Scottish Court of Session Decisions

At the time of the events with which this case is concerned, the parties were, along with other companies, members of a V.A.T. group within the meaning of section 29(1) of the Value Added Tax Act, 1983. As such, the member companies were liable jointly and severally for any V.A.T. due by the group, for which a representative member was accountable. All member companies of the group are in liquidation or receivership, or have been dissolved without winding up, or have been disposed of. A receiver was appointed to the second defenders, Elgin, on 3 April, 1991. A receiver was appointed to the pursuers, Villaswan, on 24 April, 1991. The first defenders, Blythswood, were wound up by the court. The first order was granted on 16 September, 1992. The third defenders, Starthawk, went into receivership on 11 June, 1991, and into liquidation on 19 November, 1993. At all material times, Sheraton Caltrust plc was the representative member of the group for V.A.T. purposes. On 24 June, 1992, Blythswood paid V.A.T. of £400,055.90 in respect of a chargeable output arising from the sale of certain heritable subjects. Other sums were paid in respect of V.A.T., and the views expressed in this opinion may not apply directly to all of them. The issue between Villaswan and Blythswood was focused in argument in respect of the single payment by Blythswood, and in so far as it is necessary to do so, eal with the remaining payments, that can be dealt with in the course of further procedure.

It is averred by the defenders that the V.A.T. in respect of the sale of the heritable subjects became due on 31 March, 1991. For the purposes of the debate that was not disputed.

Blythswood's liquidator made a claim against the receiver of Villaswan for relief in respect of Villaswan's share of the liability for £400,055.90. The precise amount which would fall to be apportioned to Villaswan is in dispute, but it is admitted by the receiver that there is an obligation of relief to some extent. Villaswan's obligations to its secured creditors exceed the assets available, however. The claim will have value to Blythswood if and only if it falls to be treated as a preferential debt ranking in priority to the secured creditors. Blythswood contend that the preference which H. M. Customs and Excise would have had in Villaswan's receivership in respect of that company's proper share of the tax liability is available to them. That is resisted by Villaswan. Notes of argument were lodged by parties prior to the debate.

Mr Sellar argued that any co-obligant in a joint and several obligation who discharged fully the liability of the whole co-obligants was entitled, in working out his rights of relief, to the benefit of all rights which were available to the principal creditor, whether by way of security or preference, without need for an assignation. An assignation by the principal creditor was of practical value in facilitating recovery. But it was unnecessary to place the co-obligant in right of relief in the shoes of the principal creditor. The right to benefit from securities and preferences held by the principal creditor followed automatically from the right of relief. Gloag & Irvine page 803 referred to entitlement to assignation, but it was necessary to look behind the comments which, though expressly related to caution, were relevant to any joint and several obligation: page 814. Bell's Principles para 255 set out the position with a degree of ambiguity, but supported the pursuers. The principle was fundamental. One could not distinguish the right of relief from its content as Mr Tyre sought to do. In Duncan Fox & Co v The North & South Wales Bank [1880] 6 App Cas 1 at page 19, Lord Blackburn spoke of the right of the co-obligant to an assignation of all of the rights and securities of the creditor. But that was a case in which there had been no assignation, and the right of the co-obligant was recognised. Nevertheless Professor Gloag may have been misled by the comment. It was clear that the court treated the several cases of sureties, indorsers of bills and other co-obligants as analogous. In England, the position had been regulated by statute in the Mercantile Law Amendment Act, 1856, 19 & 20 Vict. c 97. As from that Act, the law was the same in Scotland and England: Gloag & Irvine pages 642 and 804, footnote 5. The identity of Scots and English law in this field was implicit in the approach of the court in Duncan Fox & Co. In re Churchill (1888) 39 Ch Div 174 was therefore a useful authority. It showed that where a surety had paid a Crown debt in respect of which the Crown could have claimed a priority the surety was entitled to the benefit of the priority. In re Lamplugh Iron Ore Co [1927] 1 Ch 3 was a very close analogue. It involved a statutory preference. The payment in question was made after the commencement of the winding up. Eve J.'s decision had stood unchallenged since. Mr Tyre's attempt to distinguish these cases was wrong. Inter alia they demonstrated that it did not matter whether the company making the payment was in liquidation. If these cases reflected the position in England it would be anomalous if there were a different rule in Scotland. The statutory background was the same. Frequently one found Scottish and English companies in the same group. The present case was a fortiorti of Lamplugh because the payment of V.A.T. was made after the pursuers went into receivership. Gloag on Contract page 213 was said to be authority to the contrary effect. But the author had mistaken the effect of re Churchill. Garden v Gregory 1735 M 3390 was old. It was not mentioned by Bell. Gloag on Contract and Gloag & Irvine cited the case, but even leaving aside the grounds for distinguishing the case, it was doubted by Hunter on Landlord & Tenant, 4th Edition, vol 2 page 159. The other authorities cited in Bell's Principles at paragraph 1238 did not support the text. Rankine Law of Leases, 3rd edition 412 was not the most definitive of statements on the position. There had been doubt from the second half of the nineteenth century whether the case was consistent with principle. Given that doubt it would be inappropriate to apply it beyond its own immediate context.

