England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		Monday 6th November 2006

The Facts

1. Oval 1742 ("the Company") was incorporated (under the name Quayshelfco 734) on 30 September 1999, The Company's business was involved in producing high quality moving images for use in films, videos and television programmes and operated from premises in London, Bristol and Manchester.
2. On 22nd December 1999, the Company granted an "all moneys" Debenture to the Defendant, the Royal Bank of Scotland ("RBS") creating fixed and floating charges over the Company's business. The Debenture was registered at Companies House on 24th December 1999.
3. By mid 2002, the Company was experiencing significant adverse financial and trading pressure. By certain "hive down" and sale arrangements which were completed on 2 August 2002, the Company sold certain of its business and assets to 2 subsidiaries, specially formed for the purpose, and those subsidiaries were then sold to a third party purchaser, Barcud Derwen Limited ("Barcud").
4. On 2nd August 2002, the Board of the Company passed a resolution that the Company was insolvent and should cease to trade. On 5^th September 2002, the shareholders of the Company passed an extraordinary resolution that the Company be wound up voluntarily. At a meeting of the Company's creditors held immediately after the shareholders meeting, it was resolved inter alia, that Messrs Beckingham and Haskew of Begbies Traynor be appointed as Joint Liquidators. Notice of the shareholders meeting was issued on 8th August 2002.
5. The sale of the Company's business and assets to Barcud was structured as follows:

a. On 29^th July 2002, the Company transferred part of its business which it operated from Bristol and London and certain of the assets used to carry out that business to a wholly owned subsidiary company, Oval (1742) Limited, This company was subsequently re-named 422 Limited ("422 Limited"). The relevant part of the business and the relevant assets were stated in the sale agreement dated 29^th July 2002 to be transferred "free from all charges and encumbrances and all other rights exercisable by third parties". Title to the relevant part of the business and the relevant assets were stated to pass to 422 Limited on 29 July 2002. Further, by clause 3,1 of the sale agreement, "the Consideration" was stated to be the payment by 422 Limited to the Company of £547,328 (excluding VAT) which was to be left outstanding on inter company loan as an interest free loan from the Company to 422 Limited,

b. On 30^th July 2002, the Company transferred part of its business which it operated from Manchester and certain of the assets used to carry on that business to a wholly owned subsidiary company, Oval (1741) Limited, subsequently renamed 422 Manchester Limited ("422 Manchester"). Again, the relevant part of the business and assets were stated to be transferred "free from all charges and encumbrances and all other rights exercisable by third parties". Title to these assets was stated to pass to 422 Manchester on 30th July 2002, and "the Consideration" for the sale was £512,672 (exclusive of VAT) which was again to be left outstanding on inter-company loan as an interest free loan from the Company to 422 Manchester,

c. On 2nd August 2002, each of these two agreements ("the Sale Agreements") were varied materially identical Supplemental Hive-down Agreements in order to facilitate the sale by the Company of the entire issued share capital of 422 Limited and 422 Manchester ("the 422 companies") to Barcud, For present purposes, these two agreements are the material agreements. Under these respective Supplemental Hive-down Agreements,

i. The Company agreed to sell to the 422 companies such of the business and assets as were referred to in the Sale Agreements with full title guarantee and the business and assets were stated to be sold free from all charges and encumbrances

ii. The relevant transfer dates remained as in the Sale Agreements, namely 29th July and 30th July 2002 respectively and completion was to take place on the signing of the Supplemental Hive-down Agreements,

iii. The Consideration was to be paid to the Company by the 422 companies respectively in two tranches,

1. An amount in cash payable by the purchasing companies on the execution of the Supplemental Hive-down Agreements and

2. The balance, as Deferred Consideration ("the Deferred Consideration"), on terms provided by the Supplemental Hive-down Agreements. In short, the Deferred Consideration was to be paid by the 422 companies realising the book debts transferred to each of them under the agreement. In the event that this Deferred Consideration was not paid in full by 29th November 2002, then the amount of the Deferred Consideration was to be reduced by £1 for each £1 of the debts that remained to be realised, Further, by no later than 6th December 2002, the 422 companies were to assign to RBS any remaining unrealised debts, However, the 422 companies were entitled to retain an initial tranche of realised book debts (422 Limited was entitled to retain the first £66,000 and 422 Manchester, the first £34,000).

iv. In both cases, the 422 companies agreed to pay the initial consideration to the Company, and to pay the Deferred Consideration as it became due to 'the Solicitors on behalf of the Company', Osborne Clarke ("the Solicitors"), and the 422 companies acknowledged that the Solicitors were to deal with the Deferred Consideration in accordance with an undertaking given by the Solicitors to RBS and the 422 companies were not to pay the Deferred Consideration to anyone other than the Solicitors without the express written consent of the RBS (Clause 4).

v. Upon the assignment of the unrealised book debts to RBS, there was to be no further payment due from the 422 companies to the Company or RBS in respect of Deferred Consideration or otherwise under the Supplemental Hive-down Agreement.

