Scottish Court of Session Decisions

You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Bank Of Scotland v Bass Brewers Ltd & Ors [2000] ScotCS 145 (1 June 2000)
URL: http://www.bailii.org/scot/cases/ScotCS/2000/145.html
Cite as: [2000] ScotCS 145

[New search] [Help]

OUTER HOUSE, COURT OF SESSION

CA98/99

OPINION OF LORD MACFADYEN

in the cause

THE GOVERNOR AND COMPANY OF THE BANK OF IRELAND

Pursuer;

against

BASS BREWERS LIMITED and OTHERS

Defenders:

________________

Pursuer: Brodie, Q.C.; Brodies, W.S.

Defenders: Gallacher; Wright Johnston & Mackenzie

1 June 2000

Introduction

[1] In this action the pursuers seek rectification of a letter of consent granted by the first defenders, Bass Brewers Limited ("Bass"), on 27 December 1997 in terms of which Bass, who held a floating charge over the property and undertaking of Lewis Lloyd Holdings Limited ("the company"), consented inter alia to the granting by the company in favour of the pursuers of a standard security over subjects at Hazelburn, Campbeltown ("the subjects"). Although the pursuers called as defenders not only Bass but also the joint receivers of the company ("the receivers"), the Royal Bank of Scotland plc ("RBS") and Argyll & Islands Enterprise Limited ("AIE"), Bass are the only compearing defenders. In order to gain a clear understanding of the context in which the claim for rectification of the letter of consent is advanced, it is necessary to set out at least in outline the structure of certain transactions in which the company engaged.

Background

[2] The following summary of events is taken mainly from the pursuers' averments. On 29 August 1996 the company granted in favour of Bass a Bond and Floating Charge ("the Bass charge") which was registered with the Registrar of Companies on 5 September 1996. Also on 29 August 1996 the company granted in favour of RBS a Bond and Floating Charge ("the RBS charge") which was registered with the Registrar of Companies on 9 September 1996. On 4 September 1996 Bass, RBS and the company entered into an instrument of alteration regulating the ranking inter se of the Bass and RBS charges.

[3] The Bass charge contained a provision in terms of which the company undertook that:

"unless with the written consent of [Bass] we shall not create or allow to come into being any security or charge upon any part of the property (including heritable, real and leasehold property wherever situated) assets, undertaking or uncalled capital of us or any of our subsidiary companies ...".

In the pleadings that provision is referred to as "the Bass negative pledge". The RBS charge contained a provision expressed mutatis mutandis in similar terms. In the pleadings that provision is referred to as "the RBS negative pledge".

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

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

[6] The solicitors acting for the pursuers, the company and AIE respectively were, it is averred, aware of the existence of the RBS and Bass charges, and of the negative pledges which they contained. Accordingly, steps were taken to obtain letters of consent from RBS and Bass. The averments made by the pursuers in elaboration of that point are largely concerned with the obtaining of the letter of consent from RBS, but since they form the background to the averments made about the obtaining of the letter of consent from Bass it is convenient to make some reference to them. It is averred:

"It was the widespread belief amongst solicitors dealing in such transactions at the time, including [the company's solicitor] that the effect of a letter of consent from a holder of a subsisting floating charge to the grant of a standard security would be to disapply any negative pledge and enable the standard security to rank in priority to the floating charge."

The averments then narrate various communings between the company's solicitor and officials of RBS which led to the issue of a letter of consent by RBS ("the RBS consent"). The averments then continue:

"A letter of consent in similar terms ["the Bass consent"]... was obtained from [Bass]. Mr Bruce, the signatory of the Bass consent, shared the said belief that, consistent with commercial practice and understanding at the time, a subsequent standard security granted by a company would always rank in priority to a floating charge and that all that was necessary to disapply the negative pledge was to obtain a letter of consent by the holder of the floating charge containing the negative pledge."

[7] The Bass consent was dated 27 December 1996, was signed by Mr Bruce as attorney for Bass, and was in the following terms:

"We confirm that we have no intention of appointing a receiver under the floating charge granted by [the company] and will not do so within the next 21 days. We consent to the granting of Standard Securities by [the company] in favour of [the pursuers] and [AIE] over the subjects".

[8] By instrument of appointment dated 30 January 1998 the receivers were appointed joint receivers of the property charged by the RBS charge. By instrument of appointment dated 9 February 1998 they were also appointed joint receivers over the property charged by the Bass charge.

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

The Rectification Sought

[10] In the present action the pursuers conclude for rectification of the Bass consent by the insertion of the words "prior ranking" after the words "We consent to the granting of" in the second sentence.

