Talk at launch of Floating Charges in Scotland : new perspectives and current issues (eds Hardman and MacPherson) (EUP)

This is the full text of a talk I gave at Old College last night at the launch of Floating CHarges in Scotland. The book is excellent and should be of interest in Scotland and beyond (for some reasons which I tried to explain) https://edinburghuniversitypress.com/book-floating-charges-in-scotland.html

It is a pleasure to have been invited to speak in relation to this excellent new book, Floating Charges in Scotland: new perspectives and current issues. It is perhaps surprising that some 60 years after the floating charge was introduced in Scotland that this is the first sustained textbook solely on the floating charge. And the system as a whole should be hugely grateful to Alisdair MacPherson and Jonny Hardman and the team of distinguished contributors for bringing this together.

There have been earlier valuable texts of course. The charge was subject of a PhD thesis by the late Professor Robert Rennie. I had the huge pleasure of supervising Alisdair’s PhD on the attachment of floating charges, subsequently published in the Edinburgh studies in Scots law series. And there has been analysis of the charge in books on company law or on corporate insolvency by distinguished names among others Lord Drummond Young, Greene and Fletcher, David Bennett. There have been law reform projects from the Scottish Law Commission dealing with floating charges and their enforcement.

And there has been a plethora of academic and practitioner commentary in Scottish law journals for over a century. Professor Gretton in his chapter details the various articles written on the floating charge from 1961 onwards. But there was earlier commentary as Dr MacPherson notes. An interesting two part article by AJP Menzies, best known for his work on trusts, in 1909–10 considered whether it was competent to grant floating charges in Scotland. The following year a further article by Burns suggested practitioners were already being asked to consider whether Scottish companies could grant floating charges.

And while there was little additional literature on floating charges in Scots law until 1960 when the Law Reform committee for Scotland had made its recommendation that the floating charge be introduced since then there have been regular articles by academic and practitioners. Initially, they attempted to explain the legislation. Later, attempting to explain some of the case law attempting to deal with the legislation. And in this period from the 1980s on there were as part of the analysis of case law articles trying to conceptualise the floating charge, to in a Dworkinian sense fit it into Scots law and draw comparisons with other systems — often written with the defining characteristics of Grettonian rhetoric where the views of the author were carefully disguised behind questions such as “what went wrong with floating charges?” and “should floating charges and receivership be abolished?”. In addition there were articles exploring the legislative history of the floating charge — especially noteworthy being Professor Jack’s article on the coming of the floating charge into Scotland in 1987. And of course commentary on floating charges touched its zenith in 1994 through to 1998 as the case that launched a thousand quips Sharp v Thomson case worked its way from Outer House to the House of Lords and showed how perceptive Professor Wilson had been in his initial 1961 commentary on the Companies (Floating Charges) (Scotland) Act 1961.

The compendious literature Professor Gretton cites is unsurprising. Since its introduction the floating charge has always been a subject which has merited serious academic study.

Scots law had been more roman than the romans. Its system of rights in security did not allow express non-possessory securities over moveable property in any form, unlike roman law. The risks were summarised by Erskine

“the impignoration of moveable goods without their delivery to the creditor cannot but prove a heavy weight on the free currency of trade, it being impracticable to keep a record of moveables, by which purchasers may be ascertained of their danger.”

But while systems based on roman law became more liberal Scotland did not. And the contrast for businesses which were based in Scotland and those based in England trading in the same wider UK market were marked.

Scottish businesses appeared to be at a disadvantage financially, less able to raise money through borrowing than English companies. This position was disputed for some time, suggestions made that it was not clear if there had been any empirical evidence available to support the proposition. This book addresses that concern though. Dr MacPherson has shown that empirical work was done to demonstrate Scottish business was at a disadvantage and so there was a drive to introduce the most momentous commercial law reform affecting Scotland in the twentieth century — the introduction of a new non-possessory security.

But where did they turn for the solution?

They looked at England where the courts and practitioners had developed a security device granted by companies, covering the entire asset base of the company. A security device where trading could continue without purchasers having to worry about being subject to a residual security right remaining an encumbrance on the property they had acquired.

They turned to the floating charge.

It was in the expression of Alan Watson a legal transplant, a concept and doctrine lifted from one system and put into another. In this case a concept from a common law system lifted and placed into a mixed system, with an anglo-american model of corporations and a civilian system of property. When the law reform committee for Scotland was considering its introduction it was aware of the potential issues of a common law transplant into a romanist system. In attempting to assuage concern TB Smith invoked a general hypothec discussed by Scaevola (in one isolated passage in the digest) as sufficient solace that the floating charge was not out of keeping with roman property law principles as a non-possessory security over trading stock where third party purchasers were unaffected and unencumbered by the security. But to fit with scottish civilian principles the security would need to be publicised. Erskine’s concern needed to be addressed. There would not need to be a register of moveables but if the grant of the security was limited to the principal business debtor, the company, one where registration was already part of the process of incorporation and administration registration against the person not against the property publicity could be achieved to notify those dealing with the company.

The history is traced in brilliantly researched material from Dr MacPherson.

But even this brief potted summary of the background gives you a sense as to why the floating charge is a great topic for research and analysis. The floating charge is a concept that lies in its creation, application, and enforcement, at the intersection of various areas of law.

It is part of the law of property. A right in security. A right in assets owned by others. It interacts with the law of transfer of ownership — as we saw in Sharp v Thomson. It is a security which covers all property types — an effective security over incorporeal property (which as Lord Drummond Young notes is such a large part of business patrimony today) and over corporeal property. It covers moveables and it covers immoveables.

