by a ranking agreement between the pursuers and AIE which was recorded in the Register of Sasines on 23 June 1997.

[8] The solicitors acting for the pursuers, the company and AIE respectively were aware of the existence of the RBS and Bass charges, and of the negative pledges which they contained. Accordingly, steps were taken to obtain letters of consent from RBS and Bass. The Bass consent was dated 27 December 1996, and was in the following terms:

[9] On 30 January 1998 joint receivers were appointed over the property charged by the RBS charge. On 9 February 1998 they were also appointed joint receivers over the property charged by the Bass charge.

[10] The receivers subsequently brought a petition for directions in which they sought the guidance of the court as to the effect of the RBS and Bass consents on the ranking of the RBS charge and the Bass charge relative to the BI and AIE securities. Bass and the pursuers lodged answers to the petition and made submissions on the questions on which directions were sought by the receivers. By interlocutor dated 13 November 1998 Lord Cameron of Lochbroom found that the consents had no effect as regards the ranking of the RBS and Bass charges relative to the BI and AIE securities, or as regards the priority of the BI and AIE securities relative to the RBS and Bass charges (Griffith and Powdrill, Petitioners, 13 November 1998, unreported). The pursuers reclaimed against that decision, but the reclaiming motion was subsequently abandoned.

[11] In the present action the pursuers conclude for rectification of the Bass consent by the insertion, after the words "We consent to the granting of" in the second sentence of the consent, of the words "prior ranking". If so rectified the Bass consent would be in the following terms:

The rectification would convert the Bass consent from a mere consent to the creation of a subsequent standard security, silent as to ranking, (which would inevitably by reason of the Bass negative pledge have a ranking postponed to the Bass charge) into an express consent to the granting of a subsequent standard security having a ranking prior to the Bass charge.

[12] In order to set the remaining issue in context it is necessary to take note first of the provisions of section 464 of the Companies Act 1985 regulating the ranking of floating charges. Section 464 provides inter alia as follows:

[13] Since the defenders' submissions depend to some extent on the terms of section 466, it is appropriate also to note its terms. It provides inter alia as follows:

[14] Although, given their acceptance that the requirements of section 8(1)(b) have been satisfied, it is for the defenders to satisfy me that there is nevertheless ground for refusing, as a matter of discretion, the rectification concluded for, it was agreed between counsel that Mr Moynihan for the pursuers should address me first. It is therefore convenient to record his submissions first.

[15] Mr Moynihan submitted that the outstanding issue was a dispute between the pursuers and Bass as to the ranking inter se of the Bass charge and the BI security. As he later pointed out, the order in which the claims of the pursuers and Bass fall to be met by the receivers is regulated by section 60 of the Insolvency Act 1986. The dispute is as to whether the pursuer's claim falls to be paid before that of Bass by virtue of section 60(1)(a) or after it by virtue of section 60(2)(b). He acknowledged that the Bass consent could not be said to be an instrument of variation within the meaning of section 466, because it was not an instrument executed by all of the parties contemplated in section 466(1). He accordingly accepted that if priority of ranking for the BI security over the Bass charge could only be achieved by an instrument of alteration within the meaning of section 466, the pursuers must fail. The outstanding issue therefore depended on the sound construction of (i) section 464 and (ii) the Bass negative pledge. He submitted that the Bass consent, if rectified in the manner sought, would have a twofold effect. It would, in the first place, give consent to the granting of the BI security and, in the second place, give consent to that security ranking prior to the Bass charge. A letter of consent displaying both of those features would, he submitted, be sufficient to displace both aspects of the Bass negative pledge (i.e. both the prohibition on the subsequent creation of a fixed security having priority over the Bass charge, and the undertaking not to create a security without the consent of Bass).

