Scottish Court of Session Decisions

At advising on 24th February 1977,—

LORD PRESIDENT (Emslie).—On 14th March the Inland Revenue obtained a decree for payment of about £4,900 against a company known as the Imperial Hotel (Aberdeen) Limited. On 23 May 1974 the Inland Revenue arrested funds of that company in the hands of the Royal Bank of Scotland. These funds included or consisted of the sum of £593.68. On 17th July 1974 a receiver was appointed by the holders of separate floating charges over the whole property of the debtor company which were created in 1972. In this action signetted on 14th February 1975 the Lord Advocate, for and on behalf of the Commissioners of Inland Revenue, sought payment from the Royal Bank of Scotland of the sum of £593.68 which had been arrested. The action was an action of furthcoming proceeding upon the arrestment of 23rd May 1974 and was directed against the arrestees, the debtor company, and the receiver. It was defended by the receiver. After debate in procedure roll the Lord Ordinary sustained the receiver's first plea in law—a plea to relevancy—and dismissed the action. The pursuer has now reclaimed to this Court.

The question for decision in the action was and is whether the Inland Revenue as arresters in the execution are entitled to decree of furthcoming in respect of the fund arrested notwithstanding the appointment of the receiver by the holders of the floating charges created in 1972. It will be understood that the case is in no way concerned with the different questions which might arise where an arrestment proceeded not only the appointment of a receiver but the creation of the relevant floating charge under which he was appointed.

The statutory provisions out of which the question for determination arises are contained in the Companies (Floating Charges and Receivers) (Scotland) Act 1972. This Act did two things.

In Part I it re-enacted with modifications the law relating to floating charges in Scotland which was first introduced by the Companies (Floating Charges) (Scotland) Act 1961. Section 1 (1) of the Act of 1972 made it competent for an incorporated company to create in favour of a creditor a charge, known as a floating charge, over all or any part of the property which might from time to time be comprised in its property and undertaking. By section 1 (2) it was provided that on the commencement of the winding up of the debtor company any floating charge should attach to the property of the company at that date in so far as it was comprised in the charge "subject to the rights of any person who—(a) has effectually executed diligence on the property or any part of it; or (b) holds a fixed security over the property or any part of it ranking in priority to the floating charge; or (c) holds over the property or any part of it another floating charge so ranking."

Section 1 (2) then goes on to say that the provisions of the Companies Act 1948 relating to winding up shall, with an exception which it is unnecessary to notice here, "have effect as if the charge were a fixed security over the property to which it has attached …" Until 1972 therefore no floating charge crystallised as a fixed security on the debtor company's property until the commencement of winding up.

Part II of the Act of 1972 took an important step forward in the matter of floating charges for it enabled the charge to crystallise as a fixed security on a debtor company's property while it still continued to trade. What it did was to provide for the appointment of a receiver, either by the holder of a floating charge or by the Court on the holder's application, and by section 13 (7) it was enacted on the appointment of a receiver the floating charge by virtue of which he was appointed should attach to the property then subject to the charge, such attachment having effect as if the charge were a fixed security over the property attached. On the appointment of a receiver, accordingly, the right of the holder of a floating charge became that of the holder of a fixed security over the attached property. Part II then proceeded to give the receiver extensive powers to exercise that right on behalf of the holder of the charge. In particular section 15 (1) confers upon the receiver a long list of powers in addition to any prescribed in the instrument of floating charge itself. These statutory powers include power to ingather and realise the attached property and to carry on the business of the company. Section 15 (2), however, provides as follows—"(2) The foregoing provision of this section shall apply—(a) subject to the rights of any person who has effectually executed diligence on all or any part of the property of the company prior to the appointment of the receiver; and (b)subject to the rights of any person who holds over all or any part of the property of the company a fixed security or floating charge having priority over, or ranking pari passu with, the floating charge by virtue of which the receiver was appointed."

Section 16 provides for precedence among receivers being dependent upon the priority of ranking of the floating charges in question. Section 19 requires the receiver, when the company is not in course of being wound up, to pay, in priority to any claim of the holder of the floating charge, those debts of the company which on a winding up would be preferential payments. Section 20 then regulates generally the disposal of monies received by the receiver and directs that, subject to section 21 and the rights of the following categories of persons namely—"(a) the holder of any fixed security which is over property subject to the floating charge and which ranks prior to, or pari passu with, the floating charge; (b) all persons who have effectually executed diligence on any part of the property of the company which is subject to the charge by virtue of which the receiver was appointed; (c) creditors in respect of all liabilities, charges and expenses incurred by or on behalf of the receiver; (d) the receiver in respect of his liabilities, expenses and remuneration; and (e) the preferential creditors entitled to payment under section 19 of this Act, the receiver shall pay monies received by him to the holder of the floating charge by virtue of which the receiver was appointed in or towards satisfaction of the debt secured by the floating charge."

Section 21 relates to the sale or disposal by the receiver of any property or interest in property of the company which is—"(a) subject to any security or interest of, or burden or encumbrance in favour of, a creditor the ranking of which is prior to, pari passu with, or postponed to the floating charge; or (b) property or an interest in property affected or attached by effectual diligence executed by any person" if the receiver is unable to obtain the consent of such creditor or such person.