As a security it ranks alongside other creditors — not just those holding rights in security but third parties including prospective purchasers or beneficiaries in trusts or third party creditors doing diligence. The ranking questions are dealt with in complex legislative provisions — which (as we reassure students in lectures) repay careful study by which we mean — you will sweat over these before understanding them. I remember sitting in a commercial law honours examination set by Professor Gretton where one question simply read

Companies Act 1985, s 464. Discuss.

We had an hour to answer that.

The provisions are considered in various cases. Sometimes the courts got it wrong (as in Lord Advocate v Royal Bank of Scotland in the context of ranking of arrestments and floating charges or Cumbernauld Development Corporation v Mustone with questions involving the landlord’s hypothec and the floating charge). Sometimes the courts got it right as in Grampian Regional Council v Drill Stem (disagreeing with Mustone) or MacMillan v T Leith Developments Ltd (Overturning Lord Advocate v Royal Bank). Sometimes there are questions the courts have not yet had the opportunity to grapple with. For example whether preferential creditors rank above a floating charge with a negative pledge clause and above those who have securities granted after the floating charge.

And ranking leads you on to insolvency — where the role of the floating charge in giving a priority in the distribution of an estate in insolvency has been tempered by policy developments to protect unsecured creditors with a prescribed part.

The charge is a crucial part of insolvency. The changes to corporate rescue in the UK in 2003 preserved a special place for the floating charge holder — through having an effective veto in certain situations

The floating charge is part of the law of obligations too. It usually secures a debt, a contract of loan or some other form of borrowing from the creditor to the granter company. And the terms of that loan agreement can determine the enforcement of the charge. The agreement between the parties can also have ranking implications. Contractual agreement between debtor and creditor through creation of a negative pledge clause can replace the default rules of ranking (which it then transpires are rarely used in reality).

And the floating charge is part of the law of persons. This proposition is possibly more difficult to justify but familiarity with the law of persons is require to identify who can grant the floating charge, certain relationships from the law of persons can determine potential challenges to the validity of the floating charge, but it is notable that in early cross border floating charge cases the charge was not characterised as a proprietary instrument — something where the situs of the property mattered (and where Scots law has taken a hard line more civilian in approach by assessing current enforceability of a right in security as well as its initial validity). Instead, the floating charge was viewed (as Professor Riz Mokal described years later in his PhD on corporate insolvency) as a management displacement device. It was part of the law of persons in international private law terms. An English company with an English floating charge had effective extra territorial effect in Scotland in the 1930s through the power to appoint a receiver.

But for any academic in Scots law as well as this interface of the areas of private and commercial law the floating charge is a subject whose introduction and the manner of introduction itself is of interest and worthy of study.

And many of these issues are addressed in this book. Some of them are addressed in print for the first time — sometimes after long and detailed discussions in seminar rooms or supervisions rooms.

And throughout the book (and some of the recent literature on floating charges including the excellent Scots Law Times two parter by DP Sellar earlier this year) there is one topic which permeates all areas — but which does not get specific study.

The floating charge is a purely statutory creation. It is a statutory creation unusual in origin. How many other pieces of legislation of such importance began life as a private member’s bill? For scots law at Westminster possibly more than might be thought desirable. But never mind that how many other pieces of legislation used day to day and of such economic importance started life as ten minute rule bill? A parliamentary procedure designed to raise awareness of topics, initiated by Forbes Hendry using a procedure where legislation rarely if ever gets further debate, let alone makes it to the statute book.

Floating charge legislation is a wonderful hunting ground for curiosities, to explore and elucidate principles of statutory interpretation.

This is a piece of legislation where there is an extensive legislative history which is publicly available. There is background law reform commission work and parliamentary debates. And these parliamentary debates are useful (and can as Lord Drummond Young noted in MacMillan contribute to determining the meaning of the legislation within the Pepper v Hart rule). Specific questions are asked as to how provisions would work. And specific answers detailing how the legislation is meant to work are given.

And as a purely statutory creation it is not (as suggested erroneously by the first division in Forth and Clyde) a code complete in itself — but as a transplant what you have is a legislative regime which interacts with, which dovetails with and draws on the common law and common law principles, where specific provisions expressly refer to the common law (what Wilson called the statutory hypothesis where a charge attaches “as if” a fixed security), and other provisions depend for their meaning on other legislation in related areas. For example, MacMillan confirmed that the expression effectually executed diligence is understood by reference to effectual execution of diligence in what is now s 24 of the Bankruptcy (Scotland) Act 2016.

The legislation has been re-enacted various times since 1961 and so the familiar Barras principle (as to whether parliament is deemed to endorse earlier legislative interpretation by courts, no matter how low or how hight the court ) can be considered for many areas.

And the legislation has curiosities which give those of us with an interest in statutory interpretation a fluttering heart. The floating charge legislation is one of the few apparently working models of hendiadys that does not rely on something being fair and reasonable.

The legislation provides frameworks and answers that some commentators do not like, but which have somehow continued to operate effectively in practice for over 60 years. Maybe as Professor Jack Halliday noted not only judges are no daft, but practitioners are no daft either.

Each of these issues is sufficient in itself to merit academic interest and comment. Some have been discussed. Some have been discussed in great detail. But some have not. Until now.

What is surprising is that this book is the first serious systematic book on the floating charge in Scotland. As noted in Lord Drummond Young’s foreword this book does many firsts. But its most important is in existing. The first systematic book in the area in scotland. There is a cast of stars among the contributors and two industrious and learned editors. This is a fantastic book. We working in the scottish legal system are very lucky to have it.