[16] The first aspect of Mr Moynihan's argument therefore concerned the proper construction of section 464. Essentially his submission was that the effect of section 464(1A) was that a negative pledge in a floating charge was capable of affecting the ranking of the floating charge in relation to any subsequent floating charge or fixed security, and would do so according to its terms, not that the mere existence of a negative pledge, however expressed, inevitably secured that the floating charge containing it ranked prior to any subsequent floating charge or fixed security. Mr Moynihan submitted that it was necessary to place subsection (1A) in its proper historical context. The primary provision about ranking in section 464 is subsection (3). As it now stands it provides for ranking in accordance with the rules set out in subsections (4) and (5) "except where it is determined in accordance with any provision such as is mentioned in paragraph (a) or (b) of subsection (1)", i.e. in accordance with a negative pledge or a ranking clause. As originally enacted, however, subsection (3) merely provided that the order of ranking would be determined by the following subsections where it was "not regulated by provisions contained in the instrument creating the floating charge". There was at one time doubt as to whether a negative pledge should be regarded as capable of regulating ranking. Mr Moynihan referred to a passage in Gore-Brown on Companies, 44^th Edition, §18.25, which made the following comment:

The view was thus being expressed that subsection (1A) (and the amended version of subsection (3)) did not innovate on the previous law, as that had been interpreted in AIB Finance, and was concerned to provide for priority in favour of the floating charge over a subsequent security if, but only if, that was what the negative pledge, according to its terms, sought to do, i.e. if the security was one granted in breach of the terms of the negative pledge.

[17] In AIB Finance, a company executed on the same day (i) a standard security in favour of the first party, and (ii) a floating charge in favour of the second party containing a negative pledge against the subsequent creation of any security ranking prior to or pari passu with it. The standard security was recorded some time later. On the appointment of receivers to the company an issue arose as to the priority of the standard security and the floating charge. It was held (a) that the standard security was "created" when it was recorded, (b) that the ranking of the two securities inter se was determined by the negative pledge, and (c) that accordingly the floating charge ranked prior to the standard security. Mr Moynihan, in citing AIB Finance, drew attention in particular first to the opinion of the Lord Justice Clerk in which he said (at 595H):

Reference was also made to the opinion of Lord McCluskey in which, after an historical survey of the treatment of ranking in the legislation since the introduction of floating charges into Scots law in 1961, he concluded (at 603C):

Accordingly, as the law then stood, if there was a negative pledge, it was capable of affecting ranking, and it was necessary to construe its terms to ascertain how it did so.

[18] Mr Moynihan then turned to examine whether subsection (1A) required to be construed as bringing about the result that the mere existence of a negative pledge ensured that the floating charge ranked prior to the subsequent security, even if the subsequent security did not contravene the prohibition or restriction expressed in the negative pledge. He pointed out, first, that the mischief against which subsection (1A) was directed was the uncertainty that had existed (before AIB Finance) as to whether a negative pledge could have any effect on ranking. That mischief was adequately cured by subsection (1A) construed as rendering a negative pledge effective according to its terms to affect ranking. That construction would accord with the reasoning adopted in AIB Finance. Turning to the language of the subsection, it bears to apply to any situation in which an instrument creating a floating charge contains "any such provision as is mentioned in subsection (1)(a)", i.e. any provision "prohibiting or restricting the creation of any [other security] having priority over, or ranking pari passu with the floating charge". It therefore applies whether or not the negative pledge is expressed in terms that are contravened by the subsequent security. But it does not say that the negative pledge "shall confer priority"; the phrase chosen is "shall be effective to confer priority". The difference was significant. The language chosen emphasised that what was being made clear was that a negative pledge could secure priority for the floating charge over subsequent securities. It would be effective to secure priority of ranking, if and to the extent that it bore to do so according to its terms. The terms of subsection (3) also supported the view that it was to the terms of the negative pledge (or ranking clause) that attention required to be directed for the purpose of determining ranking. It was therefore wrong to construe subsection (1A) as automatically securing prior ranking over a subsequent security for a floating charge which contained a negative pledge, irrespective of the terms of the negative pledge, and irrespective of whether the grant of the subsequent security contravened the terms of the negative pledge.