vi, Further, the 422 companies agreed with the Company to use all reasonable endeavours to invoice the Work in Progress in the ordinary course of business, and covenanted with the Company not to charge, encumber or sell the Debts prior to 8th December 2002.

vii, Finally, the two Supplemental Hive-down Agreements expressly provided that RBS would have the right to enforce Clauses 4.3 (the Consideration clause), 5 (the Purchaser's Undertakings) and 17 (the Cross Guarantee given by each of the purchasing companies in respect of the others' agreement with the Company).

d. By letter dated 1^st August 2002 (faxed to Mr Subert of RBS on 2 August), the Solicitors provided an Undertaking ("the Undertaking") in the following terms toRBS

"We refer to the purchase by Barcud Derwen Limited ("the Purchaser ") of the entire issued share capital of 422 Limited and 422 Manchester Limited from the Company ("the Transaction"). Conditional upon completion of the Transaction and receipt by us of £595, 000 in cash consideration payable by the Purchaser on completion, we hereby undertake to remit to you the sum of £487, 338.64 forthwith after completion,

We further undertake to remit to you within 2 working days of receipt all collections received by us from or on behalf of the Purchaser by way of Deferred Consideration (as defined in the supplemental hive down agreements dated 2 August 2002 and made between the Company and each of 422 Limited and 422 Manchester Limited) until your indebtedness is discharged, subject to the retention by us of the sum of £2, 500 for each £100,000 received by us, up to a maximum of £10,000

e. On 2nd August 2002 (by a fax timed after the receipt by RBS of the Undertaking), RBS provided a Deed of Release ("the Release") in the following terms

"The Royal Bank of Scotland Plc ("the Bank ") hereby releases all of the properly comprised within the definitions of "Assets ") in each of (i) the supplemental hive down agreements between (1) Oval 1742 Limited (formerly 422 Limited) (company Number 03851258) ("the Company ") and (2) 422 Limited (formerly Oval (1742) Limited (company number 4449042) and dated 2 August 2002 and (ii) the supplemental hive-down agreement between (1) the Company and (2) 422 Manchester Limited (formerly oval (1741) Limited)) (company number 4449045) and dated 2 August 2002 and dated 2nd August 2992 and attached hereto (the "Released Property ") from the charges created by the Debenture dated 22 December 1999 ("the Mortgage Debenture ") between (1) the Company and (2) the Bank and from all other charges which the Bank may hold over the Released Properly.

Nothing herein contained shall prejudice or affect the security of the Bank under the Mortgage Debenture in respect of the remaining properly comprised therein or the obligations of the Company or the rights of the Bank thereunder andfor the avoidance of doubt subject to this release, the Mortgage Debenture will remain infuliforce and effect,

The Deed of Release will be dependent upon the Bank receiving cleared funds of 12487, 338.64"

f. Finally, by an agreement dated 2nd August 2002, Barcud purchased from the Company the entire issued share capital of the 422 companies for the sum of £2, payable on 2nd August 2002. Under this agreement, the Company was obliged to deliver to Barcud, inter alia, the Release provided by RBS, and Barcud undertook to RBS to procure compliance by the 422 companies with their obligations under the Supplemental Hive-down Agreements. Further, RBS was given the right, pursuant to the Contracts (Rights of Third Parties) Act 1999 to enforce that undertaking directly,

6. As a result of the sale of the business and assets of the Company to the 422 companies in accordance with the above structure

a. The sum of £595,000 was paid to the Solicitors (on the Company's behalf) in respect of the non deferred Consideration. The £595,000 represented the aggregate net non deferred consideration payable in accordance with the terms of the Supplemental Hive-down Agreements.

b. On 5th August 2002, and in accordance with the terms of the Undertaking, RBS received the sum of £487,33 8-odd.

c. Prior to 29th November 2002, a further sum of £202,191.43 was received from the Solicitors by RBS in accordance with the terms of the Undertaking in respect of the Deferred Consideration paid by the 422 companies to the Solicitors on the Company's behalf.

d. By two separate deeds of assignment each dated 16th December 2003, each of the 422 companies assigned to RBS their respective rights, title and interests in the unrealised book debts and RBS received thereby a further sum of £50,278,20 in discharge of the amounts due from the Company to RBS.