In this case the dispute between the Inland Revenue and the receiver arose in this way. In defence to the action the receiver said: the holders of the floating charges who appointed me have a fixed security over the sum in the hands of the Bank and I am entitled to ingather it subject only to the rights of persons who can bring themselves within section 15 (2) (a) or (b). To show entitlement to a furthcoming, therefore, you, the pursuing arresters, must, in the circumstances of this case, show that by arresting on 23rd May 1974 you "effectually executed diligence on" that part of the company's property consisting of the sum arrested. The contention for the arresters that by arresting they had "effectually executed diligence on" that part of the company's property within the meaning of section 15 (2) (a) was rejected by the Lord Ordinary for the reasons which he gives, and this was the basis on which the action was dismissed. Putting the matter as shortly as I may the reason why the Lord Ordinary took the view he did was that in his opinion arrestment is the first step in, and not a completed, diligence, and it confers upon the creditor only certain rights in personam which may entitle him to a preference in competition with certain other creditors in, inter alia, a sequestration or liquidation of the debtor. The diligence begun by arrestment, if it is to create in the arrester's favour any rights in rem over the subjects arrested, requires to be completed by a decree of furthcoming.

The submission for the reclaimer began by pointing out that arrestment by itself is commonly referred to as a legal diligence not only in authority but in certain statutory provisions. It cannot be disputed that this is so. It is so described in Stair III–1–39. Erskine in Book III–VI–2 recognises that it may be considered as a diligence and from time to time thereafter uses the expression "the diligence of arrestment" [e.g. III–VI–II]. Professor Bell in his Commentaries Vol. 2 section II at p. 58 introduces Poinding, Arrestment in Execution and in Security as "these diligences" and applies the label "diligence" to arrestment elsewhere in various contexts of the section of the work. The Debtors (Scotland) Act 1838, which deals inter alia with the procedure in arrestments and poindings, and was an Act to amend the Law of Scotland in matters relating to "Personal Diligence, Arrestment and Poindings" clearly includes arrestment under the description of "diligence" executed under the provisions of this Act [sec. 35]. The Execution of Diligence (Scotland) Act 1926 treats of the execution of arrestment as the doing of diligence. Finally the Bankruptcy (Scotland) Act 1913 and the Companies Act 1948, section 327, both use the word diligence to include, for the purpose of ranking, arrestments and poindings. The submission for the reclaimers then was that if an arrestment had been properly laid on in respect of a debtor's money or goods in a third party's hands, and was thus a good arrestment, it could be said to be a diligence which had been "effectually executed" in the sense that it was an arrestment which answered all the purposes of an arrestment and which had produced its intended effect.

Counsel, however, very properly recognised that this very simple approach perhaps did not go far enough to demonstrate that arrestment was effectually executed diligence "on the property" of a debtor company within the meaning of section 15 (2) (a) of the Act of 1972. In these circumstances the true nature and incidents of arrestment were subjected to close scrutiny by counsel on both sides of the argument and the principal submission for the reclaimer came to be as follows.

An arrestment which has not been followed by a decree of furthcoming has certain definite and important effects none of which is disputed. (1) It creates for the arrester, where no neglect of, or delay in, prosecution of his right is involved, a preference over a subsequent arrester even if the later arrestment is followed by a decree of furthcoming. In a competition between arresters accordingly preference is determined by date of arrestment and nothing else. (2) It creates for the arrester a preference over the only form of fixed security which can be created by the voluntary act of a debtor over moveables, namely, an assignation in security, not only where the assignation is later in date than the arrestment but also where the assignation was granted before the date of arrestment but was not intimated to the assignee until after the arrestment had been laid on. (3) It creates a preference over any later poinding but may be defeated if the poinding has been completed by sale unless, before such execution of poinding, a decree of furthcoming has been pronounced. (4) It makes the arrestee personally liable to the arrester for the value of the subjects arrested to the extent of the amount of the arrester's debt if the arrestee has, in breach of the arrestment, parted with the arrested subjects. It is also possible that, if the arrestee has made a gratuitous alienation, or an alienation involving bad faith on the part of the disponee, the arrester may recover from the disponee.

Having regard to these significant and valuable effects, and bearing in mind that in the case of a debt owed by a third party to the common debtor, arrestment is the only way of obtaining for a creditor any preference or security over it, it will be seen that arrestment entitles the user to a form of security over subjects arrested which can only be defeated in certain circumstances. The subjects themselves are "attached" [see for example Bell's Commentaries, Vol. 2, p. 62] and it has repeatedly been said that arrestment creates a "nexus" over the arrested subjects. [See Lindsay v. L. & N.W. Railway Co. 1860 22 D. 571; Dow & Co. v. Union Bank 1875 2 R. 459; M'Kenzie v. Campbell 1893 21 R. 904.] What the arrester obtains accordingly, so ran the argument, partakes of the character of a real security. For all these reasons the words "effectually executed diligence on the property" of a company are habile to include arrestment not followed by furthcoming. It would be unreasonable to suppose that Parliament did not intend by section 15 (2) of the Act of 1972 to protect the rights of arresters when these are properly understood. Any other construction which excluded arrestment would have startling consequences for, if a receiver ingathered arrested subjects, any preference in a liquidation would be lost to the arrester forever, and the whole purpose of any arrestment on the dependence would be defeated. In any event, if arrestment and poinding are not included within section 15 (2) (a), the subsection would have no content so far as diligences over moveables are concerned. If a poinding has proceeded to sale before the appointment of a receiver the subjects sold would not fall within the charge at all when it crystallised for they would no longer be property of the company. A decree of furthcoming prior to the appointment of a receiver would have the same result for, it was said, the decree invests the arrester in full right of property in the arrested subjects whether they are incorporeal rights or corporeal moveables.