In response, Mr Tyre for the pursuers argued that there was a consistent line of authority that transmission of advantages available to the principal creditor, such as securities or preferences, was not automatic, but required assignation to be effective. A co-obligant who paid more than his appropriate share of a debt to the principal creditor was entitled to demand to be put into the same position as the principal creditor, subject to certain restrictions, but was not entitled to enforce the rights and remedies available to the principal creditor without assignation. In presenting his argument he dealt with caution and other forms of co-obligation separately, because the equities favouring the position of the cautioner might be different, but his primary position was that in the present context the positions of the cautioner and of the co-obligant who paid the principal creditor in full were the same. The statement of the position in Gloag on Contract at page 213 was clear and determinative of the dispute in the pursuers' favour. He accepted that the citation of in re Churchill did not support the proposition. But the text was authoritative, and was supported by Garden v Gregory. The same views were found in Wilson on Debt page 292, para 28.3. All that the paying co-obligant acquired as a matter of law was the right of relief. If more was wanted, an assignation was essential. The foundation of the right to an assignation was in equity, and if it was not exercised, the right disappeared, because the creditor, ex hypothesi, had no need of it following payment of the debt. That was how the matter was presented in the authorities: Erskine 3. iii. 68, Gregory v Garden. Stirling v Forrester (1821) 3 Bligh 575 contained the clearest statement of the general principle. But it was always expressed in the same way: the creditor was bound to put the party paying in the same position as other co-obligants. Fraser v Shepherd 1830, 8 S. 851 was a further illustration that in order to transfer the Crown's right an assignation would have been required. Thow's Trustee v Young showed that the position was settled by 1910: there was no automatic transmission and some act of transfer was required. The cases on cautionery were to the same effect, as was shown by Bell's Principles and Garden v Gregory. Mr Sellar's criticism of Garden v Gregory was without substance. The decision was referred to frequently, by Gloag, by Rankine, by Professor Bell and by Professor Irvine in Green's Encyclopaedia. Only Hunter expressed any doubt on the case. Stewart v Bell May 31, 1814 Fac Coll. showed that a cautioner was entitled to demand an assignation. If there were automatic transmission no such assignation would have been required. Bell's Lectures on Conveyancing, 3rd edition 287, presented the position in clear terms. It was the assignation which achieved the substitution. The same position was adopted by Professor Irvine in his article in Green's Encyclopaedia, vol 3 para 395, relying on Garden v Gregory. He made no reference to English authorities such as re Churchill. In summary, the co-obligant who has paid the creditor has a right of relief against other co-obligants ex lege. On payment there arose a right to demand an assignation of the creditor's rights against other co-obligants to enable the payer to utilise any advantage such as a security held by the creditor in working out his right of relief. That was what was meant by the co-obligant standing in the shoes of the creditor. If the payer did not obtain an assignation of the creditor's rights, he did not obtain the advantage. The same position obtained in the case of a cautioner who made payment, though the foundation of the right

Mr Sellar responded. Despite the comments made by Mr Tyre, the textbook commentaries were less than clear in dealing with the idea of a right to an assignation. In Duncan Fox & Co, the co-obligant wanted an assignation. The case arose after the 1856 Act, and it would have been perceived as odd that he should require an assignation as a matter of law, as distinct from practical enforcement. The real issue was whether by obtaining an assignation the plaintiff could enlarge his substantive rights. There was a lack of clarity. Gloag & Irvine suggested that the laws of England and Scotland were the same. The English cases were instructive. Green's Encyclopaedia was not to a different effect. It was understandable that the emphasis should be on practical enforcement. In the nineteenth century the cases typically involved heritable securities. There was a requirement for a clear title, and entry with the superior could create problems. An assignation was an obvious practical requirement. Further, since the principal creditor might in some circumstances resist transfer on the ground that he was entitled to retain the security in respect of another obligation, it was necessary as a practical matter to focus the point. In Graham Stewart on Diligence, page 463, the right of a cautioner making payment of rent to an assignation was set out without reference to Garden v Gregory. The rights of the security holder were, however, dominant in a competition: the co-obligant was postponed to the principal creditor. But in this case one was not concerned with a secured creditor. No one could enter into the competition with a creditor having a preference on insolvency. No arrester could intervene. If the pursuers were correct, there would be unjust enrichment of Villaswan's secured creditor. The law would not be restoring the balance. The policy of the law was wholly concerned with equities, and in this case, the equities favoured the defenders. The policy of the law should be to avoid such a windfall benefit. Even if there were doubt about the position on securities, that should not affect the disposal of the present case. In insolvency, the rights of parties can be given effect without a document of assignation. Churchill and Lamplugh provided the guidance required. Lamplugh was cited by Halsbury vol 20 at paras 231 and 249. There was no requirement for a formal assignation in England. That had procedural implications which were irrelevant for present purposes. But the right to enforce the creditor's rights and remedies was clear: Morris v Ford Motor Co Limited (1973) 1 Q.B. 792, per Lord Denning at page 800 and James L.J. at page 809. Reference was made also to Russell v Shoolbred (1885) 29 Ch Div 254 for an illustration of the purpose of the 1856 Act. One should hesitate long before reaching the view that Eve J. was wrong in Lamplugh. The case has stood the test of time in England, and where the laws were essentially the same, was powerful authority. It was perfectly rational and gave effect to the equities.