[11] The averments which the pursuers make in support of the conclusion for rectification proceed, after narrative of the circumstances which I have summarised in paragraphs [2] to [7] above, as follows:

"The Bass Consent was a document intended to vary or renounce a right. Bass, RBS and the Company knew that as a result of the transaction for the purchase of the Subjects, the Company would grant the BI and AIE Securities and that the Subjects would become part of the property of the Company. Having regard to the nature of the said transaction, it would make no commercial sense for BI and AIE to make funds available to the Company for the purchase by it of the Subjects unless they were to obtain securities over it (sic) ranking in priority to the Bass and RBS Charges. But for the facilities made available by BI the Subjects would have not become the property of the Company. Neither the Bass nor the RBS Charges was prejudiced by the grant of the AIE and BI Securities, the effect of which was to enable the Company to acquire a substantial asset. ... Letters of consent by Bass and RBS to the grant of Standard Securities in favour of BI and AIE would be otiose unless grantor (sic) consent to them as first ranking charges, ranking in priority to the Bass and RBS Charges. The first defenders are called upon to aver for what commercial purpose their consent was granted, other than for the purpose of enabling the BI and AIE Securities to rank as first ranking charges in relation to the RBS and Bass Charges. ... As hereinbefore condescended upon the request by [the company's solicitor] was in the context of, and predicated upon, the said widespread understanding that a consent from the holder of a floating charge was sufficient to disapply a negative pledge. As hereinbefore condescended upon, Mr Bruce of the First Defenders shared this belief. The First Defenders acquiesced without demur in the request made by [the company's solicitor]. In the foregoing circumstances the Bass Consent has failed to express accurately the intention of the granting (sic) thereof. In particular, the Bass Consent omits to state in terms, as intended, that the standard securities to which they were granting consent were to rank in priority to the Bass and RBS Charges in respect of the Subjects."

[12] In addition to the present action the pursuers also raised an action seeking rectification of the RBS consent to similar effect. That action and the present action were appointed to the same diet of debate. At the beginning of the debate, however, I was informed that the pursuers were to abandon the action concluding for rectification of the RBS consent. The diet of debate in respect of that action was therefore discharged. The debate proceeded in respect of the present action.

The Statutory Remedy of Rectification

[13] At common law the court had no power to rectify deeds. Following the Report of the Scottish Law Commission on Rectification of Contractual and Other Documents (Scot. Law Com. No. 79), sections 8 and 9 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 were enacted. Section 8(1) is in the following terms:

"Subject to section 9 of this Act, where the court is satisfied, on an application made to it, that -

a document intended to express or to give effect to an agreement fails to express accurately the common intention of the parties to the agreement at the date when it was made; or
a document intended to create, transfer, vary or renounce a right, not being a document falling within paragraph (a) above, fails to express accurately the intention of the grantor of the document at the date when it was executed,

it may order the document to be rectified in any manner that it may specify in order to give effect to that intention."

The case which the pursuers seek to make is founded exclusively on section 8(1)(b). In the present case nothing turns on the terms of section 9, to which it is therefore unnecessary to make further reference.

The Issues Debated

[14] By way of general preamble to his submission that the pursuers' pleadings were irrelevant and that the action should accordingly be dismissed, Mr Gallagher for Bass made reference to McClymont v McCubbin 1995 SLT 1248 in which Lord McCluskey (at 1252D) said, in dealing with a claim for rectification under section 8(1)(a), that the court must apply the ordinary test of relevancy as explained in Jamieson v Jamieson 1952 SC (HL) 44 per Lord Normand at 50, and not dismiss the action "unless it must necessarily fail even if all the pursuer's averments are proved". His submission was that in this case the pursuers' pleadings failed that test.

[15] Mr Gallagher advanced three submissions in support of his motion for dismissal of the action. In the first place, he submitted that to make a relevant case for rectification under section 8(1)(b) the pursuers required to aver that the grantor of the document intended that it should be in terms different from those in which it was in fact expressed, not merely that the grantor's intention was that the document should achieve an effect different from that which it in fact achieved. The pursuers did not aver that Mr Bruce intended that the terms of the Bass consent should have been other than they were. In the second place, he submitted that there were no relevant averments of the intention of the grantor of the Bass consent. The grantors of the Bass consent were Bass, not Mr Bruce. It was accepted that Mr Bruce had actual authority to execute various documents on behalf of Bass, including not only letters of consent of the sort granted, but also instruments of alteration or other deeds affecting the ranking of securities. Nevertheless, what was required were averments about the grantor's intention, and at best for the pursuers they had made averments bearing only on Mr Bruce's intention. In the third place, Mr Gallagher submitted that rectification should be refused as a matter of discretion, since the rectification sought, if granted, would achieve no practical purpose. That was so because the alteration of the ranking as between the BI security and the Bass charge could be achieved only by an instrument of alteration which complied with the requirements of section 466 of the Companies Act 1985 and was timeously registered in accordance with section 410 of that Act. I propose to discuss each of those issues in turn.