Attractive though this argument was I am persuaded by the submission on behalf of the receiver that it is unsound. Arrestment has, no doubt, been called a diligence in certain contexts in which it would be tolerable to do so. The accurate description of an arrestment, however, is that it is merely an "inchoate" diligence [Stair III–1–42] a "step" of diligence or an "inchoate or begun" diligence [Erskine III–VI–II and 15]. It has never been held otherwise and is succinctly described in Lucas's Trustees v. Campbell & Scott 1893 21 R. 1096 by Lord Kinnear—a master in this field of law—in these terms:

"An arrestment and furthcoming is an adjudication preceded by an attachment and the essential part of the diligence is the adjudication"

(p. 1103). It is accordingly part but not the essential part of a diligence consisting of arrestment and furthcoming.

What an arrestment does, and all it does, is to render the arrested subjects litigious. It is in this sense and this sense only that an arrestment is said to "attach," or create a nexusover, the property in the arrestee's hands. By rendering the subject matter litigious it constitutes or transfers no right in the subject matter arrested. What litigiosity involves is in the first place a prohibition addressed to the arrestee "to alter the condition of the thing arrested nor to pay or deliver the same to the arrester's debtor but that it remain in his hand for the satisfaction of the debt arrested for" [Stair III–1–39; see also Erskine III–VI–2]. In the second place it involves that the arrester's advantage cannot be defeated by the subsequent voluntary act of the debtor himself, by any later arrestment even if it proceeds to a furthcoming, nor by any other diligence begun but not completed, e.g. poinding not followed by sale. The perfectly sound view of the nature of an arrestment is best expressed by Lord Kinnear in Lucas's Trustees at p. 1106 thus: It "is not a diligence directly affecting the goods themselves in whose hands soever they may be, but a diligence in personam which can only be carried into effect by the operation of a decree for payment or delivery against the person in whose hands the arrestment is used." The sole virtue of this diligence, and it is not insignificant, is the resulting litigiosity which constitutes a double prohibition, both being personal in their nature. Indeed it is litigiosity and litigiosity alone which is both the foundation and the explanation for the four effects of arresting so heavily relied on by the reclaimer, and I shall deal with each briefly in turn. The priority of an arrestment over a subsequent arrestment which does not depend on furthcoming is a purely personal question relating to the rights inter se of arresting creditors. The priority of an arrestment over an assignation in security granted before but not intimated until after the date of the arrestment is justified upon the view that the intimation of the assignation is to be regarded as the voluntary act of the debtor [see Erskine III–VI–19]. For my own part I question the treatment of intimation in this way since, when he parts with the assignation, the debtor cannot control the actings of the assignee, but I need not examine the matter further for the purposes of this case. So far as the preference of an arrestment over a later poinding is concerned, this again is a personal question of the rights inter se of creditors who have used comparable steps of diligence. As to the liability of the assignee for breach of arrestment the personal nature of his underlying obligation is clear and the doubtful right of the arrester to follow subjects gratuitously alienated appears to belong to the law of remedies rather than the law of rights, and certainly cannot be founded upon the theory that there is any inherent arrester's right impressed upon property arrested.

What I have said so far demonstrates that an arrestment is not to be defeated by voluntary acts of the debtor, later arrestments, and by other diligences begun but not carried to completion. What is perhaps more important, however, is that litigiosity does not protect an arrestment from being defeated by other diligences carried to completion, i.e., by a better right created later. Poinding and sale is one example. Confirmation of an executor-creditor of a deceased debtor is another. That this is a diligence there can be no doubt and its effect is to create a burden on the subjects confirmed leaving them in the haereditas jacens of the defunct debtor subject to that burden. The right of the executor-creditor, accordingly, is a right in security for his debt. [Smith's Trustees v. Grant and others 24 D. 1142—the opinion of Lord Curriehill at p. 1169.] It will be appreciated that one of the results of confirmation of an executor-creditor may be to alter the rights of arresters inter se for if there are two, and the later arrestment has been followed by furthcoming, the executor-creditor would be affected only by the latter. Finally it may be noticed that an arrestment laid on within 60 days of sequestration or liquidation is deprived by statute of any efficacy in any ranking [e.g., section 327 of the Companies Act 1948].