[19] Mr Moynihan therefore turned to the second aspect of his submissions, namely whether, if the letter of consent were rectified in the terms sought, it would be sufficient to secure for the BI security priority over the Bass charge, applying a proper construction to the Bass negative pledge. The Bass negative pledge (using that expression in the wider sense indicated in paragraph [5] above, rather than in the narrower sense adopted in the pleadings) falls into two parts. First, it prohibits the creation of any subsequent fixed security having priority over or ranking equally with the Bass charge. That prohibition is subject to exceptions in favour of (i) the securities specified in the schedule to the Bass charge, i.e. standard securities in favour of RBS and Bass over certain subjects in Glasgow, and (ii) securities in favour of Bass. Secondly, it contains an undertaking not to create any security over or charge upon the property of the company unless with the written consent of Bass. Mr Moynihan recognised that it was possible to construe those provisions as first imposing an absolute prohibition (subject to the express exceptions stated) on the subsequent creation of any prior or equally ranking security, so that undertaking (B) could only apply so as to permit, with the written consent of Bass, the subsequent creation of securities postponed to the Bass charge. He submitted, however, that the Bass negative pledge should not be construed in that way. Rather, he submitted, the two parts should be read together. Undertaking (B) was quite capable of being construed as permitting the creation of any subsequent security, whether ranking prior to, pari passu with, or postponed to the Bass charge, provided it was created with the written consent of Bass. So far as it opened the way to the creation of prior ranking or pari passu securities, it fell to be construed as a further exception to the apparently absolute prohibition of such securities expressed in the earlier part of the Bass negative pledge. Thus, any subsequent security, whatever its ranking, was not a breach of the Bass negative pledge if it was granted with the consent of Bass to both its creation and its ranking. In support of that view, Mr Moynihan referred to a passage in Palmer's Company Law, §13.216, where it is said:

Mr Moynihan also drew support for his submission from two propositions which he derived from Sharp v Thomson 1997 SC (HL) 66, namely (i) that given that a floating charge was an alien concept imported into Scots law, it was reasonable to prefer a narrow rather than generous construction of its terms (per Lord Clyde at 82E), and (ii) that the purpose of registration (in the register of charges as much as in the register of sasines) was the protection of third parties (per Lord Jauncey at 69G). The first of these, allied with other principles of construction such as the presumption in favour of freedom, supported the least restrictive interpretation of the negative pledge. The second indicated that, in a competition between two security holders which did not affect the interests of third parties, there was no policy reason for requiring, as the defenders' contention required, a formal registered instrument of alteration to give effect to the consent of one security holder that the other security should have priority of ranking. Mr Moynihan submitted that on the facts of the case, the result for which he contended, namely that the BI security ranked in priority to the Bass charge, must be taken (given their concession that the requirements of section 8(1)(b) for rectification were satisfied) to be what Bass at the time they granted the consent intended thereby to achieve and thought they had achieved. It made no practical sense if the law permitted them to succeed in arguing that full effect should not be given to their consent according to its terms. They had freely consented to the BI security having priority of ranking. That was therefore the ranking which, in the dispute between the pursuers and Bass, the BI security should be accorded.

[20] Mr Moynihan recognised that Griffith and Powdrill contained dicta which were against his argument. Lord Cameron of Lochbroom dealt with the point first in the context of the RBS charge, where he said (at page 13 of his Opinion):

Mr Moynihan did not seek to argue that that case had been wrongly decided. He accepted that, since Lord Cameron of Lochbroom, so far as dealing with the Bass consent, had been dealing with it in its original un-rectified form, he had been right to hold that it did not consent to the BI security having priority of ranking over the Bass charge, and that it followed that the Bass charge had priority of ranking. He submitted, however, that Lord Cameron's view that where there was a negative pledge priority of ranking for the subsequent security could only be achieved by an instrument of alteration was unnecessary for his decision, and was therefore obiter. Notwithstanding the persuasive force of Lord Cameron's opinion, he submitted that, for the reasons which he had set out, I should in that respect reach a different conclusion.