The Proceedings

7. On 3rd November 2003, the Joint Liquidators of the Company issued an Originating Application for the determination of (in broad terms) the following questions, (i) whether or not the relevant assets (defined in the Originating Applications as "the Assets") were subject to floating charges in favour of RBS; (ii) whether or not the proceeds of sale of the Assets should have been applied in payment of the Company's preferential creditors in priority to RBS and (iii) whether or not RBS is liable to account accordingly.
8. As a consequence of the Order of His Honour Judge Weeks QC of 20 November 2003, and because the Second Respondents to the Originating Application, the Commissioners of Customs and Excise ("the Commissioners"), were primarily affected by the resolution of the aforementioned issues, it was agreed that the Commissioners would take the role of Claimants and file and serve Particulars of Claim and RBS would take the role of Defendant and file and serve a Defence. It was further agreed that the Joint Liquidators and the Commissioners for the Inland Revenue would take no active part in the proceedings.
9. The Commissioners filed and served their Particulars of Claim on 26th November 2003, and, on 22nd January 2004, they served further information with regard to their claim pursuant to a Request for Further Information by RBS dated 28th November 2003 and an Order for directions made on 15th January 2004. RBS served its Defence on 29th January 2004,
10. Thereafter, the proceedings were effectively stayed pending the final determination of the proceedings in the House of Lords in Re Spectrum Plus Limited (in Liquidation) [2005] 2 AC 680. By a consent order dated 13th April 2006, the proceedings were then resurrected.

Issue before the Court

11. The issue for the Court is whether, in the circumstances of the hive down and sale of the Assets of the Company as outlined above, the preferential creditors of the Company fall to be paid in priority to RBS by reason of Section 196 of the Companies Act 1985 and/or Section 175 of the Insolvency Act 1986.
12. The matter comes before the Court pursuant to CPR Part 24 because it is RBS's case that the Commissioners have no real prospect of success in the present proceedings to the extent that their claim is predicated on the applicability of the aforementioned sections. RBS further contends that there is no other compelling reason for the issue to go to full trial, the matter being essentially one of statutory construction which can be decided appropriately on a summary basis (CPR Part 24.2(b)), The Commissioners do not object to the matter proceeding on this basis. Section 196 of the Companies Act 1985/ Section 175 of the Insolvency Act 1986
13. So far as material, Section 196 of the Companies Act 1985 ("Section 196") provides as follows

"(1) The following applies, in the case of a company registered in England and Wales, where debentures of the Company are secured by a charge which was created, was afloating charge

(2) If possession is taken, by or on behalf of the holders of any of the debentures, of any properly comprised in or subject to the charge, and the company is not at that time in course of being wound up, the company's preferential debts shall be paid out of the assets coming into the hands of the person taking possession in priority to any claims for principal or interest in respect of the debentures ".

14. So far as material, Section 175 of the Insolvency Act 1986 ("Section 175") provides as follows:

(1) In a winding up the company 's preferential debts shall be paid in priority to all other debts.

(2) Preferential debts-

(a) rank equally among themselves after the expenses of the winding up and shall be paid in full, unless the assets are insufficient to meet them, in which case they abate in equal proportions; and

(b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures secured by, holders of any floating charges created by the company, and shall be paid accordingly out of any property comprised in or subject to that charge"

15. For present purposes, the dividing line between the application of Section 196 and Section 175(2)(b) is whether or not the Company was in the course of being wound up at the time possession was alleged to have been taken by or on behalfofRBS of property comprised in or subject to RB S's charge within Section 196.
16. It is common ground between the parties that as the Company went into liquidation on 5th September 2002, Section 196 of the Companies Act 1985 can only apply (if it applies at all) to the non deferred consideration received by RBS on 5th August 2002 and to such of the deferred consideration (if any) as was received by RBS after that date but prior to 5th September 2002. As regards any element of consideration that remained to be paid after 5th September 2002, the only relevant provision (to the extent that it is relevant at all) is Section 175 of the Insolvency Act 1986.

Summary of the parties' respective cases

(i) RBS's case

17. RBS contends that it can only be liable to preferential creditors on the basis that either Section 196 or Section 175 is applicable and in the present circumstances neither applies.
18. In particular, it is contended that:

a. Section 196 and Section 175, properly construed, do not comprehensively provide and/or ensure that preferential creditors are paid out of floating charge realisations in priority to the holder of a floating charge come what may. See Hoffmann J in In Re Brightlife Limited [1987] 1 Ch 200 at 211 E-212C.

b. As regards Section 196,

i. Although at the relevant time the Company was not being wound up, none of the other elements necessary for the application of the section exist;

1. The relevant assets of the Company were transferred to the 422 companies on 29th and 30th July 2002 and the transfers were effected free from all charges and encumbrances.

2. Further, title to the relevant parts of the business and assets passed on these dates and the transfers were made in the ordinary course of business of the Company.

3. Neither RBS nor any person on its behalf "took possession" of the relevant assets whether pursuant to the terms of the Debenture or otherwise.