Now there can be no doubt when the true nature and effects of arrestment are understood a right of the nature of a fixed security, not tainted by any voluntary act of the debtor would not be affected by litigiosity and would be a better right, for it would be a right in rem in security which prima facie would enable the holder to realise his security even on a sequestration or liquidation, and rank under deduction of his debt. This is to be contrasted with the position of a bare arrester who must claim for the full amount of his debt and justify a preference in the ranking. By the operation of the provisions of the Act of 1972 Parliament made it possible for a creditor of an incorporated company to obtain, without liquidating the company, the high right of a fixed security, and created machinery by which that right could be exercised. These were important provisions designed to remove the former impossibility of any would-be lender to a company getting security over moveables of the company on which he would rely. The method used was that of enabling him to secure a charge from the beginning, and the right to attach the charge as a fixed security and the powers necessary to exercise the right, without the disadvantage of having to put the company into liquidation.

I now turn to the language of section 15 (2), which introduced for the first time to the law of Scotland the expression "effectually executed diligence on the property" of a company without seeing fit to define it. Having regard to the nature of the right of the holder of a floating charge on the appointment of a receiver it is not surprising that the receiver in exercising the holder's right is made subject to the rights of certain other fixed security holders and the holders of certain other floating charges [see section 15 (2) (b)]. What then is the ambit of section 15 (2) (a)? It would be surprising if it were designed to cover rights established subsequent to the date of creation of the floating charge, a public fact because of its registration, by diligences which were not truly comparable with rights of fixed security and were lesser rights of a purely personal character such as arrestment. The registration of a floating charge, after all, gives warning to a creditor who subsequently arrests that if he does not proceed speedily to a completion of his "begun" diligence he is at risk of being faced with the appointment of a receiver. The remedy lies in his own hands. Further, it is difficult to discover any good reason why a creditor who has secured and registered a floating charge should be in an inferior position to that of a creditor who has arrested, in competition with an arrestment later in date, when rights inter se come to be tested. If section 15 (2) (a) were to be construed as the reclaimer contends it would mean that those with arrestments executed within 60 days of the receiver's appointment, in the case of a company not in liquidation, would enjoy a preference which would have been denied to them had the receiver's appointment coincided with the commencement of a winding up. It is difficult to appreciate also, if that were the true construction of the subsection, how any receiver could safely risk carrying on without putting the company into liquidation for it will never be easy to know what arrestments may have been used by the date of his appointment, and, by carrying on, the receiver would put the interest of his own creditor at risk of being diminished not only by some earlier arrestments but by all. In light of these general considerations I now ask myself whether effectually executed diligence on the property of the company within the meaning of section 15 (2) (a) includes a mere arrestment, bearing in mind that section 15 (2) (a) is designed to regulate a receiver's powers in exercising the right of a holder of a fixed security. In my opinion, when the subsection is properly construed, it cannot be so understood. Under reference to my analysis of the nature and effects of arrestment it is at best a step in diligence in personam, and cannot properly be regarded as a diligence effectually executed on the subjects arrested, or as a diligence with effects comparable to those of a fixed security. This construction is consonant with the limitations inherent in a bare arrestment for, as we have seen, the litigiosity established by arrestment does not confer upon the holder any protection against those who have subsequently executed another more perfect diligence nor indeed against those who have secured completed security rights in the subjects, untainted by any voluntary act of the debtor in their creation. Further, although it is not strictly necessary for the disposal of the point in issue here to say so, it cannot, in my opinion, be said that the construction of section 15 (2) (a) which I favour leaves it without content so far as diligences over moveables are concerned. I accept that the subsection cannot include a decree of furthcoming proceeding upon the arrestment of a debt, for the decree transfers to the arrester the debtor's title, and if such a decree ante-dated the appointment of the receiver that debt would not be within the property of the company when the floating charge crystallised. For the same reasons it cannot include a poinding which has been completed by a sale. It would, however, include a decree of furthcoming proceeding on arrestment of corporeal moveables, and a warrant of sale proceeding upon a poinding, for the effect of both is to adjudicate the moveables in security so that they may be sold to the extent necessary to satisfy the creditor's debt. The important matter is that in each case the radical right in the arrested moveables remains with the debtor until they have actually been sold, and he is not divested of his title to relevant moveables which do not require to be sold and are not sold.

For the foregoing reasons I am satisfied that the Lord Ordinary reached the correct decision and that the reclaiming motion must be refused. I accordingly invite your Lordships to affirm the interlocutor reclaimed against.

I have only to add that I am much indebted to counsel on both sides of the Bar. Their helpful submissions in this far from easy case were in my opinion well constructed and thoroughly researched and were presented with the clarity and precision which are in accordance with the highest professional standards.

LORD CAMERON .—This reclaiming motion is concerned with the proper interpretation of certain provisions of the Companies (Floating Charges) (Scotland) Act 1972 and in particular the meaning to be given to the language of section 15 (2) of that Act. The language and structure of this statute are of considerable obscurity. It is by no means easy to relate with accuracy and certainty the various provisions designed to fit the introduction of the device of a receivership into the Scottish law of diligence. It was said of the Treaty of Versailles of 1919 that it "contained all the seeds of a just and durable war." It could readily be said of this statute that its provisions are well designed to provide a rich variety of issues for decision in delicate and prolonged litigation. The task of the draftsman was to reconcile the rights of a receiver necessary to enable him properly to discharge his duties in the case of a company which has not been put into liquidation, with those of creditors of the company who have already resorted to the measures available to them under the law of Scotland to ensure satisfaction of their debts. It is in respect of the use of one of these measures—arrestment—that the present proceedings have arisen.

