Scottish Court of Session Decisions

This is an appeal by the defenders against an interlocutor of the sheriff at Glasgow dated 12 January 1998 in which inter alia she repelled the defenders' plea to the relevancy of the pursuers' averments in an action brought by the pursuers seeking to enforce rights as heritable security holders against the defenders. The first defenders are Hire Foulis Limited against whom a winding up order was granted and an interim liquidator was appointed on 7 November 1996. The liquidator now appears as second defender in the action and was jointly represented along with the first defenders in the appeal. The pursuers and respondents in the appeal are UCB Bank plc in whose favour the first defenders granted a Standard Security over subjects at Dawson Industrial Estate, which was registered on 21 January 1991. The respondents served a calling up notice on the appellants on 4 February 1997 requiring

payment of the debt secured by the said Standard Security, following which by agreement they entered into possession of the security subjects on 10 February 1997. After the appointment of the liquidator but before the respondents entered into possession of the subjects the liquidator collected certain sums from companies named Mast Climbers Limited and Hoist and Access Services Limited which were paid by them in respect of rights of occupancy in the subjects previously granted to them by the first defenders. It is these sums, paid to the liquidator before the respondents entered into possession, that the respondents seek to recover in the present action, on the basis that they form part of the security which they had been granted. It was agreed before us that for present purposes the sums so paid were equivalent to rents derived from a lease of the subjects.

The sheriff held that the action was well-founded on the ground that it would be illogical if on taking possession the pursuers were entitled to future rents, as was conceded, but had no right to recover rents which had been paid after the winding-up order. It seems to us, however, that a distinction can readily be drawn between the right to receive future rents, which constitutes a debt owed by the occupier to the person in possession of the subjects, and the alleged right to recover rents which have already been paid by an occupier in satisfaction of his obligation towards the person in possession when the rent became due. The sheriff does not satisfactorily explain the legal basis upon which she held that sums which had been legitimately paid to the liquidator as the person then in possession could be recovered by the respondents by virtue of their security over subjects of which they were not at the time of payment in possession.

Whatever may have been the respondents' position before the sheriff, our understanding of their submission in this court is that they relied only on the general law applicable to heritable security holders, rather than on any provisions contained in the Conveyancing and Feudal Reform (Scotland) Act 1970 (hereinafter referred to as "the Act") which by section 9 created the particular form of security, a Standard Security, which is the foundation of the action. The Act provides an apparently comprehensive code to deal inter alia with the circumstances in which the holder of a Standard Security can exercise his rights (part of which we will mention later) and, in the absence of express provision in the Act indicating the contrary, it might be maintained that it would have been to these provisions that the court should look in order to determine whether or not in the present case the circumstances exist which entitle the respondents to pursue the action. This was the attitude assumed by counsel for the appellants in opening the appeal, his principal submission being that by virtue of certain provisions of the Act a holder of a Standard Security was afforded no effective rights until he had entered into possession.

On behalf of the respondents, however, counsel did not address us primarily, if at all on the effect of the statutory provisions founded on by the appellants. The respondents' submission was that the granting of any heritable security conferred a right in the holder to recover rents, whether already paid or unpaid, which had become or were to become due since the security was created, so long as the sums involved could be identified. The exercise of this right was postponed until the debtor defaulted, but on such default the extent of the holder's security included all identifiable rents due in the past or in the future. This submission was sought to be supported mainly by reference to authorities dealing generally with the nature and effect of the creation of a heritable security. We were not addressed by the respondents on the question whether the alleged effect of these authorities was consistent with the provisions of the Act or what would be the result if they were not. Our attention however was drawn to the provision contained in section 20(1) of the Act which provides inter alia that

Standard condition 9(1)(a), referred to in this provision, is contained in Schedule 3 to the Act and it provides that the debtor shall be held to be in default when he has not complied with a calling-up notice. However there is a further case of default provided for in standard conditions 9(1)(c) and 9(2)(c) the effect of which is to provide that a default also occurs when a winding up order is pronounced against a company. It is the default created by the liquidation, not by non-compliance with the notice, on which the respondents submitted that they were founding in bringing their action, although it is clear that a calling-up notice was in fact served and not complied with. Since there was no submission by the appellants to the contrary we are willing to proceed upon the basis that the effect of the law which it was submitted entitled the respondents to make their claim has not to any extent been excluded or altered by any of the statutory provisions contained in the Act.