4. Indeed, even if RBS "took possession" of the relevant assets, the assets were not subject to any charge at the time any such possession was taken. In short, RBS did not take possession of "any property comprised in or subject to the charge" as required by Section 196.

ii. The £487,338 was paid to RBS on 5th August, and RBS received the monies pursuant to the Solicitors' undertaking, ie pursuant to an independent obligation owed to RBS on the part of the Solicitors, which obligation was found in contract or arose by way of an express trust in favour of RBS.

iii. Alternatively, assuming that at the relevant time of transfer to the 422 companies, the relevant assets were subject to the floating charge in favour of RBS, the transfers did not serve to crystallise the floating charge over the relevant part of the business or assets, as the transfers were made in the ordinary course of the Company's business and the Company did not cease business. The Company ceased to trade at the earliest on 2nd August 2002, after completion of the sale of the 422 companies' shares to Barcud;

iv. In short, all that may be said to have occurred was not the "taking of possession", but the exercise by the Company of its contractual equitable right to redeem its property from the charge in favour of RBS in order that its property could be transferred free of any encumbrance. Section 196 has no application to any such redemption and can not operate to bestow rights on preferential creditors or impose obligations on the chargor.

c. As regards Section 175

i. This can have no application in relation to the £487,338 as the Company was not in liquidation at the time. Section 175 applies only if a company is "being wound up".

ii. At the date of the winding up of the Company, its relevant assets (the receivables) were not subject to any security, whether fixed or floating. The receivables were assets which had been transferred to the 422 companies on 29th and 30th July respectively, and title in those assets vested in these 2 companies at those dates.

iii. As a result of the structure of the transaction, the 422 companies were responsible for paying the deferred consideration from out of what had become their own book debts.

iv. Accordingly, the £202,191 received by RBS (as part of the Deferred Consideration) was received on the same basis as the £487,338, free of all encumbrances. Both of the 422 companies were obliged to pay the proceeds of realisation of the receivables to the Solicitors, who in turn were obliged to pay the proceeds to the Bank pursuant to the terms of the undertaking they had given to RBS.

d. As regards the amounts received by RBS in respect of deferred consideration subsequent to 26th November 2002, RBS contends that these amounts represented the proceeds of debts due to the 422 companies, which debts were then assigned to RBS and which were subsequently realised by RBS. Accordingly, neither the Company nor its creditors could have any claim to these monies.

(ii) The Commissioners' case

19. In answer, the Commissioners contend:

a. The Assets (as defined in the Sale Agreements) were subject to RBS's floating charge before the sale was completed

b. The Company was not simply selling the equity of redemption in the charged assets, but, with RBS's consent, was selling the Assets free from RBS' charge.

c. RBS was releasing its charge only to the extent necessary to enable the sale to proceed and in such circumstances, the charge also attached to the proceeds. In this regard, the Commissioners rely on the decision of the Court of Appeal in Buhr v Barclays Bank plc [2002] EWCA Civ 1223, which approved statements of law in this area by Professor Sir Roy Goode to the effect that "Unless otherwise agreed, security in an identifiable asset carries through to its products and proceeds The security interest in proceeds, unless separately created, is not a distinct security interest but is part of a single continuous security interest which changes its character as it moves from asset to proceeds". (Legal Problems of Credit & Security 2^nd ed, pp 618-9).

d. Had RBS needed to do so (if, for example, the proceeds of sale had not been received by the Solicitors) RBS would have been able to assert a proprietary claim to the proceeds in right of their being a chargee under their Debenture.

e. Accordingly, Sections 196 and 175 are both perfectly apt to apply to the proceeds of sale of the Assets received by RBS, Such proceeds were "property" subject to the/that charge" for the purposes of both sections. No specifically restricted sense should be ascribed to "property" and the legislature in using the wider phrase of property "subject to" the charge in addition to "comprised in" the charge must have had in mind the question of products and proceeds and have intended to include them.

f. If the proceeds of charged assets are not to be included, it would lead to the result that the sections could never apply to some floating charge assets; the only tangible manifestation of book debts and other receivables, classically the subject matter of a floating charge, are their proceeds; and in relation to other assets, the application of the sections would appear to be capable of turning on the happenstance of who had conduct of the sale or other realisation.

g. Similarly, no specifically restricted sense should be ascribed to 'possession' in Section 196. The receipt of charged proceeds is enough; one can not in any other sense, take possession of a book debt.

h. Finally, as regards the Solicitors' undertaking, it was plainly only because RBS had a Debenture and were entitled to payment of the proceeds of sale secured by it that it was able to extract and the Solicitors gave the undertaking. In any case, the undertaking is irrelevant to the application of the sections. The undertaking was simply a piece of mechanics which did not prevent the proceeds of sale of the Assets from being subject to RBS' debenture and from the sections applying for that reason.

20. The parties respective submissions are more fully set out in their Outline Submissions provided for the hearing and in the Supplemental Submissions provided, at the Court's request, after the close of the hearing. Whilst it is obviously not possible to deal in this Judgment with every point raised in these Submissions, I have endeavoured to cover the key points below, Background to Section 196
21. The origin of Section 196 of the Companies Act 1985 lies in Section 3 of the Preferential Payments in Bankruptcy Amendment Act 1897 (60 & 61 Vict., c. 19). This section became Section 107 of the Companies (Consolidation) Act 1908, which in turn became Section 94 of the Companies Act 1945 and finally Section 196 of the Companies Act 1985.
22. The policy of all these provisions was to ensure that certain debts took priority over a floating charge securing a debenture. Section 196 (1) of the Companies Act 1985, as originally enacted provided as follows

"The following applies, in the case of a company registered in England and Wales, where either a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge, or possession is taken by or on behalf of those debenture-holders of any property comprised in or subject to the charge and the section went on to specify the duty on the part of the receiver or person taking possession to pay out the assets coming into his hands to preferential creditors in priority to the debenture-holder. Thus, the critical words for present purposes, namely "or possession is taken by or on behalf of" the debenture holder are not new but go all the way back to the original enactment of the predecessor to the current provisions in 1897.