The particular issue is whether the use of arrestments not followed by furthcoming is to be held to be "an effectual execution of diligence on property of the company" within the meaning of section 15 (2) (a) in the context in which that provision is set and in light of the objects which the Act was intended to achieve.

The Lord Ordinary has rejected the pursuers' claim and in my opinion he was right to do so. Your Lordship in the chair has already set out the circumstances out of which this action arises and the rival contentions of parties and it is not necessary for me to repeat them. In my opinion, in seeking to interpret the language of section 15 (2) (a) not only is it necessary to have regard to the context in which the subsection is set, but also to keep in view that the subsection is concerned, not with any particular form or aspect of diligence, but with diligence in any form and in any legitimate context.

The only definitive qualifications on the word "diligence" are that it should have been effectually executed and that its execution should be effectual on the property of the debtor company. It is in my opinion significant that in section 15 (2) (a) the word "attached" is not used although it finds a place in the later section 21 (1) (b). That section is concerned with the receiver's right to dispose of property or interests in property of the company and in the particular subsection reference is specifically made to property or an interest in property "affected" or "attached" by effectual diligence executed by any person. The statute itself, therefore, draws a distinction between "attachment" of property and "execution" of diligence on property. The word "attached" when used in the law of diligence is normally used in relation to and to define the legal consequence flowing from the laying on of an arrestment by a creditor. I of course assume that this difference in wording to which I have drawn attention is one which was deliberate and, in light of the normal association and usage in the context of the law of diligence of the word "attached," was intended to convey a real distinction of meaning between the language used in section 15 (2) (a) and section 21 (1) (b) and, still more important, what was intended to be covered by the use of that distinctive wording. The word "diligence" itself is one which carries or is capable of carrying more than one meaning, and its proper interpretation in any given case may therefore turn upon the context in which it is used. "Diligence" has been compendiously defined as the legal procedure by which a creditor strives to obtain performance of his debtor's obligation: Menzies Lectures on Conveyancing p. 285, Graham Stewart on Diligence p. 1. In Bell's Dictionary the matter is put thus:

"The term (diligence) is applied generally to the process of law by which person, land or effects are attached on execution or in security for debt."

Bell's Dictionary S.V. Diligence. The definition of "Diligence of Creditors" is divided into definitions of diligence against the heritage, moveables and person of the debtor. In respect of moveables it is thus defined "The diligence against moveables consists of (1st) arrestment by which the debtor's effects or the debts due to him are attached in the hands of third parties and furthcoming by which the property of the goods arrested is transferred to the debtor." Thus diligence against moveables comprise two separate and independent steps of procedure the use of both of which in the case of moveables is necessary so as to qualify for description as "diligence." The obvious corollary of this is that the use of arrestment alone not followed by furthcoming and a decree thereunder will not so qualify. But arrestment is defined in Bell's Dictionary as itself a "diligence." It is "the diligence whereby the debtor in a moveable debt or obligation is interpelled from making payment to his creditor until the debt due to the arrester by the arrestees creditors is paid or secured." But, as explained by Graham Stewart op. cit. p. 255, it is at best an inchoate diligence. It is inchoate in the sense that in order to transfer the debt arrested to the creditor or to enable goods to be sold for his benefit, it is necessary that arrestment be followed by a process of furthcoming. The effect of a decree in an action of furthcoming is to adjudge the debt to the arrester or so much of it as may pay his debt. Bell's Principles para 2283. This necessarily means that in the case of funds arrested the arrestee loses any title he may have had to the debt as adjudged to the arrester, but in the case of corporeal moveables the situation is different, because in order that the decree of furthcoming can be worked out there has to be a process of sale and at no stage is the title to the property covered by the decree transferred from the arrestee to the creditor, who is only entitled to receive such part of the proceeds of the sale as is necessary to satisfy his debt. An action of furthcoming therefore has a two-fold objective, (first) to ascertain the debt due by the arrestee to the common debtor or the goods in the arrestee's hands and (second) to transfer to the successful arrester the fund or such part of it as will satisfy his claim either by adjudging to him the debt arrested or by selling on his behoof the goods attached. It is a necessary implication that until a decree of furthcoming is obtained in the case of incorporeal moveables there is and can be no transfer of property in any part of the fund arrested in hands of the arrestee to the creditor. In the case of corporeal moveables the diligence is not completely or effectually executed until the goods attached by the arrestment have been sold. Thus while it may well be the case, as the reclaimer argued, that the process of diligence effectually executed by a decree in an action of furthcoming is executed on the property of the company and by its own force transfers the title to that property to the adjudging creditor, yet in the case of corporeal moveables it is necessarily conceded that the decree, though an effectual execution of diligence on that property, does not transfer the title to the creditor. It therefore cannot be successfully argued as a general proposition that if diligence is effectually executed on the property of a company it is the necessary and inevitable consequence to deprive the company of the legal title to that property. If that were so then of course there would be no real content to be given to the language of section 15 (2) (a); but it has to be kept in mind that the words are not directed to any particular form of diligence but are clearly designed to apply to and cover all and every form of diligence open to an unsatisfied creditor. But let it be assumed that arrestment is a diligence, the question is whether arrestment not followed by a furthcoming is a diligence which is executed on the property of the company. It was powerfully argued by the reclaimer that arrestment creates a nexus or a nexus realis over the property arrested. It may well be that these words have been used to describe the effect of arrestment which admittedly interpels the arrestee from parting with the subjects arrested, but gives only limited remedies against the arrestee in favour of the arrester should he do so.