The Nature of the Intention

[16] The first submission made on behalf of Bass was that, on a sound construction of section 8(1)(b), in order to be in a position to invite the court to exercise its discretion in favour of granting rectification of a document, the party seeking rectification required to aver that the intention of the granter which the document failed to express accurately was an intention as to the content or wording of the document, not an intention as to the effect which the document should achieve. In this case (leaving aside for the purpose of this issue the distinction between the grantor and the signatory of a document), the only averments which the pursuers made bore on what Mr Bruce intended the document to achieve. There was nothing in the pursuers' averments to suggest that Mr Bruce had intended that the Bass charge should be expressed otherwise than it in fact was. If the document was expressed as Mr Bruce intended it to be expressed, it could not be said that it had failed accurately to express his intention.

[17] Mr Gallagher recognised that his submission might be seen as contrary to the thrust of what was said by Lord Penrose in Norwich Union Life Insurance Society v Tanap Investments VK Limited (in liquidation) (No. 2) 1999 SLT 204. The documents which the pursuers in that case sought to have rectified were minutes of agreement relating to the second and third tranches of a loan. A standard security in the pursuers' favour had been expressed as securing sums advanced under an original minute of agreement and any variation and extension of it. Following the borrower's insolvency, the minutes of agreement relating to the second and third tranches were held not to be variations or extensions of the original minute of agreement. In these circumstances the pursuers sought rectification of the second and third minutes of agreement in a manner which would characterise them as such variations and extensions. It was argued inter alia that rectification was incompetent because what was sought did not attempt to alter the obligations of parties, or correct the expression of their rights and duties. In allowing a proof before answer, Lord Penrose said inter alia:

"In my view there is no warrant for a 'technical' construction of the expression 'error of expression' on which to erect a system of restrictions of the scope of [section 8(1)]" (at 211L);

"There is no basis for a priori definition of the extent of amendment which may be resorted to in the rectification of the document" (at 212B); and

"... it would only be in the clearest case that one could say in advance of proof that the scale or scope and character of amendments proposed went beyond the discretionary power of the court" (at 212C-D).

Mr Gallagher submitted, however, that Lord Penrose had not addressed the distinction which the present pursuers seek to draw between error in the terms of the document and error as to its effect. He took issue with what Lord Penrose said at 211L about there being no technical construction of "error of expression". He cited a passage from the speech of Lord Reid in Anderson v Lambie 1954 SC (HL) 43 at 57:

"In my judgment, if two parties both intend their contract to deal with one thing and by mistake the contract or conveyance is so written out that it deals with another, then as a general rule the written document cannot stand if either party attacks it. ...

I wish to make it clear at the outset that I regard cases of this kind as essentially different from cases where the question at issue is the meaning of the words in the deed; where the words are those which the parties agreed to put in but the court attaches to those words a meaning other than that which the parties or one of them intended. In that case the parties are held to their words; it is for the court to construe the document and determine the meaning of those words".

Mr Gallagher's submission, as I understood him, was that that distinction was preserved in the scope of section 8(1)(b) - the power to rectify was not available when the words of the document were the words which the grantor had intended to use, even if those intended words, properly construed, did not achieve the effect that the grantor thought that they would achieve and intended that they should achieve.

[18] Mr Gallagher also recognised that his argument might be seen as being contrary to the approach of Lord President Hope in Bank of Scotland v Graham's Trustee 1993 SLT 252, where his Lordship said (at 255B-D):

"We think that it would be unwise to attempt to define all the circumstances to which the power of rectification under section 8(1)(b) can apply. The only express limitations which the provision contains are that it must be related to the intention of the grantor of the document at the time when it was executed and that it is in order to express accurately that intention that the power is available to be exercised. The phrase 'express accurately' can cover a range of inaccuracies from errors of expression on the one hand to errors of omission on the other. Ambiguities may be corrected, and so also may more substantial defects such as errors in the expression of the grantor's intention in the dispositive clause of the deed which, if uncorrected, might leave intended grantees without the rights which the grantor intended to confer. ... A case of defective form filling falls naturally within the range of these inaccuracies, so long as the court is not being asked to supply signatures which are not there at all or to cure other defects of such a fundamental kind that the deed cannot be said to have been executed at all. The intention of the grantor at the date when the deed was executed is a matter for evidence, and it is to all relevant evidence whether written or oral that the court may have regard."

[19] Mr Gallagher also sought to support his submission by reference to the Scottish Law Commission's Report on Rectification of Contractual and Other Documents. In paragraph 2.1 the term adopted to denote the problem under consideration was "defective expression", and the point was made that:

"What we are concerned with is not an error in contractual understanding but simply a defect in the written expression of an agreement which has already been concluded."