23. The Insolvency Act 1986 altered these provisions in two main respects. First, so far as receivers were concerned, the relevant provisions were moved out of Section 196 into Section 40 of the Insolvency Act 1986, leaving Section 196 to deal only with the case where "possession is taken, by or on behalf of the holders of any of the debentures". Secondly, the provisions were amended so that their operation depended on whether the charge "as created" was a floating charge. That amendment was made in order to meet the argument that it was the status of the charge as a floating charge at the date possession was taken or a receiver appointed that determined whether the section applied, so that if the charge had crystallised the section did not apply. This point has no bearing on the present dispute.

When is "possession taken" under Section 196.

24. The first question I have to resolve before getting into the facts of the present dispute is what is meant by the words "possession is taken, by or on behalf of' the debenture-holder in Section 196. In particular, does payment by a company out of assets that are comprised in or subject to the charge amount to "taking possession" of the property.
25. Of the various authorities to which my attention has been drawn by Counsel, it seems to me that the only one directly bearing on this question is IRC v Goldblatt [1972] Ch 498. In that case, the debenture-holder had first appointed a receiver who, although he had taken possession of the assets subject to the charge, had not complied with his duty under section 94 of the Companies Act 1945 (as it then was) to pay the priority debts. The debenture-holder had then discharged the receiver, and entered into an agreement with the company whereby the company assigned assets (which it was held were subject to the charge) and made a payment of just over £6,000 to the debenture holder to be accepted in full satisfaction of all his claims under the debentures.
26. Among the issues that Goff J considered in his judgment was whether, in receiving that property and money, the debenture-holder had been taking "possession" so as himself to come under the duty to pay creditors under section 94 of the Companies Act 1945. It was submitted on behalf of the debenture-holder that he had not, because the section had in mind only a case where debenture-holders took possession "in exercise of their rights and powers as mortgagees, and not to a case where a debenture holder takes, not only possession, but also full ownership in satisfaction of his claim." Goff J rejected that submission (at 506) where he stated

"I can see no justification for so limiting the section. Indeed it would be somewhat extraordinary if the section were to protect the preferential creditors when the debenture holder takes possession as mortgagee, leaving the assets available for prior claims, and not if he wholly arrogates them to himself'.