[21] Mr Moynihan returned, towards the end of his submissions, to the importance of section 464(3). In terms of that subsection, unless ranking was determined otherwise in accordance with a negative pledge or a ranking clause, the BI security, having been recorded before the receivers were appointed under the Bass charge, was entitled to priority over the Bass charge by virtue of section 464(4)(a). A negative pledge which prohibited in any circumstances the subsequent creation of a prior ranking security would have determined the ranking, giving the charge priority because the security would be in breach of the negative pledge. A negative pledge which prohibited the subsequent creation of a prior ranking security without the charge holder's consent would have the same effect if the security were granted without such consent, again because the security would be in breach of the negative pledge. But a negative pledge prohibiting the subsequent creation of a prior ranking security except with the charge holder's consent would not be broken by the creation of a security with the charge holder's consent to its priority of ranking. In that situation the negative pledge would not prohibit the subsequent security, and ranking would accordingly not be determined by the negative pledge. The security would then retain the ranking conferred on it by section 464(4)(a). On a sound construction of the Bass negative pledge, and in the event of the Bass consent being rectified as sought, the actual circumstances of the present case were an example of the last-mentioned situation.

[22] In any event, Mr Moynihan submitted, it was important not to lose sight of the fact that this was a ranking dispute between the pursuers and Bass, not involving any third party. Even if Bass were right in submitting either (i) that subsection (1A) had the effect that the mere existence of a negative pledge in the Bass charge meant that it had priority of ranking over the BI security, or (ii) that, even if the Bass consent were rectified, the BI security would remain a contravention of the prohibition in the first part of the Bass negative pledge, it did not follow that in a question between the pursuers and Bass effect should not be given to the rectified consent. The procedure of making and registering an instrument of alteration was concerned with the protection of third parties. As between the pursuers and Bass, Bass, having consented to the granting of a prior ranking security in favour of the pursuers, should not be entitled to evade the consequences of their consent. The matter might be analysed as waiver on the part of Bass of their entitlement to rely on the negative pledge as depriving the BI security of its priority of ranking.

[23] The submissions advanced by Mr Wallace on behalf of the defenders fell into two main parts, concerning first the proper construction of section 464(1A) and secondly the proper construction of the Bass negative pledge. He submitted, however, that Mr Moynihan was wrong in suggesting that it made a difference that the dispute was simply between the pursuers and Bass and did not involve the interest of any third party. As the issue had been defined in the Joint Minute, the pursuers would fail if, on a proper application of the statutory provisions to the terms of the Bass negative pledge, the BI security did not have priority of ranking over the Bass charge. The question was not whether Bass had agreed to an alteration of the ranking but whether such alteration had actually been achieved.

[24] Mr Wallace submitted that subsection (1A) of section 464 should be given what he described as a literal interpretation. He pointed out that it came into play where the instrument creating the floating charge contained "any such provision as in mentioned in subsection (1)(a)", i.e. any provision prohibiting or restricting the creation of a security having prior or pari passu ranking. Its application therefore did not depend on the terms of the negative pledge. There was no significance in the use of the words "shall be effective to confer priority", rather than simply "shall confer priority". The additional words "be effective to" added nothing to the meaning of the phrase. The meaning of the subsection was the same as if it had said "shall confer priority". Moreover, the priority that was conferred on the charge was priority over "any fixed security or floating charge created after the date of the instrument". It therefore did not matter whether the subsequent security contravened the prohibition or restriction. The effect of the subsection was that the mere existence of a negative pledge, however expressed, secured priority for the floating charge over any subsequent security, whether granted in contravention of the negative pledge or not. Mr Wallace recognised that that proposition went further than the view taken in AIB Finance, but nevertheless maintained that it was the correct interpretation of the subsection. That interpretation, he submitted, involved no absurdity. All it meant was that, if there was a negative pledge and it was desired subsequently to create a prior ranking security, it would be necessary to execute an instrument of alteration complying with the requirements of section 466 and register it in accordance with section 410. The terms of section 466(4)(b) made it clear that variation of the order of ranking between the floating charge and fixed securities was one of the purposes for which it was contemplated an instrument of alteration might be used. The need for an instrument of alteration protected the interests of third parties, who would be able as a result to see the alteration of the ranking on the face of the register. Mr Wallace had, however, some difficulty in offering any practical illustration of that point. In support of his interpretation of subsection (1A) and the consequence that an instrument of alteration was required to alter the ranking of the BI security and the Bass charge inter se, Mr Wallace also relied on the view expressed by Lord Cameron of Lochbroom in Griffith and Powdrill. He accepted that in suggesting that consent to the subsequent creation of a prior ranking security could only be made effective by an instrument of alteration Lord Cameron was expressing an obiter opinion, but relied on it as persuasive authority.