The remedy which the law gives to the arrester for breach of arrestments lies in pursuing the delinquent arrestee to the extent of the sum arrested, but at the same time it has to be noted that not all intromissions by the arrestee after arrestment with the funds or goods arrested will be regarded as breaches of arrestment. See Graham Stewart pp. 220–221. In effect it is put by the same author in a succinct phrase, "an arresting creditor cannot be in a better position than the common debtor: he can attach his right and nothing more." Op. Graham Stewart p. 92. Be it that there is a limited attachment of the fund arrested in the hands of an arrestee, and it is only in that sense that the word "nexus" can be used, can it be said that this is execution of diligence on the property of the company? In my opinion, "No." The matter was put in the clearest terms by Lord Kinnear in giving the judgment of the Court in the case of Lucas's Trustees v. Campbell & Scott 21 R. 1096; what he said was this at page 1103:

"An arrestment and furthcoming is an adjudication preceded by an attachment, and the essential part of the diligence is the adjudication"

and later in the same judgment (p. 1106) Lord Kinnear described the nature of arrestment in these significant terms thus:—

"it is not a diligence directly affecting the goods themselves in whose hands whoever they may be, but diligence in personam which can only be carried into effect by the operation of a decree for payment or delivery against the person in whose hands the arrestment is used."

If this reasoning is correct and to be accepted as it must, then I think it is clear that arrestment is not a diligence which can be accurately described as effectually executed on the property of the company and on this ground alone it appears to me that the Lord Ordinary's decision can be supported. But I think the decision can be supported on other grounds also.

As I have already pointed out, arrestment is no more than an inchoate diligence which must be followed by a furthcoming to secure satisfaction of the debt in respect of which it was laid on. The action of furthcoming, however, is not a mere formal step of process; an arresting creditor may be met and his claim defeated by any one of a formidable catalogue of defences open in an action of furthcoming to an arrestee and to the common debtor, defences which, while capable of defeating the purpose of the diligence, do not by necessary implication extinguish the claim of debt itself—thus the validity of the arrestment itself may be challenged, or it may be pleaded that the arrestee was not a debtor to the common debtor and held no moveables belonging to him; that he himself had a right of real security over the subjects arrested, or that a superior diligence has defeated the creditor's arrestment, or even that the fund itself was not attachable by arrestment. If the validity of an arrestment can be challenged on a furthcoming I find it difficult to see how it can be maintained that when all that has happened is the laying on of an arrestment that can be held to be an effectual execution of diligence on the property of the debtor.

It cannot therefore be presumed that an arrestment necessarily involves the consequences (first) that anything will be attached in the hands of the arrestee or (second) that if anything is attached it will become available to the arresting creditor in a process of furthcoming. In these circumstances I find it difficult to see how in such a situation a person who has placed arrestments in the hands of a third party can fairly be said to have effectually executed diligence on the property arrested. The word "effectual" or "effectually" must be given a meaning: the word is used in its ordinary sense and carries no technical implication. The word "effectual" according to the Oxford English Dictionary just means "that which produces its intended effect or answers its purpose." The effect which it is intended to produce on the property of a debtor company by the use of diligence is to satisfy a debt. The only diligence in the case of moveables which by execution can produce and can be intended to produce that effect is the composite procedure which results in an effective decree in a successful action of furthcoming preceded by validity laid on arrestments. In this case there is no decree of furthcoming. The action itself was only raised in February 1975 while the receiver's appointment was made in July 1974; therefore, as at that date, there was in existence no more than the inchoate diligence of arrestment but no completed diligence which could produce or had produced the intended effect of the action taken by the reclaimers. Upon this construction of the particular wording of section 15 (2) (a), it appears to me that here also support can be found for the conclusion at which the Lord Ordinary arrived and for which the respondents contended.

But even if it were to be assumed, contrary to the views I have been putting forward, that arrestment itself, if its formal validity is not open to challenge, may be held as "effectually executed" diligence and diligence executed on the property of the company, it is then necessary to consider the nature and extent of the rights thereby secured to the arresting creditor and the extent to which the exercise of the statutory or conventional powers of the receiver is subject or postponed to them.