27. It appears that Goff J considered that this conclusion applied as much to the money paid to the debenture-holder as to the other property transferred under the agreement, since he specifically considered and rejected an argument that the money was not caught by the provision.
28. The difficulty with this statement of Goff J is to understand how far it goes. Given the circumstances in Goldblatt 's case, it is easy to see why Goff J should have characterised the act of the debenture-holder as one in which he had "arrogated" the companies' assets "wholly" to himself. Moreover, it seems to be right that the debenture-holder cannot avoid the application of section 196 merely by taking care that it should obtain possession of the relevant assets otherwise than by the exercise of a power under the debenture. To the extent that Mr Atherton, on behalf of RBS, suggested that Section 196 applies only when some enforcement of the charge in question has taken place by the chargee or at least some entitlement to enforce the charge has arisen, I reject that argument. There is nothing in Section 196 to this effect or which would suggest such a gloss. Nor is there any justification to import a qualification that the section only applies once an entitlement to enforce has arisen. In this regard, the observation of Goff J quoted in Paragraph 26 above would seem to be apposite.
29. The application of Section 196 does not depend upon who has conduct of the realisation of the charged assets. In my view, there is considerable force in Mr Girolami's submission that one must bear in mind when construing Section 196 that the section is not concerned with land but with floating charges and assets subject to a floating charge. It is impossible to enforce a charge over a receivable or other choses in action, classically the subject of a floating charge, by the act of 'taking possession' or the receivables or choses in question. All one can do is receive or possess their proceeds.
30. On the other hand, it seems to me to be stretching the language and purpose of the section considerably if one holds that every time a company pays a debenture-holder and uses, as a source of that payment, assets which are subject to a charge, the debenture-holder "takes possession" of those assets. The extreme circumstances which were present in Goldblatt's case do not necessarily decide that issue and I would be reluctant to conclude that in every case where the company pays the debenture-holder out of assets subject to a floating charge, Section 196 applies. In effect, where a floating charge is widely drawn to apply to most or all of a company's assets, that would mean that every time a debenture holder ever received a payment he would be obliged to inquire into the possibility that priority creditors ought to be paid. It does not seem to me that this was the intention of the section. The primary focus of section 196 -as originally drafted- and of Section 196 in conjunction with section 40 of the Insolvency Act 1986, as they now stand, is on acts which amount to the realisation of the security interest conferred by the floating charge. Nor does it seem to me to be a natural use of language. If X is paid a sum of money by Y, one would not normally or naturally describe that as a case where X had "taken possession" of Y's money.
31. Nevertheless, if Section 196 is to be effective, then attention has to be paid to the substance of what is done and not merely to its form. It may be, as Goldblatt's case demonstrates, that something that is in form a voluntary or consensual act to discharge the indebtedness to the debenture-holder nevertheless operates in such a way as to be tantamount to the debenture-holder "taking possession". Where, for example, the debenture holder is positively and actively involved in the transaction(s) whereby payment is made to it of monies which are subject to its floating charge, then this may amount to "taking possession", the emphasis there being on the "taking" of possession. I say this because where a floating charge has not crystallised or its crystallisation is not imminent, a debenture holder arguably does not have to do anything in order to be paid. No release of its floating charge is necessary; the company can dispose of its assets in the ordinary course of its business and then simply pay the debenture holder out of the proceeds. However, if the debenture holder is being asked expressly to release its charge over certain assets in anticipation that on the sale by the company of those assets the floating charge will in fact or is likely to crystallise, and the debenture holder and the company come to an arrangement whereby particular monies, subject to the floating charge, are earmarked to be used to pay the debenture holder, then it can be said to be "taking" possession of those monies. In such circumstances, it may be said that the arrangement between the company and the debenture holder, in substance, puts the parties in the same position as if a Receiver had been appointed and had taken possession of those assets. Obviously, not every payment made to discharge liability will have that character and in each case one must look at the substance of the transaction.
32. Interpreting Section 196 in the manner outlined above does not, in my view, leave creditors other than the debenture holder wholly unprotected where a debenture-holder receives a payment. If the payment is made in circumstances where it constitutes a preference, Section 239 of the Insolvency Act 1986 may in appropriate circumstances be applied to avoid it. It seems to me wrong, in principle, however, to suppose that Section 196 alone has the practical consequence that every payment to a debenture holder whose rights are secured by a floating charge carries with it an obligation on the part of that debenture-holder to apply all sums received to pay preferential creditors. Some line has to be drawn between acts which are, in substance (whatever their form) acts by which the charge-holder realises the security and acts which are (in substance) no more than the ordinary discharge of the debtor's liability.

Application of Section 196 and Section 175 to the present facts

33. In my view, and for reasons which I shall elaborate below, Section 196 is capable of applying and does apply to:

a. the £487,388 (the non deferred consideration) received by RBS on 5th August 2005 and

b. to that part of the £202,191 (the Deferred Consideration), which was paid to and received by RBS prior to 5 September 2002 when the Company was wound up.

34. However,

a. that part of the £202,191 which was paid between 5 September and 29th November 2005 can only be caught by Section 175 Insolvency Act 1986, and for the reasons set out below, I find that it is caught by that section, and

b. those amounts received by RBS post 29 November 2005 as a result of RBS realising the debts assigned to it by the 422 companies on 16th December 2202 are not caught by either Section 196 or Section 175.

The Non Deferred Consideration of £448,337.64

(i) "Property comprised in or subject to the charge"

35. As set out at Paragraph 5(e) above, on or about 1 August 2002 RBS was asked to provide a Release in relation to the Assets (as defined in the two identical 422 Sale Agreements) which the Company was intending to sell to the 422 Companies.
36. The very fact that a release was requested from RBS indicates that the Company, quite correctly, anticipated that the floating charge held by RBS would crystallise on or immediately after the sale of the Assets and that RBS's participation in the process was therefore required. Had the Company been selling these Assets in the ordinary course of its business and then simply using the monies to discharge its indebtedness to RBS, arguably no such release would have been necessary.
37. The critical words of the Release for present purposes (the full terms of which are set out above) are

"Nothing herein contained shall prejudice or affect the security of the Bank under the Mortgage Debenture in respect of the remaining property comprised therein or the obligations of the Company or the rights of the Bank thereunder and for the avoidance of doubt, subject to this release, the Mortgage Debenture will remain in full force and effect

The Deed of Release will be dependent on the Bank receiving Cleared funds of £487,338.64 emphasis added".

38. It is quite clear from this wording that the Release was not intended to and did not operate until RBS received £487,338.64 in cleared funds fromlon behalf of the 422 companies, which it did on 5th August 2002. By the 5 August 2002 (and pursuant to the two almost identical "Supplemental Hive Down Agreements" referre4 to above and which were executed and completed on 2 August 2002), the Company had transferred the Assets to the 422 companies in consideration of a payment by the 422 companies to the Company of £547,328 and £512,672 respectively. The consideration payable by each of the 422 companies to the Company was divided into two parts; a certain payment on the execution of each respective agreement (ie on 2 August 2002) and a payment of the balance (the Deferred Consideration) in accordance with Clause 4.3 thereof.
39. Accordingly, by 5th August 2002, as a matter of contract, there existed a debt owed to the Company by each of 422 Limited and 422 Manchester pursuant to Clause 4.1 of each "Supplemental Hive-down Agreements".
40. Further, and for the purposes of Section 196, these two debts (for the full amounts of the sums stated in Clause 4.1 of each agreement, but payable in two tranches) were clearly debts "comprised in or subject to" by RBS's Charge as at 5 August 2002 having been created as at 29th and 30th July 2002 respectively and falling within Clause 1.11 of the Charge as forming part of the

"undertaking and all properly, assets and rights of the Company present and future and not subject to a fixed charge ".

