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Inner House overrules 40 year old authority on “effectually executed diligence”

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Inner House overrules 40 year old authority on “effectually executed diligence”


21 March 2017

The interaction between diligence and floating charges has been the subject of significant debate since receivership was introduced to the law of Scotland in 1972. The legislation provides that the rights of the receiver are subject to the rights of a creditor who has “effectually executed diligence” on the property of the Company. In the case of Lord Advocate v Royal Bank of Scotland 1977 SC 155, the Inner House determined that an arrestment, not followed by furthcoming, was not an effectually executed diligence. This case has generally been interpreted as entitling a receiver to deal with the assets of a company without reference to diligence undertaken after the execution of the floating charge.

In the case of MacMillan v T Leith Developments Limited (In receivership and liquidation) [2017] CSIH 23 the Court required to consider the rights of an inhibiting creditor in a receivership.  The inhibition was executed prior to the enactment of the Bankruptcy and Diligence (Scotland) Act 2007 (the “2007 Act). It was granted after the execution of the floating charge. However, the sums due by the debtor to the holder of the floating charge were all incurred after the registration of the inhibition.

A bench of five judges was convened in order to reconsider the decision in Lord Advocate v Royal Bank of Scotland.  The Lord President concluded that the words “effectually executed diligence” required to be given their ordinary, legal meaning. This meant diligence which had proceeded upon a proper warrant, had been validly executed and had not been struck down by a subsequent liquidation.  He therefore concluded that the case of Lord Advocate v Royal Bank of Scotland had been wrongly decided.  Having reached this decision, the Inner House considered whether or not it was appropriate to overrule the decision in Lord Advocate v Royal Bank of Scotland where: (i) the statutory provision had been re-enacted by Parliament; and (ii) the decision had represented the law for a period of almost 40 years.  The Inner House was not persuaded that either of those grounds would make it inappropriate to overrule the decision. The Lord President stated that “It would be odd indeed if this court considered that Lord Advocate had been wrongly decided as a matter of law, but declined to overrule it because of subsequent practice”.

In consequence, the Inner House found that the inhibition was an effectually executed diligence and so ranked ahead of the floating charge.

Kenny McBrearty QC and Elisabeth Roxburgh of Axiom Advocates appeared for the pursuer and respondent.

http://www.scotcourts.gov.uk/search-judgments/judgment?id=fdb12ca7-8980-69d2-b500-ff0000d74aa7