In my opinion, the rights which accrue to an arresting creditor are of limited extent and do not extend so far as to give him, by virtue of the arrestment, any rights in rem over or on the property of the company. It may well be that he has, by arresting, secured for himself certain preferences of ranking among his co-creditors in the event of liquidation, or in competition among themselves according to the nature, effect and priority in date of the diligence used or security created and held. Your Lordship in the chair has already illustrated by specific examples instances in which competing diligences will prevail over arrestment and vice versa, which I need not therefore repeat. I would also express my agreement with your Lordship's doubt as to the validity of Erskine's justification of the priority of an arrestment over an assignation in security granted before but not intimated until after the date of the arrestment. Apart from this matter of preferences and competition, it is necessary to be clear as to any other right or rights which an arresting creditor obtains by virtue of his arrestment. He obtains certain rights against the arrestee should he intromit with or dispose of the arrested fund in breach of the arrestment; he also aquires, by virtue of the arrestment, the right to sue a furthcoming against the arrestee and common debtor. But an action of furthcoming would clearly be incompetent to prevail against the right of the holder of a fixed security which had effectively attached to the security subjects, and could not be used to oust or defeat the rights of a fixed security holder. The effect of an arrestment is no more than to bring about a condition of litigiosity as far as the arrested fund is concerned, and to place the arrestee in a position to launch an action of furthcoming. "Litigiosity" is an implied prohibition of alienation to the disappointment of an action or of diligence, the direct object of which is to obtain the possession or to aquire the property of a particular subject. In effect, the use of the word "nexus" in connection with arrested property is no more than to indicate that by virtue of the arrestment the arrested subjects have become litigious.

Although by virtue of arrestment the property attached is rendered "litigious," no intimation of the arrestment to the common debtor is necessary nor is there any registration of it required. Thus a receiver could be appointed and proceed to exercise his powers without knowledge of the existence of an arrestment. How then, it might be asked, could he be held to be aware of the rights, if any, of an arrestee or discharge in all cases his duty in compliance with the requirement of section 21? When diligence has been effectively executed by use of the appropriate and necessary judicial machinery, that is adequate notification of the facts of the proceedings, but where there is only an arrestment not followed up by further procedure there is no means of which the receiver can be certiorated of the "rights" of the arresters, in order to take any necessary action to give such recognition thereof as the statute requires. This point seems to me to lend support to the respondents' contention that arrestment alone is not sufficient to satisfy the requirements of section 15 (2) (a). Mr Prosser in his admirably succinct argument for the respondents put the dispute in focus by inviting first a consideration of the fundamental issues between the parties which in his submission, was one of competition of the rights of persons with beneficial interests, the arrester on the one side and the holder of a floating charge on the other. The first and vital question to be answered was what does the law say about their powers? The reclaimer could only rely on the powers which the law conferred on an arrester. The respondents' powers were to be found in the statute and particularly section 13 (7). I have already expressed my opinion as to the nature and extent of the powers conferred by law on the arrester and the extent to which any rights he may possess are subordinated to those of other persons executing diligence on or against the property "affected" or "attached" by his arrestment. A receiver's rights derive directly from the statute and, agreeing with Mr Prosser, I think that the language of section 13 (7), is definitive of that right. On his appointment the floating charge, to which the property of the company has already become "subject" by virtue of section 1 (1) becomes operable in a certain manner on the property of the company or on the part of it over which the charge was created. Now a floating charge is just one of the charges to which section 106 A of the Companies Act 1948 applies and, from the date of its creation, is a charge over the whole or any part of property of a company although it floats in the sense that it affects the property of the company as the property is constituted at any given time. It will be kept in view that in the present case his creation and registration by the floating charge substantially ante-dated the reclaimers arrestments.

By section 1 (1) of the Act of 1972 it is provided that it is competent for a company to create a floating charge for the purpose of securing a debt, over property from time to time comprised in the property of the company. Thus from its creation a floating charge is one which is a charge on the property of the company. To this extent it possesses a certain similarity to a hypothec. By section 1 (2) the charge attaches to the property i.e. does not merely attach the property as does an arrestment within its limited scope of effectiveness; but that attachment is made subject to the rights of other persons having or holding security rights over or on the property and having priority in date to the charge in question. It is on the appointment of a receiver that the attachment already referred to in section 1 (1) becomes an attachment of the property then covered by the floating charge, and thus it has effect as if the charge were a fixed security over the property to which it has attached.

Now by section 16 (1) it is provided that, when there are two or more floating charges subsisting over the property, a receiver may be appointed under the Act by virtue of each charge. Then comes a most important provision "but a receiver appointed by or on the application of the holder of a floating charge having priority of ranking over any other floating charge by virtue of which a receiver has been appointed shall have the powers given to a receiver by section 15 of that Act to the exclusion of any other receiver" and the floating charge in virtue of which that receiver exercises his powers attaches to the property "as if the charge were a fixed security." I think also that some assistance in the solution of the problems of statutory construction in this case can be found in the provisions of section 12 which narrate the circumstances in which a receiver may be appointed. It is clear enough therefrom that the purpose of the appointment is to enable the holder of a floating charge to work out his security on the property of the company attached by the charge and so obtain satisfaction of the debt, without being compelled to take the extreme step of putting the company into liquidation, but this working out must be subject to such rights if any, either in relation to the holder of the charge or of other persons categorised in section 15 (2), as they may possess or be entitled to enforce.