41. Further, these two debts comprised part of the 'remaining property' held subject to the Charge as at 5th August 2002 when the Charge was released only to the extent necessary to enable the Assets (so defined) to be free of encumbrances in the hands of the 422 companies~ The actual transfer of the Assets to each of the 422 companies took place on 29 and 30th July respectively (see definition of 'Transfer Date') and the words 'remaining property' in the Release, properly construed, must mean the remaining property at the date of the Release, namely 5th August 2002 (the date RBS received the monies).
42. Accordingly, RBS did not release its Charge over the Assets (as defined) until the Company's right to recover a debt from each of the 422 companies had arisen under the "Supplemental Hive Down Agreements". The debts created on 29^th and 30th July 2002 under these two agreements were existing debts of the full amount of the stated consideration in Clause 4.1 of the "Supplemental Hive-down Agreements", payable in 2 tranches; the first part being due and payable on execution of the "Supplemental Hive Down Agreements", the balance being due but not payable until some time thereafter.

(ii) "taking possession"

43. In my view, the aforementioned payment to RBS of the £487, 388.63 on 5 August 2002 amounted to 'taking possession' for the purposes of Section 196. What happened in the present case can not be characterised, as Mr Atherton argues, as simply a payment to RBS of its debt in the ordinary course of the Company's business nor did it amount to a redemption of the bank's charge.
44. The book debt was clearly property subject to RBS's charge. The Company and RBS agreed, in the face of the impending crystallisation of RB S's floating charge over the Company's assets (which happened at the very latest when the Company resolved to cease trading on 5 September 2002, but more likely would have been determined as having occurred on the sale of the Assets to the 422 Companies), that RBS would be paid out of the proceeds of the sale of the Assets. Thereafter RBS participated in the arrangements whereby these particular monies were applied to discharge its debt, The position is almost indistinguishable to that in IRC v Goldblatt.
45. The fact that the £487,388.63 was received by RBS pursuant to the mechanism of an Undertaking given to it by the Solicitors does not, in my view, affect the above analysis. The Court must look at the substance of the transaction, not its form. What occurred in the present case, in substance, was the realisation of RBS's security. In fact, the wording of the Undertaking (set out in full above) in my view implicitly recognises RB S's rights over the monies received by the Solicitors from Barcud/ the 422 companies. Contrary to RBS's submissions, the Undertaking does not create a separate contractual entitlement on the part of RBS to receive the monies from the Company (and held by the Solicitors on the Company's behalf); rather the Undertaking recognises RBS's existing entitlement to the monies subject to its Charge and the Solicitors' agreement to transfer such monies to RBS on their receipt from Barcud/the 422 Companies.
46. Further, the fact that the money used to discharge the debts from 422 Limited and 422 Manchester to the Company appears to have come from Barcud does not alter the postion. Barcud was the purchaser of the entire issued share capital of the 422 companies. It was clearly discharging the debts owed by the 422 Companies to the Company.
47. In light of the above analysis, it is not strictly necessary to analyse the position in the more general terms put forward by the Commissioners, namely the argument that a charge over an asset necessarily attaches to the proceeds. As mentioned above, in support of this proposition, the Commissioners rely on a recent decision of the Court of Appeal in the Buhr case, in particular, Paragraphs 39, 57 and 58 of the Judgment of Lady Justice Arden, where the Court approved the statements contained in Professor Sir Roy Goode's books referred to above.
48. For my part, although, as I say, it is not strictly necessary for me to determine this

particular issue, I do not consider the decision in the Buhr case to be on point:

a. Firstly, the Buhr case concerned the disposal of property subject to a mortgage, not a floating charge, and the wrongful disposition of that property such as would otherwise destroy the Bank's security. Accordingly, to the extent that the Court of Appeal adopted Professor Goode's analysis, it does so only with regard to the position under a mortgage, not a floating charge and any further observations must be obiter.

b. Moreover, it seems to me to be quite clear from the extracts from Professor Goode's books referred to above that what Professor Goode is concerned with is a specific security over an identifiable asset, for example, a mortgage or a fixed charge. Indeed, the footnote (135) to Professor Goode's Commercial Law states that 'it is necessary for the security to be spec~flc. A floating charge covering assets of a particular description will not carry through to proceeds of a d~fferent description, for this would be inconsistent with the power of disposition inherent in the floating charge'.