Reference was also made to paragraphs 2.2 to 2.4 and 2.11, where the distinction between defective expression and contractual error is reiterated, and to paragraphs 3.6 to 3.10, which deal with rectification of unilateral documents. Mr Gallagher also made reference to the discussion of various types of error in Gloag on Contract, 435-456. He submitted that it would be a very substantial and unjustified innovation upon the law of contract to hold that section 8(1)(a) entitled a contracting party, where a contract had been entered into in agreed terms but under a shared misapprehension as to the effect of a contract so expressed, to ask the court to change it to permit it, contrary to the legal effect of the language which the parties had agreed to use, to have the effect they intended it to have. Correspondingly, under section 8(1)(b) it should not be open to a party to argue that a document, expressed exactly as the grantor intended it to be expressed, should be rectified so as to achieve a different effect because the grantor misapprehended the effect of the words he had intentionally used.

[20] Mr Brodie for the pursuers submitted that the construction of section 8(1)(b) contended for by Mr Gallagher was much too restrictive. It was contrary to the broad approach to the construction of section 8(1) adopted by Lord Penrose in Norwich Union v Tanap and by Lord President Hope in Graham's Trustee. The correct approach was to be found in the language of section 8(1)(b). It was concerned with documents which were "intended to create, transfer, vary or renounce a right". The intention in question was thus an intention to bring about a particular legal result. What the subsection accordingly did was invite comparison between the intended legal effect, and the legal effect of the language actually used in the document. If the language actually used did not bring about the intended legal result, it failed to "express accurately" the intention of the grantor, and the way was open (subject to the court's discretion) for rectification to be granted.

[21] In my opinion, in this respect Bass's attack on the relevancy of the pursuers' case fails. It is true that the only averments about the grantor's intention that the pursuers make relate to the legal effect or result that Bass (in the person of Mr Bruce) intended that the Bass consent should have. The thrust of the pursuers' case is that Mr Bruce was, at the time when the Bass consent was granted, labouring under the misapprehension that that consent, expressed as it was, would have the effect of enabling the company to grant in the pursuers' favour a standard security over the subjects which would rank prior to the Bass charge. There are no averments to suggest that the language in which the Bass consent was expressed was, in any respect, other than Mr Bruce intended that it should be. Mr Gallagher was, however, in my opinion wrong in submitting that rectification under section 8(1)(b) is not available where the language used in the document is the language that the grantor intended to use.

[22] The issue raised by Mr Gallagher is one of the proper construction of section 8(1)(b). The resolution of that issue ought in my view to be sought in the first instance in the language of the provision. It seems to me that it is plain that the sub-section directs the court to consider first what the grantor intended by way of the creation, transfer, variation or renunciation of rights. That is, in my view, concerned with the substance of what the grantor intended to achieve as well as the form of the document by which he intended to achieve it. The natural form of the answer to the question to which the provision invites attention is that the grantor intended to bring about a particular legal result rather than that he intended to grant a document expressed in particular words. Once the content of the grantor's intention has been identified, attention turns to the document as actually expressed, and the question that must be addressed is whether it expresses accurately the intention already identified. That question can in my view be paraphrased by asking whether the legal effect of language actually used in the deed to express the grantor's intention is to achieve the result that the grantor intended to bring about. To exclude rectification where the language used is the language that the grantor intended to use but the legal result is different from the legal result that the grantor intended to achieve would reduce the role of the remedy to little more than the correction of clerical errors. There is, in my view, no reason in the language of the provision to read it in such a narrow way. Section 8(1)(b) no doubt covers cases where there is a discrepancy between the language used in the document and the language that the grantor intended to use, although I doubt whether rectification would be granted if the discrepancy in language did not produce a difference in legal effect. In my opinion, however, it also covers cases where the language used is precisely the language that the grantor intended to use, but that language does not bring about the legal result that the grantor intended to achieve thereby.

[23] I do not consider that there is anything in the pre-existing law cited by Mr Gallagher, or in the Report of the Scottish Law Commission, that excludes the construction of section 8(1)(c) that I prefer. It seems to me that that construction is in accordance with the approach adopted by Lord President Hope in Graham's Trustee and by Lord Penrose in Norwich Union v Tanap. (The decision on the reclaiming motion in Norwich Union v Tanap became available after I had made avizandum, but it does not appear that the point was argued in the same form in the Inner House: see the opinion of the Extra Division, 26 May 2000).