Mr Wallace submitted that the two parts were independent of each other. The prohibition of the subsequent creation of a prior ranking security was (except for the expressly stated exceptions) absolute. There was no provision permitting the creation of such a prior ranking security with the consent of Bass. Undertaking (B) could not be construed as introducing an exception to the prohibition. The only means by which a subsequent security might be given priority over the Bass charge was by an instrument of alteration amending the negative pledge to that effect.

[26] The primary purpose of this action is to obtain rectification of the Bass consent. As it was actually expressed, it gave consent merely to the creation of the BI security (and the AEI security). The pursuers' contention, however, is that so expressed it failed to express accurately the intention which Bass had when granting it, and that Bass's true intention was to consent to the granting of a security in favour of the pursuers ranking prior to the Bass charge. By the Joint Minute Bass accept that that contention is well founded. It follows that in considering the issue which remains, as to whether rectification should be refused as a matter of discretion because it would serve no useful purpose, it is appropriate to bear in mind that Bass accept that they truly consented to the creation of the BI security with priority of ranking over their charge. Bass's argument is that, because of the statutory rules governing ranking, the BI security should be denied the priority of ranking to which they intended to give consent.

[27] It is in my view clear that, on a sound construction of the Joint Minute, Bass accept that the pursuers have a sound prima facie case for rectification. The only ground that they put forward for refusal of rectification is that the court should, in the exercise of the discretion that is conferred on it by the use of the word "may" in section 8(1) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985, refuse to grant the rectification because it would serve no useful purpose. The only basis on which they seek to support that ground is that, on a proper construction of sections 464 and 466 of the Companies Act 1985, the Bass consent, rectified as sought, would not confer on the BI security priority of ranking over the Bass charge. The determination of that issue requires consideration both of the proper construction of the legislation and of the proper construction of the Bass negative pledge. Unless I am satisfied that on the application of the legislation (properly construed) to the Bass negative pledge (properly construed) the Bass consent, if rectified, would not confer on the BI security priority over the Bass charge, it is agreed that I should grant rectification as first concluded for. If I am so satisfied, it is agreed that the action should be dismissed.

[28] In the submissions of the parties there was a difference in emphasis in the approach to the construction of the relevant statutory provisions. Bass's contention concentrated on the terms of section 464(1A), while the pursuers' contention took a broader view of the scheme of section 464, and laid particular emphasis on subsection (3). In my view it is appropriate to consider the provisions of section 464 as a whole. Subsection (3) sets out the primary rule as to 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". That rule is that the order of ranking "is determined in accordance with the provisions of subsections (4) and (5) except where it is determined in accordance with any such provision as is mentioned in paragraph (a) [a negative pledge] or (b) [a ranking clause] of subsection (1)". Unless the exception mentioned in subsection (3) applies in the present case, the BI security will rank in priority to the Bass charge by virtue of section 464(4)(a), because the BI security is a fixed security recorded before the Bass charge crystallised.

[29] In AIB Finance it was held that a negative pledge of the sort contemplated in section 464(1)(a) did regulate ranking, so that even with subsection (3) in its original form and without subsection (1A) the order of ranking prescribed in subsections (4) and (5) might be displaced by a negative pledge. It is, however, in my view clear that at that stage of the development of the law it was necessary to examine the terms of the negative pledge to see whether in the particular circumstances it did regulate ranking otherwise than if it were regulated by subsections (4) and (5). It is also in my view clear that at that stage the effect of a negative pledge would be to confer priority on the floating charge over any subsequently created security which was created in breach of a prohibition or restriction expressed in the negative pledge. There was, however, in my view no basis for supposing that as the law then stood the mere existence of a negative pledge would secure for the floating charge priority of ranking over a subsequently granted security which (a) in terms of the relevant provision of subsections (4) and (5) would have priority over the floating charge and (b) did not contravene any prohibition or restriction contained in the negative pledge.