Initially, Mr Sellar accepted that the defence must fail unless he made out his first general proposition in its broadest form. Mr Tyre's response was equally wide: without express assignation there was no transmission of the principal creditor's rights of security or preference. However, by the end of the debate, Mr Sellar sought increasingly to distinguish the position of the defenders from that of a co-obligant seeking to take advantage of securities and other ancillary rights held by the principal creditor at the time of payment. He also submitted that the landlord's hypothec involved special considerations which undermined the general application of authorities on that topic. The shift in position makes it necessary to treat apparent agreement on the applicable principles with some care. However, superficially, there was no dispute that a right of relief arose, in the circumstances, ex lege, without requirement of any form of assignation. The rule is expressed in Gloag on Contract, 2nd edition, page 206, as follows:

Similar statements are found in Stair's Institutions I 8.9., Bell's Principles para 62, and Gloag & Irvine Rights in Security page 810, among other sources. Among the cases, it is sufficient to refer to Stirling v Forrester (1821) 3 Bligh 575, where Lord Redesdale explained, at page 590 in the course of argument, and in his speech at page 596, the essentially equitable nature of the right of relief among co-obligants, and its absolute character. At page 590 he said that "the creditor is bound in conscience, if not by contract, to give the party paying the debt all his remedies against the other debtors".

In the present case, counsel's agreement on this position masks an underlying problem as to the characterisation of the debt, and a difference of view whether a preference attached to a debt by statute is an incident of the debt, as distinct from an ancillary benefit enjoyed by the creditor in particular circumstances.

The factual position in this case appears to be highly unusual in a number of respects. Elgin went into receivership on 3 April, and Villaswan on 24 April, 1991. The position of Elgin was not dealt with in detail in the course of the debate. But it is clear that there was no payment in respect of the V.A.T. in question at that stage by Elgin's receiver. At 24 April, therefore, H. M. Customs & Excise would have been entitled to a preferential ranking in the receivership of Villaswan for the whole amount of £400,055.90: Insolvency Act, 1986 sections 59, 386 and 387 and schedule 6. The tax would have fallen due within the period of six months prior to the relevant date, 24 April, 1991. In the receivership of Villaswan, in accordance with section 59 of the Insolvency Act, 1986, the receiver should have advertised for preferential claims. To the extent that he received intimation of the Crown's preferential claims, or otherwise knew within six months of his appointment of their existence, he would have been obliged to make provision for them. Accordingly, in the ordinary course, the claim for the V.A.T. of £400,055.90 due at 31 March, 1991 would have had to be recognised as a preferential debt in the Villaswan receivership from the outset. If the debt a sum hhad been paid by the receiver, and a sum in excess of Villaswan's appropriate share of the liability been paid accordingly, the receiver would have had a right of relief against the other members of the group. If all of the members had been able to make payment of their appropriate shares, the net result at the end of the day would have been a reduction of the assets available to the secured creditors of Villaswan by the amount of its appropriate share of the liability. Had there been a shortfall in recoveries, the assets available to the secured creditors would have been reduced correspondingly. But, critically, one would have expected claims which recognised the entitlement of H. M. Customs & Excise to payment by the group members jointly and severally. Any difference in the availability of funds to meet the appropriate shares of the liability would disturb the fair balance among the companies and potentially affect the sums available for payment of secured and ordinary creditors' claims. But that is inevitable. It is sometimes immaterial, however. In many group insolvencies the same lender is the major floating charge creditor of each of the member companies and the distribution of preferential debts is of relatively little significance in practice. But where, as here, there are different lenders, the statutory scheme would appear to be capable of being worked out more or less rationally, at least in most cases.

Had the normal course of events been followed, a group company, whether trading actively, or in receivership or liquidation, which paid, voluntarily or under compulsion, the whole debt, would have been entitled to an assignation of the Crown debt which had been claimed against the other members of the group, as a matter of convenient management of parties' affairs, even if not strictly required for relief, and to rank in respect of that debt in the other receiverships or liquidations. When Blythswood paid the total sum, it was not in liquidation. H. M. Customs & Excise were asked to assign their claims against the other members of the group to Blythswood, but declined to do so. Whether they were entitled to do so in the circumstances is not a matter dealt with in the documents before me. Oneon which I need comment. There may be can envisage circumstances in which they might be entitled to refuse. For example, failure to make a return of the V.A.T. liability which prevented a claim for a preferential ranking from being made within the six months time limit relative to any receivership might give rise to a question whether there was a preferred claim to assign. There was no criticism nor any explanation of the official position in this case, at least for the purposes of the debate. Whatever the background, the present issue wais presented on the basis that the only claim for a preferential ranking was that made by Blythswood's liquidator. There is no suggestion that what is sought is a substitution of Blythswood's claim for a Crown claim already made regularly in Villaswan's receivership in terms of the legislation. If the defenders are to succeed in these circumstances, it must be on the basis of a common law right.