[24] I am therefore of opinion that the pursuers' pleadings are not irrelevant for want of averments to the effect that the grantor of the Bass consent did not intend it to be expressed in the language in which it was expressed. Nor, in my opinion, are the averments which seek to identify the grantor's intention by reference to the legal result sought to be achieved irrelevant to the claim for rectification. In my view the pursuers' averments designed to support the inference that the grantor of the Bass consent intended thereby to grant consent to the creation of a standard security in favour of the pursuers which would rank in priority to the Bass charge, when taken with the averments that that was not the effect of the Bass consent granted in the terms in which it was, constitute a case for rectification under section 8(1)(b) that is relevant for inquiry.

The Intention of the Grantor

[25] The second submission for Bass was that to make a relevant case for rectification under section 8(1)(b) the pursuers required to make averments about the intention of the grantor, that is of Bass. It was not sufficient to make averments confined to the intention of the signatory, Mr Bruce. The basis for that submission was a passage in the speech of Lord Clyde in Bank of Scotland v Brunswick Developments (1987) Limited 1999 SC (HL) 53 at 58A-D, where his Lordship concluded that for the purpose of section 8(1)(b) the grantor of a document is the principal, not the signatory, where these are not the same person. Here the pursuers make averments that identify Mr Bruce as the signatory of the Bass consent, and averments that bear upon his belief, at the date of execution, as to the effect of the document. There are no averments about the intention of Bass in relation to the Bass consent. Nor are there any averments identifying who made the decision to grant the Bass consent. There was no legitimate basis in the pursuers' averments for imputing to Bass the view allegedly held by Mr Bruce as to the effect of the consent. It was accepted by Mr Gallagher that Mr Bruce had authority to sign the Bass consent on Bass's behalf, and that the extent of his authority was such that he would have been able to sign a document which truly did have the effect on the ranking of the BI security and the Bass charge inter se that he thought the Bass consent would have. It was submitted, however, that nothing had been averred to indicate that Mr Bruce had power to make on Bass's behalf the decision that a consent to that effect should be granted by Bass. There were thus no relevant averments as to the intention of the grantor of the Bass consent.

[26] Mr Brodie submitted that since a company can act only through the medium of its authorised officers, and since it was a matter of concession that Mr Bruce had authority which extended both to execution of the document that he actually executed and to execution of a document having the effect that he believed the actual document would have, the averments about Mr Bruce's belief as to the effect of the Bass consent relevantly supported the inference that Bass intended it to have that effect. In the absence of express averments by Bass drawing a distinction between authority to execute a document and authority to decide that that document should be executed, the assumption could legitimately be made that there was no such distinction. The inference that Bass intended the Bass consent to have the effect of enabling the company to grant a first ranking standard security in favour of the pursuers could legitimately be drawn from the averments that Mr Bruce, who was authorised to execute such documents on behalf of Bass, entertained at the time when he executed the Bass consent the belief that such would be its effect.

[27] In my opinion Bass's submissions on this aspect of the case are not well founded. There seem to me to be two related but separable aspects of the matter. The first is whether there are relevant averments from which it may be inferred that Mr Bruce intended that the Bass consent should have the effect of enabling the company to grant in favour of the pursuers a standard security ranking prior to the Bass charge. The second is whether, if so, those averments are relevant averments of the intention of Bass.

[28] In my opinion the pursuers' averments afford a relevant basis for the inference that Mr Bruce intended that the Bass consent be a consent to a prior ranking security. There are averments that it was his belief that, expressed as it was, it would have that effect. Where a person grants a document knowing that it will have a particular effect, it is in my view generally legitimate to infer that he intended it to have that effect. There is, in my view, no distinction between a case where the grantor knows that the document will have a particular effect and a case where he mistakenly believes that it will have that effect. The inference that he intended it to have that effect is equally legitimate in the latter case. In the present case the inference that Mr Bruce intended the Bass consent to have the effect of permitting the granting of a prior ranking security may also derive support from the pursuers' averments (a) that the belief that such a document would have that effect was consistent with commercial practice and understanding at the time, (b) that having regard to the nature of the transaction it would have made no commercial sense for the pursuers to make funds available to the company for the purchase of the subjects unless they were to obtain a prior ranking security, and (c) that the Bass consent would have been otiose if its effect had not been to consent to a prior ranking security. In all the circumstances, therefore, I am satisfied that the pursuers have made relevant averments that Mr Bruce intended the Bass consent to open the way for the grant by the company of a prior ranking security in favour of the pursuers.