I think, agreeing with Mr Prosser's submission that when the definition of "fixed security" in section 3 is examined it becomes clear that the intention of the legislature was to provide in the shape of a floating charge a form of security over the property of a debtor company which, at the discretion of the security holder, or on application to the Court and on the appointment of a receiver, should operate as a fixed security and that this should be so when the circumstances were appropriate for the secured creditor to be given the right and opportunity to work out his security, without being compelled to proceed into liquidation: the floating charge in these circumstances becomes a valuable and convenient device in the interests both of creditor and company to secure and obtain satisfaction of a debt or claim without recourse to the extreme remedy of liquidation.

In these circumstances, agreeing with your Lordship, I have reached the conclusion that arrestment of a debt due by the arrestee to the common debtor is not "diligence effectually executed on the property of the debtor company" and that the Lord Ordinary's decision was correct and should be affirmed. I am for refusing the reclaiming motion.

LORD JOHNSTON .—Your Lordship in the chair has set out the facts which give rise to this action, the relevant statutory provisions and the contentions of the parties and it is unnecessary that I should repeat them or seek to add to the analysis of the nature and effect of diligence, with which I respectfully agree.

The question for decision is whether the Revenue, as arresters in execution, are entitled to proceed to a furthcoming in respect of the fund arrested, notwithstanding the appointment of a receiver, subsequent to the arrestment, by the holder of the floating charge created prior to the arrestment.

It is agreed, first, that but for the passing of the Companies (Floating Charges) (Scotland) Act 1972 the Revenue as arresters would have secured a preference to the extent of the sum arrested and would have been entitled to proceed to a furthcoming and by that means to satisfy their decree to the extent of the sum arrested, and, second, that the appointment of a receiver deprived the Revenue of their preference and their right to proceed to a furthcoming unless their right as arresters be that of a "person who has effectually executed diligence on all or any part of the property of the company" within the meaning of section 15 (2) (a) of the Act.

Before examining that phrase and attempting to give meaning to it, it is, in my opinion, imperative to note that section 15 (2) (a) of the Act is a saving subsection and has as its object the protection of rights which have emerged prior to the appointment of the receiver. That this is the object of the subsection must be kept clearly in mind when construing the subsection and effect must be given to it so far as the language of the subsection allows.

The phrase, which appears in more than one section of the Act, is not defined. Diligence itself has two possible meanings. First, and shortly put, it may mean perfected diligence in any of its forms, which has resulted in the transfer of the title to the property to the person using the diligence. But, as your Lordship in the chair has pointed out, this cannot be the meaning of the phrase for such property was not the property of the company at the date of the appointment of the receiver and the floating charge could not attach to such property in terms of section 13 (7) of the Act. There were therefore no rights to be saved and to ascribe such a meaning to the word "diligence" in the phrase would leave the subsection without effect.

The second meaning of diligence is that given by the Revenue, who argued that diligence means no more than arrestment or poinding. I respectfully agree with the views expressed by Lord Kinnear in Lucas's Trustees v. Campbell & Scott 1893 21 R. 1096 on the nature of diligence but what he said does not alter the fact that "diligence" meaning "arrestment" has been in use for two hundred years and that arrestment is commonly referred to as diligence in the Institutional and other writers and in the statutes already noted. I would add only one further reference, Graham Stewart in his Law of Diligence at p. 14, after discussing the history of diligence, states that "Arrestment then is the diligence whereby the debtor in a moveable debt is prohibited and restrained from making payments of the debt or satisfaction of the obligation. It also serves as an inchoate diligence for transferring the debt or fund to the arrester; but to complete the transfer to him a decree of furthcoming must be obtained. In its first aspect it is a preventive or preservative diligence, in its second a diligence in execution."

I agree with your Lordships that arrestment creates an inchoate right and a nexus or attachment over the property arrested; that it renders the arrested subject litigious and that no right of property is transferred.

Where I venture to differ from your Lordships is in the weight to be attached to the analysis of diligence and arrestment in construing the phrase in question. It may be a misuse of language to talk of "diligence on" when what is meant is "arrestment of" but, as your Lordships have pointed out, there are numerous and authorative examples of this use. In my opinion greater weight should be attached to the meaning given to the words by usage than that derived from a strict analysis. In my opinion the words "diligence on" are apt to include "arrestment of."

If this meaning be given to "diligence on" meaning can be given to the qualifying words "effectually executed" as denoting the point at which the sheriff officer, proceeding on a proper warrant, fenced and arrested the debtor's funds in the hands of the Bank by leaving a schedule of arrestment with the Bank.

These considerations and the consideration which I mentioned at the outset of this opinion, namely that the object of section 15 (2) (a) is to preserve rights, lead me to the conclusion that the Revenue's argument should be accepted. I am fortified in this conclusion by consideration of the other sections of the Act, none of which, so far as I can see, are inconsistent with the interpretation which I favour or make its operation difficult.

It was also argued that if the effect of the subsection is to save the rights of an arrester, a receiver would be encouraged to proceed to liquidation in order to protect the holders of the floating charge who appointed him and would be discouraged from continuing the company as a going concern. That may be so in some cases depending on the state of the company and the view the receiver takes of its prospects. But that it may be so does not in my opinion justify depriving an arrester of his right unless the Act plainly does so.

For these reasons I differ from your Lordships and I would allow the reclaiming motion and grant decree to the Revenue.