Scottish Court of Session Decisions

This action came before me on the motion roll on 24 August 2000. The motion as enrolled was in the following terms:-

Despite the terms of the motion it was clear that it had been enrolled at the instance of the liquidator of the defenders who were wound up by virtue of a interlocutor pronounced by the sheriff at Glasgow on 21 March 2000. A copy of that interlocutor is produced in 6/1 of process.

Opposition to the motion was enrolled by the pursuers "on the basis that it is incompetent, the defenders being in liquidation and the Liquidator not having sisted himself as a party to the action and in any event on the basis that there is no justification for recall of the Arrestments which provide proper security for the pursuer's claim". Despite the terms of that opposition, Mr MacLeod conceded at the motion roll hearing that the motion on behalf of the liquidator was competent and he confined his opposition to the issue of whether the arrestments should be recalled.

In moving the motion counsel for the liquidator gave a history of events. On 5 November 1999 the summons in the present action was signetted. The action was one of payment of Value Added Tax assessed to be due by the defenders to H.M. Customs and Excise. The action was sisted on 9 November 1999. Counsel asserted that the reason for the sist was to enable the defenders to lodge an appeal against the assessments which formed the basis of the action. However the pursuer's solicitor later advised me that no such appeal had been lodged and the reasons for the pursuer agreeing to the sist was that criminal proceedings were likely in respect of the returns which had been made on behalf of the company. Counsel for the liquidator also advised me that arrestments on the dependence of the action were served on 9 November and 10 December 1999. On 21 March 2000 the defenders were wound up by the court and the only assets of the defenders were claims which they had against Alfred McAlpine Construction Limited in respect of joinery subcontracts. These claims were the subject of litigation in Glasgow Sheriff Court, as a result of which interim decree for £64,971 had been granted in May 1999 and a further decree for £45,000 had been granted on 29 November 1999. The interim decree granted in May 1999 had been granted following a preliminary proof and there had been an appeal to the Second Division in respect of that decree. That appeal had been refused and the action was due to recommence in Glasgow Sheriff Court. There was a total sum now outstanding of £545,000. The liquidator had taken the view that the outstanding claim was well-founded and should be pursued but the only way in which he could pursue this claim was by using the funding which would result from his receiving the sums awarded by the sheriff. These sums were currently attached by virtue of the arrestments. Incidentally, this narrative would appear to be at variance with the minute of the meeting of creditors held on Thursday 20 April (6/2 of process). My attention was not drawn to this minute in the course of the submissions at the motion roll but in the course of preparing this Opinion I note that it is recorded at page 2 under the third paragraph that a director of the company had made a payment to cover the ongoing costs of the litigation and the liquidation. Even if there is no contradiction between the minute and what I was told, this minute illustrates that there may be other means available to the liquidator to fund the ongoing litigation without the necessity of the court recalling the arrestments.

The basis upon which recall of the arrestments was sought was that they were ineffective in respect that on 19 October 1994 the defenders had granted a floating charge over the whole of their assets to the Governor and Company of the Bank of Scotland. Copies of the relevant documents from the Companies Register are produced as 6/3 to 6/5 inclusive of process.