[29] I am also of opinion that the averments about Mr Bruce's intention are, in the circumstances of this case, relevant averments of the grantor's intention. I accept, of course, the distinction between the grantor of a document and its signatory drawn by Lord Clyde in Bank of Scotland v Brunswick Developments. That distinction was of particular importance in the somewhat unusual circumstances of that case. In the present case, the grantor of the Bass consent was Bass, not Mr Bruce. But a limited company acts through its authorised officers. There are no doubt circumstances in which, to make averments about the intention of the company, it would be necessary to make averments relating to the intention of the board of directors. But where a company has delegated authority to an officer to effect certain acts on its behalf, and the officer effects such an act in accordance with his authority, his intention in doing so may in my view be regarded as the intention of the company. In the present case, the pursuers aver that Bass granted the Bass consent and that it was executed on their behalf by Mr Bruce. It is implicit in those averments that Mr Bruce's execution of the Bass consent was a valid execution on behalf of Bass, and was therefore within authority delegated to him. In that situation, in the absence of any challenge by Bass to Mr Bruce's authority to execute the Bass consent, the pursuers are in my view entitled to proceed with their averments on the basis that Mr Bruce's intention in executing the Bass consent may be taken to be Bass's intention in granting it. The situation might no doubt be different if Bass disputed Mr Bruce's authority to execute the consent, or maintained that while he had authority to grant the consent in the form in which it was actually expressed, he had no authority to grant consent to a prior ranking security. But Bass make no such suggestion, and Mr Gallagher in the course of the debate expressly accepted that Mr Bruce acted under a power of attorney which authorised him to execute deeds affecting the ranking of securities. Mr Gallagher suggested that authority given to an officer to execute deeds on behalf of a company did not authorise him to decide on the company's behalf that the deeds should be granted. In my view, however, if Mr Bruce's authority were limited in that way, it would be for Bass to say so in averment, and to identify the person by whom the substantive decision to grant the Bass consent was actually taken. They have not done so. In all these circumstances I am of opinion that the pursuer's averments about Mr Bruce's intention at the time of execution of the Bass consent are relevant averments of the intention of the grantor, Bass.

Sections 466 and 410 of the Companies Act 1985

[30] The third branch of Mr Gallagher's submissions was to the effect that the action should be dismissed because it could be seen that the rectification sought, if granted, would achieve no practical purpose. A mere letter of consent, even if it expressly consented to a prior ranking security, could not bring about an alteration of the ranking of the BI security relative to the Bass charge. What was required for that purpose was an instrument of alteration which complied with section 466 of the Companies Act 1985 and was registered in accordance with section 410 of that Act. If it were correct that the rectification would achieve no practical purpose, it would be appropriate for the court, as a matter of discretion, to refuse to grant it. It was for the pursuers to satisfy the court not only that the Bass consent did not accurately express the intention of its grantor, but also that in the circumstances the court should in the exercise of its discretion grant the remedy sought (Bank of Scotland v Brunswick Developments (1987) Limited 1997 SC 226 per Lord President Rodger at 231C-D). Where the defenders put in issue whether the rectification sought would serve any practical purpose, it was for the pursuers to explain in averment how it would do so. The pursuers had not attempted to do that.

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

"(1)	Subject to subsection (2), the instrument creating a floating charge over all or any part of a company's property under section 462 may contain -
	(a)	provisions prohibiting or restricting the creation of any fixed security or any other floating charge having priority over, or ranking pari passu with, the floating charge; ...
(1A)	Where an instrument creating a floating charge contains any such provision as is mentioned in subsection (1)(a), that provision shall be effective to confer priority on the floating charge over any fixed security or floating charge created after the date of the instrument.
(3)	The order of ranking of the floating charge with any other subsisting or future floating charges or fixed securities over all or any part of the company's property is determined in accordance with the provisions of subsections (4) and (5) except where it is determined in accordance with any provision such as is mentioned in paragraph (a) or (b) of subsection (1).
(4)	Subject to the provisions of this section -
	(a)	a fixed security, the right to which has been constituted as a real right before a floating charge has attached to all or any part of the property of the company, has priority of ranking over the floating charge; ..."

[32] Section 466 provides inter alia as follows:

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

[33] Section 410(2), as applied to instruments of alteration by section 466(5), provides inter alia as follows:

"[Every alteration to a floating charge created by a company] is, so far as any security on the company's property or any part of it is conferred by the [alteration], void against the liquidator or administrator or any creditor of the company unless the prescribed particulars of the [alteration], together with a copy (certified in the prescribed manner to be a correct copy) of the instrument (if any) by which the [alteration] is [executed] or evidenced, are delivered to or received by the registrar of companies for registration in the manner required by this Chapter within 21 days after the date of [execution of the alteration]".

Section 420, as so applied, provides as follows:

"The court, on being satisfied that the omission to register [an alteration to a floating charge] within the time required by this Act or that the omission or mis-statement of any particular with respect to any such [alteration] or in a memorandum of satisfaction was accidental, or due to inadvertence or to some other sufficient cause, or is not of a nature to prejudice the position of creditors or shareholders of the company, or that it is on other grounds just and equitable to grant relief, may, on the application of the company or any person interested, and on such terms and conditions as seem to the court just and expedient, order that the time for registration shall be extended or (a the case may be) that the omission or mis-statement shall be rectified."