In presenting his argument, Mr Tyre distinguished cases involving caution, on the view that historically cautioners had privileges, such as the benefit of discussion, which might suggest equities in their favour which would not be available to contractual co-obligants. It is clear that there could be differences in the treatment of cautioners in particular circumstances. But I consider that there is no difference which requires the authorities to be distinguished for present purposes. It is of interest that Section 60 (3) of the Bankruptcy (Scotland) Act, 1985, as applied by the Insolvency (Scotland) Rules, 1986, (to which I was not referred) provides:

The term "co-obligant" includes a cautioner for these purposes. The parallel treatment of the two groups in the statutory context reflects the realities of the situation, in my view. What one has to consider are the equities which require to be recognised as between the paying debtor and others liable to him in relief. There is no obvious requirement to distinguish caution from co-obligation in thate present context. The discussion of the general principles in Erskine II xii 66, III iii 68, and III v 11 indicates that so far as concerns relief there is no material difference.

It is, on the other hand, necessary to recognise that because the foundation of the law in this field is equity, the treatment of competing claims may differ depending on the categories of rights of the principal creditor which the paying obligant seeks to utilise in making out his right of relief. Where the principal creditor holds securities, in reliance on which he may have made a number of advances, on the same or on differing dates, a co-obligant in respect of one secured debt might expect to be in a different position from a co-obligant for a debt which alone is secured, perhaps depending on the relative date of his obligation to the other debts involved in the competitiondecured. That distinction is clearly recognised in the authorities. The general position is explained by Lord President Dunedin in Bruce v Scottish Amicable Life Assurance Society 1907 S.C. 637 at page 643:

The final sentence may be too widely expressed. In Sligo v Menzies 1840, 2 D 1478, it was recognised that generally the creditor might refuse an assignation which would conflict with his legitimate interests. However, the majority held that that did not extend to retaining a security for a subsequent advance to the detriment of the interest of a cautioner for a prior debt. Although that case was not referred to in argument, it is of some importance in arriving at an understanding of the treatment of securities in the present context. The opinion of the majority of the consulted judges, delivered by Lord Mackenzie, at pages 1489 to 1491, was that:

These observations are followed by a discussion of Erskine III 5 11. The general proposition there, supported by citation of Garden, was that wherever a creditor received payment from one who was not the proper debtor, "he who pays is from equity entitled to demand an assignation from the creditor of every separate security which he hath in his person for the debt, that he may thereby work his relief the more effectually against the principal debtor". But there was a qualification : "But if such assignation tends to hurt the granter, equity interposes on the other part with this rule, that no creditor can be compelled to assign a right to his own prejudice.." That passage was qualifieddisapproved in Sligo. The minority, represented in the opinion of Lord Moncrieff, were firmly of the opposite view. But the majority view is generally recognised: Bell's Lectures on Conveyancing pages 288-9. See also Gloag & Henderson's Law of Scotland 10th edition paragraphs 3.18 and 20.15 for a recent commentary to the same effect.

In my view, sSome of these considerations clearly apply exclusively to security rights held by the principal creditor. The whole notion of competing security rights depends on voluntary contractual relationships. In that context, I consider that Mr Tyre was correct in arguing that the position was well established by 1910. In Thow's Trustee v Young, at page 592, the Lord Ordinary said:

He went on to refer to the possibility of equities which would disentitle the assignee from claiming the benefit of securities held by the principal creditor. The case was primarily concerned with the question whether the assignee could extend his rights by taking an assignation from the principal creditor. There have been reservations about the Lord President's observation on page 596 that "security" always means security over the estate of the debtor. However, it is clear that what the court had in mind were security rights created by the parties. In general the position is not materially different from that set out by Lord Redesdale in Stirling v Forrester, at page 590 in the course of argument, and in his speech at page 596, that "the creditor is bound in conscience, if not by contract, to give the party paying the debt all his remedies against the other debtors". In that context oOne is concerned with the balancing of equitable considerations as among co-obligants and between secondary obligants and the principal creditor in allocating the benefit of securities held by them under private arrangements. Timing of the several transactions is or may be a relevant factor in that context.