[30] It is against that background that it is necessary to consider whether the amendment brought into operation in 1995 innovated upon the law as it was understood at the time of AIB Finance. It is in my view important to remember that the amendment comprised not only the introduction of subsection (1A) but also inter alia an alteration to the wording of subsection (3). The latter alteration made it clear that, as had been held in AIB Finance, a ranking clause in terms of subsection (1)(b) was not the only way in which the provisions of the instrument creating the floating charge might regulate ranking, and that a negative pledge in terms of subsection (1)(a) was also a means of doing so. It seems to me to be prima facie clear from the language of the amended version of subsection (3) that, just as it is necessary to examine the terms of a ranking clause to see what effect it has on ranking, similarly it is necessary to examine the terms of a negative pledge to see what effect it has upon ranking. It seems to me, therefore, that subsection (3) continues to contemplate that the effect of a negative pledge on ranking will depend on its terms.

[31] The question therefore comes to be whether subsection (1A) compels the adoption of a different approach. Certainly, the introductory words of the subsection refer to "any such provision as is mentioned in subsection (1)(a)", i.e. to any negative pledge. Equally, the closing words of the subsection refer to priority over "any fixed security or floating charge created after the date of the instrument". There is therefore reason to see the subsection as setting up a rule of universal application to all negative pledges and all subsequent securities. It is, however, in my view significant that the operative words of the subsection are "shall be effective to confer priority", rather than "shall confer priority". The significance of that difference of language is perhaps easy to overlook. In my view, however, when the mischief that the amendment was intended to address, namely the uncertainty as to whether a negative pledge could regulate ranking, is borne in mind, the language of the subsection can properly be seen as answering that uncertainty in the affirmative but going no further. It confirms the effectiveness of a negative pledge to regulate ranking, but does not indicate what the effect will be in any given case. It produces the result, in my view, that any negative pledge which, according to its terms by prohibition or restriction strikes at the subsequent creation of a prior ranking security, will be effective to achieve, as a matter of ranking, that any subsequent security created in breach of the prohibition or restriction will be deprived of any priority of ranking that it would otherwise, by virtue of subsections (4) or (5), have. It would, however, be strange if a negative pledge had conferred upon it, by subsection (1A), an effect which according to its terms it did not seek to have. I see no good reason for construing subsection (1A) as compelling that result.

[32] Mr Wallace submitted that the construction of subsection (1A) that he proposed yielded no absurdity, but I am not persuaded that that is so. If he is right, the mere existence of any negative pledge relegates to postponed ranking any subsequent security, even if it (a) would otherwise be entitled to priority of ranking in terms of subsection (4) or (5) and (b) involves no breach of the negative pledge. That is, in my view, a result that should not be held to follow unless the language of the provision permits no other. The point may be illustrated by supposing (i) that the negative pledge expressly prohibits only a subsequent prior ranking security without the written consent of the floating charge holder, and (ii) that the subsequent security is a standard security, granted with the express consent of the floating charge holder expressed in gremio of the security and confirmed by their execution of it, and recorded prior to the crystallisation of the floating charge. In such a situation it could not be clearer that the subsequent security is one otherwise entitled to priority in terms of subsection (4)(a) and not prohibited by the negative pledge. There seems to me to be no persuasive reason for regarding subsection (1A) as depriving such a security of its priority of ranking. Mr Wallace's submission that his construction of subsection (1A) yielded no absurdity was founded on the availability of the procedure of execution and registration of an instrument of alteration as a means of preserving the priority of ranking of the subsequent security, if that was what was desired. I find that submission difficult to understand. If, as Mr Wallace's construction of subsection (1A) would imply, it is impossible to express a negative pledge in a form that will have the result that a subsequent security which involves no breach of the negative pledge retains its priority of ranking, I do not see why it should be possible to amend it by instrument of alteration into a form that does have that effect. To put the matter the other way round, if by instrument of alteration the negative pledge can be amended into a form which will allow the subsequent security to retain priority of ranking, I do not see why the same result should be incapable of being achieved by appropriate expression of the original negative pledge.