[34] The effect of the Bass consent (and the RBS consent) in the context of those provisions was the subject of the petition for directions brought by the receivers, to which I have made reference in paragraph [10] above (Griffith and Powdrill v Bass Brewers Limited and Others, Lord Cameron of Lochbroom, 13 November 1998, unreported). The part of Lord Cameron of Lochbroom's opinion dealing with the Bass charge was in the following terms:

"While the provisions of the Bass Charge ... take a different form from those of the Royal Bank Charge, nevertheless I consider that they have the same effect. There is a prohibition from creating subsequent to the execution of the Bass Charge any fixed security having priority over or ranking equally with the Floating Charge. That prohibition constitutes a negative pledge such as is mentioned in paragraph (a) [of section 464(1)], and in terms of sub-section (1A) it is effective to confer priority on the Charge over a fixed security created after the date of the instrument. Counsel for the Bank of Ireland conceded that if the Company created a subsequent fixed security in breach of the prohibition such a fixed security even when constituted as a real right, could not be brought within the order of ranking set out in sub-section (4)(a) [of section 464]. Undertaking B [i.e. the Bass negative pledge] does no more than enable the Company to create a security upon part of its property subsequent to the charge with the written consent of the Company (sic; sc. Bass) in so far as that fixed security does not displace the order of ranking which arises by virtue of the prohibition against creating a fixed security which displaces that order of ranking. Mere written consent to the creation of a subsequent fixed security by the Company cannot carry with it any displacement of the order of ranking which arises by virtue of the terms of sub-section (1A) in an instrument which has been registered in the Register of Charges and which remains unaltered as regards that order by any instrument of alteration in terms of section 466. Accordingly ... I am of opinion that the letter of consent had no effect as regards the ranking of the Bass Charge relative to the Securities in favour of the Bank of Ireland and Argyll Enterprise, and in particular the letter did not have the effect of giving priority to these Securities relative to the Bass Charge. In each Charge the provision contained in it, being a provision such as is mentioned in section 464(1)(a) of the 1985 Act, remained at all times up to the appointment of the petitioners effective to confer priority on the charge over each Security, albeit the order of ranking had been otherwise altered by the Minute of Alteration in September 1996."

[35] In light of those provisions and that decision, Mr Gallagher submitted that the existence of the Bass negative pledge inverted the order of priority that would otherwise have arisen by virtue of section 464(4)(a). Irrespective of whether the Bass consent stood in its original terms or was rectified to the effect sought by the pursuers, the Bass negative pledge subsisted, and by virtue of section 464(1A) ensured that the Bass charge took priority over any subsequently created fixed security, including the BI security. That position could only be altered by an instrument of alteration under section 466. Any such instrument of alteration required to be executed both by the company and Bass as the holder of the charge. The Bass consent, even if rectified as sought, could not constitute such an instrument of alteration. Even if the pursuers could overcome that difficulty, they would then be faced with the further difficulty that the Bass consent (if it was to be treated as an instrument of alteration) had not been registered as required by section 410(2), and was therefore void against any creditor of the company. In response to that further difficulty, the pursuers pointed in their Note of Argument to section 420, but it could not be said that they would succeed in obtaining relief under that provision. Those submissions were, Mr Gallagher maintained, supported by the decision of Lord Cameron of Lochbroom in Griffith and Powdrill. The pursuers, having abandoned their reclaiming motion in that case, must be taken to have acquiesced in that decision.

[36] Mr Brodie did not seek to argue that it was premature for Bass to take the point that the rectified consent would achieve nothing. He submitted, however, that the court should refuse rectification on that basis only if satisfied that there were no circumstances in which the rectified Bass consent could have legal effect in a question between the pursuers and Bass. The pursuers had made the advance to the company for the purchase of the subjects in the belief, shared by Bass, that Bass were agreeable to that advance being secured by a standard security ranking in priority to their charge. The court should in those circumstances be very slow to conclude that, even if the Bass consent were rectified to reflect that understanding, Bass could insist, in a question with the pursuers, on maintaining the priority of their charge. Such a conclusion would allow Bass to derogate from their consent by standing on a technicality.

[37] Mr Brodie further submitted that section 466 came into play only if, in order to achieve priority for the BI security, there required to be an alteration of the Bass charge. He submitted that such alteration was not required. The Bass negative pledge was not in unqualified terms. It did not wholly prohibit the creation of a prior ranking fixed security. The prohibition was subject to an exception in favour of a prior ranking fixed security granted "with the written consent of Bass". The Bass consent, if rectified, would constitute the written consent of Bass to the creation of the BI security as a fixed security ranking in priority to the Bass charge. In these circumstances the creation of the prior ranking BI security involved no contravention of the Bass negative pledge. No alteration to the Bass charge was therefore required in order to release the negative pledge.