On the other hand, it appears that a different regime operates in relation to the landlord's hypothec. The authorities referred to reflect considerable development in the law. Mr Tyre relied heavily on Erskine 3. iii. 68, and on Garden v Gregory. He did not seek additional support from the case of Lesly 1665, M 2111, to which Erskine also referred. The passage in Erskine contains an explanation for the treatment of relief as a right arising de jure. In accordance with practice, at that time, all co-cautioners were taken bound in a single deed. Their obligations inter se arose from one deed, and accordingly no assignation was required. It is against that background that the text continues:

Garden v Gregory involved a competition between a cautioner who had paid tack-duty due under a let without obtaining an assignation of the landlord's hypothec, and a creditor of the tenant who had arrested corn belonging to the tenant in a third party's hands. The cautioner contended that he was entitled to the benefit of the hypothec ex lege on the basis of the equitable principle that what a party was obliged to do the law holds as done. He did not require any other assignation. The arrester was preferred in respect that the cautioner had not obtained an assignation of the tack duty and hypothec. Treating hypothec as a form of security, the case fell within the general proposition in Erskine. In the circumstances, the hypothec had to arise after the constitution of the cautionary obligation. Mr Sellar relied on the later treatment of the case by Hunter Landlord & Tenant in which, vol 2 page 159, the case was treated as superseded, belonging to the "older rule". The general rule was stated to be that: ".. a cautioner has a right to have the benefit of the landlord's hypothec, which benefit devolves on him ex lege". The authorities cited for that proposition are the then current editions of Bell's Commentaries vol 2 page 33, and Bell's Principles para 1238. Whatever authority the paragraph in Hunter might otherwise have had is, in my view, undermined by the decision in Steuart v Stables 1878, 5 R 1026. The passage in Hunter was before the court: page 1025. It was held there that a grazier who had pre-paid sub-rents was not entitled to an assignation of the landlord's hypothec over the principal tenant's stock. The case followed the Hypothec Amendment (Scotland) Act, 1856 and the sub-tenants' rights were affected by that. But the decision was based on the view that the landlord would be prejudiced by an assignation of his hypothec in respect of the period in question because the hypothec was available to him over the same stock for rents for subsequent periods. In Guthrie's edition of Bell's Principles, paragraph 1238, the position was said to be that: "A cautioner for rent, 'but not a stranger', may, on paying the rent to the landlord, insist for an assignation to the hypothec". Far from there being an ex lege transmission of the hypothec, there was an equitable right to an assignation provided that it did not prejudice the legitimate interests of the landlord. It is significant that the interest of the landlord which was recognised was related to a later period than that in respect of which the right of relief arose. Hypothec was therefore treated differently from voluntarily negotiated securities in respect of debts. In Guthrie's edition of Bell's Principles, paragraph 1238, the position was said to be that: "A cautioner for rent, 'but not a stranger', may, on paying the rent to the landlord, insist for an assignation to the hypothec". But that must be considered to be qualified. In Guthrie & McConnachy v Smith 1880, 8 R 107, the majority held that there was no right to an assignation where arrears of feu duty were paid by a third party. The superior did not have to tolerate any continuation of a debitum fundi. Lord Mure, at pages 112-3 compared the position in relation to hypothec, citing Graham v Gordon 1842, 4 D 903. In that case, the House of Lords decided (2 Robinson 251) that the landlord was not obliged to grant an assignation of his hypothec. Lord Fullerton discussed the position at page 908, explaining that the landlord had an interest in the discharge of the liability for rent at successive terms, leaving the stock and crops available to secure each current year's rent. Lord Shand was of the opposite view. Citing the seventh e

Before leaving the general treatment of the subject, it should be noted that there are cases in the section of the Dictionary before that in which Garden v Gregory appears, which might have been important indicators of the development of the law. Mann v Reid 1705 M 3308 includes the important qualification of the right to demand an assignation that it be clogged with the reservation that the cedent should continue to have priority for debts due to him. The later case, of Gardiner v Agnew 1771 M 3385, is of more general interest. It involved co-obligants in a bond, and was concerned principally with a claim for damages by two of the co-obligants who had paid the debt against the creditor who had refused an assignation. The breach alleged depended on there being a duty in the circumstances to grant the assignation sought. The report includes an extensive citation of earlier authorities and discussion of the views reflected. In finding for the creditor, the majority of the judges considered that the demand for an assignation "rested only upon equitable considerations". The mminority view appears to have been that a creditor was obliged to grant an assignation de jure.

Taking these authorities as a whole, in my opinion it is clear that for a co-obligant or cautioner to be able to make use of the ancillary securities and analogous rights (such as the benefit of diligence) held by the principal creditor, it must be demonstrated, in case of a competition, that there are no countervailing equities in favour of the principal creditor which require to be preferred. Demand for an assignation is the obvious way of focusing the issue, where a competition arises, and in order to satisfy third parties that the cautioner or co-obligant is entitled to enforce the principal creditor's ancillary rights, an assignation will be required in general. Where heritable securities are involved, there will be the additional requirement of a step in the progress of titles to the land in question in order to satisfy singular successors. In most insolvency situations there will be a statutory as well as a common law right to demand an assignation of the principal creditor's rightsse, subject to any counter equities in favour of the principal creditor which prevail in the circumstances. In these cases, the right to the benefit of the advantages held by the principal creditor is not absolute. The requirement for assignation reflects the need for consideration of the rights of the paying co-obligant in all of the circumstances which are relevant. But it ismay be a different question whether any of these considerations apply in the case of a debt which has the benefit of a statutory preference. Typically the principal creditor has the benefit of such a preference exclusively in relation to the specific debt, and has no right to transfer or extend the benefit of it to other debts due by the principal debtor.