[34] I therefore turn to the construction of the Bass negative pledge. It comprises two parts, namely (i) a prohibition on the subsequent creation of any fixed security having priority over or ranking pari passu with the Bass charge (save as specified in the schedule and save in favour of Bass), and (ii) an undertaking by the company not to create any security unless with the written consent of Bass. It seems to me that if the first of those provisions were to stand alone, the BI security would arguably be in contravention of it, because it permits no exception in favour of prior ranking security subsequently created with the consent of Bass. Conversely, if the second provision stood alone, the BI security would involve no breach of it, because (rectified as proposed) the Bass consent gives consent not only to the creation of it, but also to its prior ranking. The difficulty arises from the presence of the two provisions alongside each other. There are, it seems to me, two possible solutions. One is that proposed by Mr Wallace. The two provisions are independent of each other. The first prohibits absolutely (because the stated exceptions have no application to the BI security) the subsequent creation of any prior ranking security. The scope of the second must therefore be confined to securities with postponed ranking. It can have no effect in relation to prior ranking securities. Its only effect is to prohibit the creation of a security with postponed ranking, unless with the consent of Bass; in other words Bass's consent will be effective to render permissible only a security having postponed ranking. The other solution, proposed by Mr Moynihan, is to attempt to read the two provisions as parts of a single scheme of regulation of subsequent securities. So read, the apparently absolute prohibition in the first part is qualified by the exception to the second part in favour of securities granted with Bass's consent. That recognises the fact that the second part of the negative pledge is not expressed as applicable only to subsequent securities with postponed ranking.

[35] In my view Mr Moynihan was correct in submitting that it is appropriate to attempt to construe the two parts of the Bass negative pledge as parts of a single scheme of regulation of the creation of other securities by the company. That submission does not, however, in my view take the pursuers very far, because (although Mr Wallace maintained that his approach involved reading the two parts as independent of each other, while Mr Moynihan characterised his approach as involving reading them together) it seems to me that either of the approaches outlined in the preceding paragraph can be regarded as a way of attempting to read the two parts together. The first approach involves reading the first part as effective according to its terms, and the second part as consequently operating more narrowly than its terms would suggest. The second approach allows the second part to take unrestricted effect by operating as a qualification of or exception to the first part. A number of considerations seem to me, however, to point in favour of the second approach. If adopted, it would give the Bass negative pledge a less restrictive effect. That would be in accordance with the presumption in favour of freedom, as well as the view expressed by Lord Clyde in Sharp v Thomson (at 82E) in favour of narrow interpretation of floating charges. Moreover, it is not obvious to me why it should readily be supposed that Bass intended that the Bass negative pledge should so operate as to disable them in advance from permitting the subsequent creation of a security ranking in priority to their charge. It seems to me that their interest would be adequately protected by a negative pledge construed as prohibiting subsequent prior ranking charges in general, but permitting an exception where they gave written consent to such priority. It therefore seems to me that practical common sense favours the second approach (c.f. Sharp v Thomson, per Lord Jauncey at 76F). I am therefore of opinion on balance that the second approach to the construction of the Bass negative pledge is to be preferred. Consequently, I am of opinion that on a sound construction of the Bass negative pledge, rectification of the Bass consent in the manner sought will bring about the result that the BI security did not contravene it.