[38] Mr Brodie also pointed to the fact that section 466(1) provides that a floating charge "may" be altered by an instrument of alteration thereunder. The language of the provision was thus permissive rather than mandatory. The absence of an instrument of alteration complying with section 466 and registered in accordance with section 410 was accordingly not fatal to the effectiveness of the rectified Bass consent.

[39] So far as section 410 was concerned, Mr Brodie made two points. The first was that the possibility of seeking relief under section 420 was available. The second was that the purpose of registration was to give publicity to the document in question for the protection of third parties (c.f. Sharp v Thomson 1997 SC (HL) 66 per Lord Jauncey of Tullichettle at 69E-G). Bass were not such third parties, and should therefore not be entitled to rely on the lack of registration under section 410.

[40] In my view the crux of the question raised in this aspect of Bass's submissions is whether the Bass consent, if rectified to the effect sought, would nevertheless fail to affect the ranking of the Bass charge and the BI security inter se because an instrument of alteration would be required to affect the ranking. Lord Cameron of Lochbroom's decision in Griffith and Powdrill is, in my view, prima facie support for Bass's contention, but it seems to me that it is necessary to bear in mind that in that case no consideration was given to the situation which would exist if rectification were granted, and the Bass consent expressly bore to give consent to a prior ranking fixed security. Nor, it seems to me, was there advanced before Lord Cameron of Lochbroom the argument presented to me by Mr Brodie and recorded in paragraph [37] above. That argument seems to me to be not without difficulty. Section 464(1)(a) contemplates that a negative pledge may either prohibit or restrict the subsequent creation of prior ranking fixed securities. That, if read alone, might lead one to expect that a negative pledge would confer priority on the floating charge over any subsequent fixed security which was granted (i) in contravention of a prohibition or (ii) otherwise than in accordance with the terms of a restriction. If that were so, an exception in the negative pledge in favour of a fixed security granted subsequently with the consent of the charge holder might be thought to leave open the possibility that such a fixed security might rank in priority to the charge, provided the charge holder gave his written consent to its doing so. No question of an instrument of alteration of the charge would arise in such circumstances, because the fixed security would be granted in accordance with an exception to the restriction imposed by the negative pledge. That reasoning, however, seems to me to be difficult to reconcile with the terms of section 464(1A). That subsection appears to fail to reflect the fact that a negative pledge need not wholly prohibit, but may merely restrict, the subsequent creation of a prior ranking fixed security. It confers priority on the floating charge over any subsequent fixed security, apparently even if the negative pledge imposed merely a restriction rather than a prohibition, and the subsequent fixed security was not within the scope of the restriction. There therefore seems to me to be a potentially difficult question of construction of the effect of section 464(1)(a) and (1A) in the context of a negative pledge imposing only a restriction (qualified by reference to the charge holder's consent) to the creation of subsequent fixed securities. I do not consider that it would be appropriate to seek to decide that question at debate in this process, when it arises not as a substantive issue but as an aspect of the exercise of my discretion under section 8(1)(b), particularly since I have held that the pursuers' averments in support of their claim for rectification are otherwise relevant to go to inquiry.

[41] I do not consider that Mr Brodie was correct in his submission that section 466(1) was merely permissive. The use of the word "may" is entirely explicable by the fact that the subsection is concerned to enact that it is possible for a floating charge to be altered. But it is in my view mandatory as to the manner of effecting such alteration.

[42] The section 410 argument does not seem to me to arise in any practical way. If an instrument of alteration was required, there was none, and it is unnecessary to consider the question of registration. If, on the other hand, Mr Brodie is correct in his argument that there is no need for an instrument of alteration where the negative pledge does not apply because there has been consent to the prior ranking fixed security, it is equally unnecessary to consider registration. I would only add that, if the point did arise, I would not regard Mr Brodie's argument based on the purpose of registration as an adequate answer to the express provision of section 410 that an unregistered alteration is void against any creditor of the company, although if it came to an application for relief under section 420 it might be possible to argue that having regard to the purpose of registration Bass would not be in a strong position to resist the granting of such relief. I express no concluded view on these matters.

[43] In the whole circumstances, I am not persuaded that it would be appropriate for me to dismiss the action at this stage on the basis that the rectification sought, if granted, could have no practical effect.

Result

[44] I shall accordingly allow parties a proof before answer of their respective averments. I shall put the case out By Order for the purpose of determining what further procedure is required in preparation for the proof.