Thise first and most obvious factor, which emerged late in Mr Sellar's submissions. But I consider that the point is valid. O, was that one is not concerned in this case with a right of security, or the benefit of a diligence which is held by the principal creditor as an ancillary right. The preferenceIt is a characteristic of the principal obligation created for the benefit of or conferred on the principal creditor in circumstances prescribed by Parliament. It does not exist other than as an aspect of the definition of the debt in circumstances associated with the insolvency of the principal debtor, or particular co-obligant as the case may be. Mr Tyre particularly relied on the views of Professor Gloag at page 213, that "If the debt is entitled to a preference, e.g., if the creditor is the Crown... the assignation will carry that preference, which, without it, would be lost." In the Stair Encyclopaedia article on cautionary obligations, vol 3, at paragraph 929, the passage is doubted. It is questioned why the beneficium cedendarum actionum should not suffice without assignation. The validity of that viewat is the central issue in this case.

Gloag's authorities on the point are Churchill (which I will refer to later since it is an English decision) and Fraser v Shepherd 1830 8 S 851. In As Mr Tyre acknowledged, Gloag's citation of Churchill causes difficulty in accepting his analysis. I shall refer later to what was held. In Fraser v Shepherdthat case there was a competition between the Bank of Scotland, as poinders of furniture belonging to Thomas Paterson, and a Mr Shepherd who had paid off a debt due by Paterson to the Crown to avoid a writ of extent which had been issued against Paterson but not carried into execution. Had there been execution, the furniture would have been seized for the Crown debt. Shepherd failed in the competition because he was not able to point to anything more than an agreement that he should have the benefit of the Crown diligence. He had failed to "get a transference to the furniture in his favour completed in a legal manner". However, in my opinion, the case does not vouch the proposition for which it is treated as authority. The issue of the writ of extent did not, of itself, create any preference. It was a step in a process of diligence which would have created a preference if completed. As the opinions make clear, the process had not been carried far enough forward. The case was disposed of before the Court of Exchequer was absorbed into the Court of Session in 1856, and one might have expected the practice of the English Court of Exchequer to have been followed if this had been the only issue in the case. I refer later to English cases of the period. However, it appears from the report, that the judges had considerable doubt whether Paterson paid in reliance on any right over the furniture, and the case appears to have been disposed of on its facts. Garden v Gregory, the other authority referred to, does not bear on the question of the transmission of the benefit of a statutory preference. In my view, the view expressed by Gloag is wrong. It is not supported by the cases referred to. The text appears to stand alone in this respect. And there is no explanation why the debt should transmit to the paying co-obligant for purposes of relief shorn of the preference conferred on it by Parliament.

It is necessary to consider how this view relates to other textbook commentaries on the topic of transmission of the benefit of statutory preferences. There is considerable force in Mr Sellar's observation that the position adopted is less than clear. Bell's Lectures on Conveyancing states the general position as follows:

On page 288, he refers to the "usual and proper practice" of obtaining a discharge and assignation nevertheless. On pages 288-9 he deals with securities and diligence, and with the landlord's hypothec. In those cases, the requirement for an assignation is focused. He does not refer to the position of a cautioner for a preferential debt. Bell's Principles, para. 255 states the position of the paying cautioner very broadly. But there is he does not notice ofe the position of a creditor with a statutory preference. Graham Stewart on Diligence, 1898, page 312, distinguishes cautioners and co-obligants from third parties generally. He says: "Where a cautioner or co-obligant pays the debt, he is in all cases entitled to an assignation so as to operate relief". The authorities for that proposition are Bell's Principles, para. 558, which is equally broadly expressed under reference to Guthrie & McConnachy v Smith in which, as previously noted, Lord Shand cited a previous edition of Bell at paragraph 255. The seventh edition of Bell, paragraph 558 was in these terms: "Payment made by one interested in the debt (as co-obligant or surety) will take away the right of the creditor, but will not extinguish the debt of the principal obligant. The person so paying is entitled to an assignation to the effect of operating his relief". No authorities were cited. The paragraph was completely general in effect. Graham Stewart's other authorities were Stewart v Bell 31 May, 1814, F.C.; Edinburgh v Provan's Creditors 1665, M 6235; and Stevenson v Cooper 1822, 1 S. 312. The first of these was concerned with the right of a cautioner for rent to an assignation of the landlord's hypothec, and must be regarded as superseded by later authority. Stevenson was related to the same subject matter, but appears in any event to have been special. The case of Provan's Creditors is much closer to the present. It was concerned with the town's priority for tack duty, by virtue of a tacit hypothec which conferred a preference over all other creditors lacking such a privilege. The general right of the tTown was affirmed. The case was decided before the introduction of Crown preferences by the Exchequer (Scotland) Act, 1707, and it is of little value in relation to one's understanding of the nature of statutory preferences. But ithe case is of greater interest for the report by Gilmour that the tTown had assigned the tack to a cautioner for relief following payment. "The Lords found that the cautioner-assignee, by his assignation, had the same privilege competent to him that the cedent had, and therefore preferred the assignee." The seventh edition of Bell, paragraph 558 was in these terms: "Payment made by one interested in the debt (as co-obligant or surety) will take away the right of the creditor, but will not extinguish the debt of the principal obligant. The person so paying is entitled to an assignation to the effect of operating his relief". No authorities were cited. The paragraph was completely general in effect. In my opinion, Provan's Creditors is directly supportive of the view I have arrived atexpressed. Once it was accepted that an assignation was not required for relief, the case reasoning supports the view that the preference follows the debt to which it is attached for the benefit of the paying co-obligant. In my view there is no persuasive authority to a contrary effect.