[36] I do not find in Lord Cameron's opinion in Griffiths and Powdrill reason to doubt the conclusion which I have reached. The issue before his Lordship was the effect of the Bass consent in its original un-rectified form. In that form it expressed consent to the creation of the BI security, but not consent to its priority of ranking. It was sufficient for the disposal of the issue in that case that there was no consent to priority of ranking. As counsel were agreed, his Lordship's view that priority of ranking could only be achieved for the BI security by an instrument of alteration was therefore unnecessary for his decision. Moreover, it is not clear to me whether all of the argument that I heard was deployed before Lord Cameron. Having heard the issue which remains in the present case fully debated, I am persuaded, for the reasons which I have given, that once the Bass consent is rectified, it will have the effect that the BI security did not contravene the Bass negative pledge, and accordingly retained its priority of ranking over the Bass charge. In these circumstances I do not consider that any need for an instrument of alteration arises.

[36] I have reached my conclusion without placing any particular reliance on the parts of Mr Moynihan's argument that emphasised that the dispute in the present case was a ranking dispute between the pursuers and Bass which did not involve any third party. It is, moreover, unnecessary for me to express a view on Mr Moynihan's alternative argument that even if Mr Wallace's submissions were sound the pursuers should succeed on the basis that by their consent to the BI security having priority of ranking over the Bass charge Bass had waived any entitlement to found on the fact that (on that hypothesis) the BI security did breach the Bass negative pledge.

[37] Bass have thus failed to satisfy me that rectification of the Bass consent would serve no purpose because, on a proper construction of sections 464 and 466 of the Companies Act 1985, such rectification would not confer on the BI security priority of ranking over the Bass charge. On the contrary, I am of opinion that such rectification would have the effect that Bass consented to the creation of the BI security as a security having priority of ranking over the Bass charge, that on a sound construction of the Bass negative pledge the BI security accordingly did not contravene it, and that on a sound construction of section 464 the BI security therefore has priority of ranking over the Bass charge.

[38] Such being my conclusion, it is a matter of agreement between the parties that rectification should be granted. I shall therefore sustain the pursuers' first plea-in-law, repel the first defenders' pleas-in-law and grant decree in terms of the first conclusion of the summons. I shall reserve consideration of the question of expenses.

	"1.	That the Bass Letter of Consent dated 27 December 1996 falls to be rectified in terms of the First Conclusion of the Summons unless the Court is satisfied that such rectification would serve no purpose because, on a proper construction of Sections 464 and 466 of the Companies Act 1985 such rectification would not confer on the Pursuers' Standard Security a prior ranking over the Bass Floating Charge.
	2.	That in the event that the Court should not be satisfied that rectification would serve no such purpose, rectification should be granted in terms of the First Conclusion, otherwise the action ought to be dismissed.
	3.	That the Court should not determine in this process whether the Letter of Consent is, in any event, void for non registration pursuant to section 410 of the said Act nor, if it is, whether it may be appropriate to grant relief pursuant to Section 420 of the Act."

"(1)	Subject to subsection (2), the instrument creating a floating charge over all or any part of a 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)	with the consent of the holder of any subsisting floating charge or fixed security which would be adversely affected, 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.
(1A)	Where an instrument creating a floating charge contains any such provision as is mentioned in subsection (1)(a), that provision shall be effective to confer priority on the floating charge over any fixed security or floating charge created after the date of the instrument.
(3)	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 determined in accordance with the provisions of subsections (4) and (5) except where it is determined in accordance with any provision such as is mentioned in paragraph (a) or (b) of subsection (1).
(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; ..."

"(1)	The instrument creating a floating charge under section 462 or any ancillary document may be altered by the execution of an instrument of alteration by the company, the holder of the charge and the holder of any other charge (including a fixed security) which would be adversely affected by the alteration.
(4)	Subject to the next subsection, section 410(2) and (3) and section 420 apply to an instrument of alteration under this section which -
	(a)	...
	(b)	varies, or otherwise regulates the order of, the ranking of the floating charge in relation to fixed securities or to other floating charges. ..."

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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Bank Of Ireland v Bass Brewers Ltd & Ors [2000] ScotCS 234 (23 August 2000) URL: http://www.bailii.org/scot/cases/ScotCS/2000/234.html Cite as: [2000] ScotCS 234

Scottish Court of Session Decisions