The first issue which appears to us to arise in relation to the respondents' submissions is whether the amounts sought to be recovered formed part of the subjects which constituted their security when they exercised their rights. The authorities put forward as supporting the respondents' submissions were not primarily directed to this obviously critical issue. These authorities were Grindlay v. Drysdale, etc. (1833) 11 S. 896, Athole Hydropathic Co. Ltd. in Liquidation v. Scottish Provincial Assurance Co. (1886) 13 R. 818, Anderson's Trustees v. Donaldson & Co. Limited (in Liquidation) 1908 S.C. 38, Webster v. Donaldson (1780) Mor 2902, Campbell Trustees v. Whyte's Trustees (1879) 5 R. 586. There were also cited Gloag and Irvine, Rights in Security, p. 4, and Opinion No. 10 Professor Halliday on The Conveyancing Opinions of J.M. Halliday (ed. Prof. D.J. Cusine), pp. 32-35. Most of these authorities were apparently directed at establishing that a right to the security holder to satisfy his debt on default of the debtor from the security subjects including its fruits arises on the granting of the security, which in the case of a Standard Security is on registration. There is no dispute that this is the case although, as we shall mention, the exercise of the right is subject to certain requirements. However the extent and value of the security afforded by the grant are not immutably fixed at the time when it is constituted. So far as the fruits are concerned, they may vary from time to time, as in the case of the security afforded by a poinding of the ground. No authority was cited to us to suggest that the extent of the respondents' security in the present case, in relation to rents, falls to be determined as at the date of the grant rather than at the date when the right was exercised. On the contrary, the authorities to which we were referred indicate that once rents have been paid to the person contractually entitled to receive them, the sums so paid no longer form part of the subjects which constitute the security: see, for example, Graham Stewart, Diligence p. 163 in which the author refers to the fact that if rents have been paid the security holder "has lost his right to them". Apart from authority, it seems to us that a contrary view would lead to absurd results. A person who is entitled to receive and does receive rents is under no obligation of trust or otherwise to the security holder. He can do what he likes with the money, and the extent of the respondents' security cannot sensibly depend, as was submitted, on the chance whether or not the sums paid can be specifically identified. It was submitted that at least a liquidator who has received rents owes a duty to the security holder to preserve or apply them for his benefit; but if rents which are legitimately paid to and received by him do not form part of the security subjects he has no duty to preserve them other than for the benefit of the general body of creditors, and this consideration therefore cannot affect the issue. We accordingly hold that the respondents' averments in support of their claim are irrelevant in respect that the sums claimed do not constitute part of the security afforded by the grant.

Moreover, on the basis of the general law founded on by the respondents, there is a further obstacle to any claim for rents due and paid before they entered into possession of the subjects. As was observed by Lord Kinloch in Bridge v. Brown's Trs. et. al. 10 M. 958, 962, the right of a security holder to the rents is not that of a full proprietor. "The full evolvement and enforcement (of the right)...requires judicial steps on his part". The step which was stated to be required was the raising of an action of maills and duties, and although such an action could not be raised in respect of rents which have already been paid, the omission to specify any other judicial step or the taking of possession as a requirement of evolvement and enforcement of the right is clearly due to the fact that rents which have been paid do not form part of the security subjects, as we have held. The requirement, as appears from a later passage at p. 962 of Lord Kinloch's opinion, is founded on the consideration that until an action of maills and duties is raised, the occupier is bound to pay rent to the person in possession, and steps must be taken to prevent this if the security holder is not in possession and his rights are to be preserved. However that may be, the case is clear authority for the general proposition that a security holder is not entitled to recover rents merely by virtue of the debtor's default, as the respondents maintain: see also Graham Stewart, op. cit. pp. 514-515. Since the present action has not been preceded by the requirement at common law to raise an action of maills and duties or to take any other judicial step to prevent the rents claimed from being paid to the person entitled to receive them, it is in our opinion irrelevant on the basis of the general law put forward by the respondents for this reason also.

The conclusion that the respondents' case is irrelevant for the reasons which we have given is in our view supported by the provisions of the 1970 Act. As is indicated in the speech of the Lord Chancellor in Watson v. Woolwich Equitable Building Society 1992 S.C. (H.L.) 21 at pp. 36-37 the Act was not intended to innovate on the general law relating to heritable securities, and provisions relevant to the issue in the present case, even if they have not wholly superseded the previous law, at least provide an indication of what that law has been.

Section 20(5) of the Act provides as follows:

The section makes it clear that an assignation of proprietorial rights, including the right to rent, takes place when, and not before, the creditor takes possession, which in the present case was on 10 February 1997. At that time neither of the appellants who previously had possession had any "right" to the rents which had legitimately been paid to them. Their right had already been satisfied and the corresponding obligation had been discharged by the payment. This view of the section is confirmed by the provisions contained in standard condition 10 which specify the rights of the creditor on default. It is provided inter alia in condition 10(3) that on default the creditor "may enter in to possession of the security subjects and may receive or recover...the rents of those subjects...". When the respondents entered into possession their right to rent was clearly limited by those provisions to receipt from the occupier, or recovery from him, of rents which had not been paid. The respondents were not assigned any further right in relation to rents. The provisions of the Act accordingly confirm the existing law that rents which have already been paid do not form part of the security subjects.

For these reasons we sustain the appeal, recall the interlocutor of the sheriff dated 12 January 1998, sustain the appellants' first plea-in-law, repel the respondents' first plea-in-law and dismiss the action.