It is appropriate at this stage to consider the second branch of Mr Tyre's submissions. The argument was that no question of preference arose in the circumstances because Blythswood was not in receivership or liquidation when it made the payment. Preferences were provided for in the Insolvency Act solely by reference to a relevant date. The Commissioners had a cascading preference in a group situation: in re Nadler Enterprises [1981] 1 W.L.R. 23. The Commissioners were entitled to a preferential ranking in the liquidation of the representative member and Villaswan in April, 1991 in respect of the supplies of all group members in the preceding six months. However, when Blythswood went into liquidation in September, 1992, the liability for £400,055.90 was for a period outwith its reference period of six months. The sum was paid in June, 1992 voluntarily, when there was no question of the company being insolvent. As at September, 1992, the Commissioners had a fresh preferential claim in Blythswood's liquidation. On the face of it the Commissioners were over-protected, and that became material in the case of Elgin. But Elgin could have avoided that problem by registering separately for V.A.T. and so removing themselves from the group and avoiding post receivership credits being applied in extinguishing pre-receivership debts. Villaswan had done so. But that did not affect the position of Blythswood. The group debt due by it could not become preferential until there was a relevant date relating to Blythswood. Until then Blythswood's debt was a simple debt entitled to no preference. Even if there had been an assignation by the Commissioners it would not have affected the position. There would have been no preference to assign. The Commissioners could have an advantage capable of assignation only as an incident of the debt due by Blythswood. At the date of payment there was none, and nothing could have been carried by assignation. The statutory preference was a different kind of advantage from a security: it could arise only on liquidation or receivership and had no prior existence.

Mr Sellar responded that the argument was misconceived. The only relevant consideration was whether there was a preference in the receivership of Villaswan. The status of Blythswood at the date of payment was irrelevant, and the argument whether there was a preferential debt due by Blythswood at that time was misconceived.

In my opinion the argument for Villaswan is correct. To return to the position of securities held by the principal creditor briefly, it is clear that the co-obligant making payment is entitled to the benefit of securities, where that is appropriate, whether or not he knew of their existence when making payment, and whether or not they were held by the principal creditor at the time the joint obligation was undertaken: Duncan Fox & Co v North & South Wales Bank. The securities are not made available to the paying co-obligant because they were an incident of his relationship with the principal creditor, but because they were an incident of the relationship between the principal debtor and the principal creditor. Dealing with the situation which arises in this case, and with reference to the single payment involved, the issue is what is transferred to enable Blythswood to work out its right of relief. In my opinion it can only be the Crown's claim against Villaswan. The claim against Blythswood was discharged by the payment. That payment exceeded the obligation of Blythswood as a matter of the domestic relationships of the member companies of the group. To work out relief what Blythswood requires, and is entitled to, is to stand in the shoes of the Crown in a question with Villaswan, that is to enforce against Villaswan an appropriate part of the debt which the Crown had in a question with Villaswan and for which it could have ranked in its receivership. It is necessary to return to the language of the Insolvency Act and the nature of the preference created by it. Section 386 provides that:

In setting out the categories of preferential debts, the schedule refers to "any value added tax which is referable to" the reference period. Tax which fits the description is entitled to the preference. In my opinion, a principle of equity which recognises the right of a co-obligant to relief against a principal debtor upon paying such a debt must relate to relief in respect of a debt which is the same as, not different from, the principal debt. The notion that more is required involves the idea that the preference is separate from the debt, and therefore may be transferred to or withheld from the paying debtor. But the preference has no substance divorced from the debt. It is, of course, clear that if the V.A.T. group continues, and there are later insolvencies of other group members within the statutory period of six months after the first insolvency, complex situations can arise. But any emerging preference would then of necessity relate to a different reference period. The remedy in those circumstances may lie in the hands of the receiver of the earlier companies to go into receivership, or the liquidators of companies which are wound up, by taking steps to break free from the group so far as concerns later accountable periods. It is unnecessary to consider such situations in relation to the payment by Blythswood.

In my view this result is in accordance with the substantial equities in any such case. The hypothesis is that there can be computed an appropriate part of the total value added tax liability which would in any event have fallen to be paid out of the resources of Villaswan. That would be paid as if the Crown had demanded payment from the company's receiver, with the benefit of the preference, in priority to the secured creditors. Any other result would benefit the secured creditors at the expense of the secured and other creditors of Blythswood. As Mr Sellar put it, the secured creditors of Villaswan would be unjustifiably enriched by the accident of the order in which the Crown chose to exercise its several rights against the group members.