The submission on behalf of the liquidator was that even although the holder of the floating charge had decided not to appoint a receiver, nevertheless the effect of the liquidation of the company was to crystallise the floating charge as a result of which the arrestments ceased to have effect. Under reference to sections 53(7), 54(6) and 55(3) of the Insolvency Act 1986, Lord Advocate v Royal Bank of Scotland Limited 1997 S.C. 155 and Forth & Clyde Construction Company Limited v Trinity Timber & Plywood Company Limited 1984 S.C. 1, counsel for the liquidator submitted that upon appointment of a receiver arrestments on the dependence of an action ceased to have any effect. He further submitted that as section 463 of the Companies Act 1985 contained similar provisions to sections 53(7), 54(6) and 55(3) of the Insolvency Act 1986 there was no difference in effect between the appointment of a receiver and the appointment of a liquidator. Accordingly where a company had granted a floating charge over its assets, the appointment of a liquidator should be treated in the same way as the appointment of a receiver insofar as the effect upon arrestments on the dependence of an action are concerned. Such arrestments were not effectually executed diligence for the purposes of section 55(3) of the Insolvency Act or section 463 of the Companies Act. The arrestments in this case were ineffective, so the submission went, and the company or rather the liquidator was entitled to have them recalled. The solicitor for the pursuer, explained that he had no quarrel with the submissions of counsel except when counsel sought to equiperate the position of the liquidator with that of the receiver. If a receiver had been appointed, the pursuer would not challenge the recall of the arrestments. However it was submitted that the defenders' position was based upon a misunderstanding as to the effect of section 463 of the Companies Act 1985. That section merely set out the consequences for the holder a floating charge when the company went into liquidation. The effect of liquidation is that the floating charge becomes attached to the assets of the company and, as with the holder of any fixed security in a liquidation, arrestments on the dependence of an action do not dilute the asset over which there is security. Section 463 did not alter the general law and did not have the effect of rendering arrestments ineffective against creditors generally. There was no provision in section 463 for cutting down arrestments generally. After satisfying the debt due to the holder of the floating charge, there may be funds available for other creditors. If that were the case, the effect of recalling the arrestments would be that the pursuer would lose any preference derived from these arrestments.

I considered the competing submissions and concluded that I should refuse the motion. If the Bank of Scotland, as holder of the floating charge, wished to achieve the result which counsel for the defenders sought, their remedy was to appoint a receiver. The Bank had chosen not to follow that course and it is easy to understand such a decision. The appointment of a receiver would not confer upon the Bank any greater right than the appointment of a liquidator. In either event, the Bank is in the position of a creditor holding a fixed security over the assets of the company and by relying upon section 463 of the Companies Act 1985 rather than appointing a receiver the Bank is relieved of any potential expense associated with such an appointment.

In my opinion section 463 is intended to regulate the position of the holder of a floating charge when a company goes into liquidation. In particular it confers upon him the rights of the holder of a fixed security and thereby determines the preference to which he is entitled as against other creditors of the company. His fixed security is subject to the rights of the creditors specified in section 463(1)(a), (b) and (c) which do not apply in the present case. Section 463 is restricted to the consequences of liquidation for the holder of a floating charge. It does not otherwise affect the law of insolvency and, in particular, does not alter the effect of insolvency on diligence. Section 185 of the Companies Act 1986 applies inter alia certain subsections of section 37 of the Bankruptcy (Scotland) Act 1985 with certain modifications. The effect of section 37(1) of that Act as modified is that the winding up of the company is the equivalent of an arrestment in execution and decree of furthcoming. Section 37(4) as modified precludes arrestments within the period of sixty days before the commencement of the winding up from creating a preference for the arrester and requires the arrested estate to be handed over to the liquidator. The arrestments in the present case predated the winding up by more than sixty days and accordingly the liquidator's right to recover the arrested property is postponed to the right of the pursuer who holds prior arrestments. In this regard I would refer to the case of Commercial Aluminium Windows v Cumbernauld Development Corporation 1987 S.L.T. (Sh. Ct) 91 to which I was not referred but which I consider to be relevant in the context of this motion.

If I were to give effect to the submissions on behalf of the defender, it appeared to me that I would be conferring upon the liquidator a greater right to recover assets of the company than had been conferred by Parliament and I would be infringing a preference which the pursuer had obtained over the liquidator in respect of the arrested funds. In the absence of clear authority justifying such a course, I considered that I was precluded from doing so. Moreover I did not consider that the analogy with the receivers was well-founded. As can be seen from the judgment of the sheriff in Commercial Aluminium Windows v Cumbernauld Development Corporation at pages 91L-92D significant distinctions require to be drawn when comparing liquidations with receiverships insofar as the vesting of property is concerned. I agree with the views expressed in that Opinion.

In refusing the motion I expressed the view that the liquidator could seek funding from creditors to pursue the litigation but I did not appreciate at that time that he may already have done so. Another option for the liquidator would be to provide the pursuer with sufficient alternative security to encourage the pursuer to agree to the release of the rest of the funds. No offer of security was made at the motion roll, probably because the liquidator considered that he was entitled to the recall of arrestments without any such offer. The refusal of the motion does not preclude the liquidator from proceeding with the liquidation.