c. The 'continuity' to which Professor Goode refers (at 1-63, (5) of Legal Problems of Credit and Security) is the continuity of the security - ie one continuous security interest over an asset. Even if Professor Goode is correct that the effect of a security agreement, such as a floating charge, is to create a single, continuous interest which moves from asset to proceeds, it does not address the issue raised in the present case where it is contended there has been a release of a floating charge over particular assets. As RBS contends, if there had been a release in relation to the assets (and there was no debt caught by the balance of the Debenture as I have found), then there can be no continuity as there is no security. Professor Goode is not, in my view, considering the position where assets move in and out of the security, nor where the security has been released. He is concerned with the continuity of the security interest as opposed to the continuity of the asset into proceeds.

49. However, as already indicated, given that I have found that the debts created by the Supplemental Hive-down Agreements were caught by RBS's Charge as at 5 August (when the money was received by RBS and the release effected), this particular argument is academic. What is, in my judgment, determinative on the present facts is the fact that RBS took possession of monies owed by the 422 companies to the Company, which monies were comprised in/subject to RBS floating charge as at 5 August 2002 (the date the release was effected over the Assets).

(ii) The Deferred Consideration of £202,191.43

50. The position with regard to that part of the Deferred Consideration of £202,191.43 received by RBS prior to 5th September 2002 (when the Company was wound up) is in my view identical to the position with regard to the £487,338. It is caught by Section 196 Companies Act 1985.
51. Further, to the extent that it is not clear on the evidence whether the whole or only part of the £202,191.43 was received before or after 5th September, I accept the Commissioners' submission that it does not in fact matter because the result is the same whether Section 196 Companies Act 1986 or Section 175 Insolvency Act 1986 applies to these monies. The only substantive difference between the two sections is that Section 175 contains no concept of "taking possession" and the manner in which the charged assets came to be realised under Section 175 is irrelevant. In my view, RBS in fact "took possession" of the whole of the £202,191.43 for the same reasons I find that it "took possession" of the Non Deferred Consideration. Accordingly, to the extent that any part of the £202,191.43 was realised after 5th September 2002, in my view it is caught by Section 175.
52. The £202,191.46 was received by RBS from the Solicitors on the Company's behalf in accordance with the Undertaking. It is quite clear from Clause 4.1 of the Supplemental Hive-down Agreements that this Deferred Consideration was consideration which was due to the Company from the 422 companies (but not then payable) on the execution of the Supplemental Hive-down Agreements, namely on 2nd August 2002.
53. During the period between 5th August 2002 and 29th November 2002, as between the Company and the 422 companies, the Deferred Consideration was being paid by the 422 companies to the Company in discharge of their debts, over which debts RBS had retained its floating charge. RBS realised its security over these monies by the mechanism agreed with the Company, namely by the operation of the Undertaking. Its receipt of these monies was however referable to its entitlement to them by virtue of its debenture.
54. The fact that the 422 companies were entitled to retain respectively the first £60,000 and £33,000 realised from the book debts used to discharge the outstanding debts to the Company does not effect the analysis. Likewise the fact that the amount of the Deferred Consideration payable by the 422 companies to the Company was reduced by £1 for each £1 of Debts not realised by 29 November 2002. The monies were used to discharge the 422 Companies' debts and RBS took possession of these monies through the mechanism of the Undertaking in the same way as it took possession of the Non Deferred Consideration. In substance, this was part of the process whereby RBS realised its security.

(iii) The Assignment of Outstanding debts

55. However, in my view the position is materially different with regard to the monies realised by RBS itself from the book debts that it had assigned to it on/before 16th December 2003 pursuant to Clause 4.3(a) (ii) of the "Supplemental Hive-down Agreements".
56. On the assignment of these book debts to RBS on 16th December 2003, RBS did not take possession of, nor more importantly (because only Section 175 applies post 5th September 2002) did it receive any property "comprised in or subject to" its floating charge, which comprised the debts from the 422 companies to the company.
57. On 16th December 2002 RBS took possession of quite separate and distinct assets - the book debts of the 422 companies. The 422 companies transferred directly to RBS assets over which RBS had no charge at the time it received them, and indeed never had a charge over these assets.
58. Accordingly, it follows that Section 175 Insolvency Act 1986 has no application to these monies and RBS is not obliged to account to the Commissioners in respect thereof.

Proposed Order

59. It is common ground that the precise wording of any Order requires further discussion between the parties and that my findings in favour of the Commissioners on the Non Deferred Consideration and the Deferred Consideration does not dispose of the entire action. Further, given that I have found that RBS is not liable to account for the monies it has realised from the assignment to it of the debts of the 422 companies, it is not possible to answer the questions posed in the Originating Application in terms of a simple 'yes' to questions (1) and (2).
60. I will hear submissions from Counsel on the question of costs and any issues on the order.
61. Finally, I wish to thank both Counsel for their assistance in this matter and their very helpful submissions.