I have reached these views without reference to tThe English cases, but it may be appropriate to mention some of them. Iin re McMyn was decided on the terms of the Mercantile Law Amendment Act, 1856, section 5, in my view, and is not helpful. The first question of importance relates to Mr Tyre's criticism of North J.'s judgment in in re Churchill. The argument for the successful claimants was that, on general principle, of law and equity, a surety was entitled to all of the remedies of the creditor on payment. A secondary argument was based on the 1856 Act. North J.'s opinion deals with both, and, inter alia, explains that the 1856 Act was designed to overcome a procedural technicality of English practice. In my view it is not possible to dismiss the decision as Mr Tyre sought to do. It states the right of the paying surety as a matter of general principle. On the other hand, it appears that Mr Tyre was, in my view, correct in his submission that in Lamplugh, Eve J. proceeded wholly on the terms of the Act, though Churchill was cited by both parties. It is unnecessary and would be inappropriate to hold in these proceedings that Eve J. was wrong in law in arriving at the decision he did. The three cases are cited by Halsbury at paragraph 231, and Churchill and Lamplugh again at paragraph 249. The position in England appears clearly to be accepted that the guarantor or surety who pays a Crown debt is entitled to claim in the insolvency of the principal debtor with the benefit of the Crown preference without an assignation, and irrespective of whether the principal debtor was in liquidation or was bankrupt at the date of payment of the debt. Since 1856 that view has been based primarily on the Act, for obvious reasons. Mr Tyre was correct in arguing that so far as the authorities to which I was referred are concerned North J. alone supports the view that the same result would have followed independently of the Act. While North J did not cite authority, it is to be noted that the claimants did cite English authorities prior in date to the Act in support of their submissions: page 175, footnote (6). Halsbury, paragraph 249 deals with Crown debts at footnote 5. It is of interest that in the two cases cited, R. v Salter (1856) 1 H & N 274, and R V v Robinson (1855) 1 H & N 275n, one has the closest parallel to Fraser v Shepherd. The practice of the Court of Exchequer set out there would have supported an application by the paying debtors that the Crown's writ of extent be put into force on their behalf, if that had been the central point in the case. The analogy of an assignation of securities is referred to, but the mechanism adopted to put the paying debtor in the position of the principal creditor was a discretionary remedy made available by order nisi.

Churchill was before the court in Morris v Ford Motor Company, but is not referred to in the opinions. However, Lord Denning's observations on the rights of sureties, at page 800, reflect the generality of the rights of the paying surety, under reference to pre-1856 authorities. I should say that I did not find any help on matters of general principle in Russell v Shoolbred. It was too closely concerned with the classification of the right of distress in the context of the 1856 Act to assist.

The question for me is whether there is assistance in the English authorities cited in arriving at a view as to the position in Scotland. While a wider investigation of the English authorities might suggest otherwise, it appears to me that it would be unsafe to rely on Churchill or any other of the English caseas as authority in disposing of the present disputeis case. While it is clear from its long title that the 1856 Act was intended to assimilate the laws of England and Ireland to the law of Scotland at the time in certain respects, the means selected, of an implied assignation, were not part of the rationale of Scots law then or subsequently. It appears that there may have been procedural reasons for the perceived deficiencies in English law, and that may explain the solution arrived at. But even where there are common statutes different results can be arrived at, as is illustrated by Turner v Inland Revenue 1994 S.L.T. 811. As I understand the English authorities they would arrive at the same conclusion as I have in the circumstances of this case. As Mr Tyre acknowledged, Gloag's citation of Churchill causes difficulty in accepting his analysis. In Churchillthat case, North J. held that a surety who paid a Crown debt was entitled to stand in place of the principal creditor and take the benefit of the Crown priority. Lamplugh was to a similar effect. Mr Tyre's attack on Eve J.'s reasoning was consistent with his general approach to the problem in this case. But the decision has stood unchallenged for decades. It seems to me that these two decisions must be taken to reflect the established law in England. It is a comfort to find that in this case the same result would follow in England as I have arrived at on the Scottish authorities. But that must be regarded as a casual result of the analysis of Scots authorities rather than a reflection of the English decisions. In relation to competition between creditors generally in relation to insolvent estates there can be no assumption that the laws of the two countries will arrive at the same result. Different principles are applied. Differences must occur. Fortunately there are no relevant difference in the present case.

In the circumstances, I am inclined to sustain the first plea in law for the defenders so far as it relates to the pursuers' second conclusion, repel the pursuers' second plea in law, and to that extent dismiss the action. However I have made use of authorities to which the parties did not refer in the course of the debate, and it will be appropriate to give an opportunity to parties to make further submissions if they choose to do so. Further, the first conclusion encompasses inter alia claims for preference in respect of sums set off against credit returns by Elgin in January, 1997. I am inclined to continue the debate so far as those sums are concerned to enable parties to consider whether there is any speciality which might differentiate them. In the circumstances, I shall have the case put out by order on Friday 13 November 1998 to hear parties on further procedure.