COMPANIES (FLOATING CHARGES) (SCOTLAND) BILL (Hansard, 5 July 1961)

VISCOUNT COLVILLE OF CULROSS
My Lords, I cannot disguise from your Lordships that this is a very complicated and technical Bill. I therefore hope that your Lordships will forgive me if I take a few minutes in explaining it to the House. The Law Reform Committee for Scotland were sometime since given remit to consider the law relating to the restrictions imposed on the constitution of security over moveable property—that is, what we know in England as chattels—and various individual points connected with this problem. They reported in May last year, and this Bill is really no more than a full implementation of the points which they recommended. However, the actual implementation of those recommendations, the putting of them into the form of a Statute, is no mean task, and I am sure that tribute should be paid to my noble friend, the honourable Member for Aberdeenshire, West, for the work that he has done in introducing this Bill into another place and following it through.
The difficulty that this Bill sets about to remedy is partly set out in the second paragraph of the Introduction to the Law Reform Committee's Report. They say: By the law of Scotland it is not possible for a debtor to create in favour of his creditor a real security of corporeal moveables belonging to the debtor, without delivery, or some equivalent delivery. That means to say that if you want to raise money on security of moveable property you have to hand over possession of that property.
Much the same applies in the case of heritable or real property; if you want to raise money on the security of the property, as the law has stood heretofore, you can do it only by two means. If I go into Scottish legal phrase I do so 1435 at this point because it appears in the Bill, and it might be convenient to your Lordships to know what this ruling is at this stage. You can do it in the first place: …by way of an ex facie absolute disposition or assignation qualified by a back letter; Your Lordships will find this model phrase in Clause 8 (1) (c) of the Bill, and it means, in fact, that you sell it to the man from whom you should receive the money, but that all the time, round the backdoor, there is a letter which says he has had it only as security and that you can have it back when you have paid him his money back. Or, alternatively, you can do it by a method called a bond of disposition for security, which is very much the same thing, except that on the sale itself there appears on this document that the sale was for the purpose of security; and there is no need for any backdoor rule. Full details of this goes on a register which is kept in Edinburgh, which is the register of transfer of heritable property, where the details are put down and recorded for everyone to see.
In England, for some time, a company has been able to raise money by means of a device called a floating charge, and I do not think I can do better than read out what the Law Reform Committee define as a floating charge, in another Report. They defined it in these terms: that it was: security over the whole or a specific part of the company's undertaking and assets which shall not preclude the company from selling or otherwise dealing in such assets in the ordinary course of business until the company goes into liquidation when the charge shall crystallise and become fixed security over such of the company's assets as are subject to the charge. Of course, the essence of this is there is no limitation on dealing with raw materials, the stock in trade and the finished products of the company, notwithstanding the fact that they are being used as security for a loan. Of course in Scotland that cannot be done, because if they are security for a loan the possession of them has to be gone into. Equally in the case of heritable or real property security can be raised only be one of these security dispositions, whereas under the English system a floating charge on real property can also be bought and sold without affecting the validity or the value 1436 of the floating charge created on it. So this freedom has not existed in Scotland before.
It is interesting, I think, to note from the Law Reform Committee's Report that it does not exist in America either. But it certainly does exist in England, and has done so for a long time; and it has worked extremely well. I am sure that, apart from anything else, that is a good reason why uniformity should be introduced between the two countries.
But quite apart from that, the lack of this facility in Scotland has had quite remarkable effects. For one thing it has prevented a company which has only a short lease from raising any loan at all, because it has nothing which it can give as security; it has no heritable property. It has also to some degree caused companies which have all their interests and business and land in Scotland to register in England so that they can have a floating charge, which is clearly nonsensical. It has discouraged foreign companies from setting up subsidiaries in Scotland because the lack of this facility has seemed a very grave disadvantage. And in general it has had the effect of hampering Scottish industry in raising the money they badly need for modernisation and progress and enlargement of their business.
With that background, I should like to try to show your Lordships how this Bill puts matters right. The first clause defines the sort of organisation which may raise a floating charge. In England it is only companies, and so it is to be in Scotland. But the meaning of the first subsection of the first clause is that it should not only be registered companies but also companies under charter or set up under a Private Act of Parliament. Then it goes on, in the eighth line on page 1, to explain that it is not only security for future loans that may be raised by means of floating charge but also security for money already owed by the company. Then subsection (2) of Clause 1 describes the floating nature of the charge. It sets out how it is only the property which forms part of the assets of the company at the time of its liquidation which is in any way fettered. Up to such time the property may come and go, may be bought and sold and dealt with in the ordinary course of business without any fetter or limitation whatsoever: it is only on liquidation that any 1437 question of attaching the property comes into prominence.
Then on page 2 that subsection goes on to set out the initial stages of the ranking, the order of precedence in which the floating charge will come if the company should have to go into liquidation. It sets out that someone who has executed diligence (that is, distrained on the property) should have precedence and that a fixed security should also have precedence, and so on. Then there is what seems at first sight to be a most obscure phrase, but the reason for it is this: that having dealt with the ranking of the debts of holders of the fixed securities there must then be some method by which the holder of the floating charge can realise his money. This particular part of subsection (2) has been put in in order to attract Section 61 of the Bankruptcies (Scotland) Act, 1913, as applied by Section 318 of the Companies Act, 1948; so that if it comes to a liquidation the floating charge will count, in the wording of the 1913 Act, as a security, and the holder of it can get his money back from the liquidator in a perfectly proper way. But that phrase does not mean that the floating charge can be considered to be a fixed security for any other purpose. An ordinary fixed security can be dealt with in the market, it can be sold and it can be subject to various other transactions. Not so the floating charge, which is only a fixed security for this one purpose of liquidation; it cannot be realised in any other way than on liquidation.
The proviso sets out the debts that must always be paid first in liquidation, such as taxes, local taxes and employees' wages. They, of course, will come before the debts due to the holder of the floating charge. Subsection (3) explains that it is possible for a company, when it grants a floating charge, to leave some of its property out, and if it does so that property is never subject to the floating charge. Clause 2 is really only an explanation of how it is done, and it refers to a typical example of the deed or the instrument which sets up the charge and which your Lordships will find in the First Schedule. But of course it need not necessarily be exactly in that form, provided that it is something like that.
1438 Clause 3 is there to avoid a certain doubt. As I have explained to your Lordships, a floating charge may be created among other things over heritable property which belongs to a company. If so, some people might say that it is not a valid charge if it is not registered as are all other charges on heritable properties in the Register of Sasines, but in order to make quite clear that it is a valid charge this clause has been put in to deal with that matter.
Clause 4 introduces what is the only controversial matter in this Bill. It inserts a new reason into the provision of the Companies Act which sets out the reasons upon which the court can order a winding up to take place. This reason inserted is that the holder of the floating charge considers his security is in jeopardy, and "jeopardy" is defined in the clause. This is done because in England the holder of a floating charge, if he thinks that the affairs of the company in which he is interested are becoming a bit shaky, or there is danger of his losing his money, can ask that a receiver be appointed. The receiver has, in practice, been a competent and businesslike man, and very often he has succeeded in rescuing the company from the fate which seems to be about to befall it and has put it back on the road to prosperity.
However, it has been found in the consideration of this matter by the Scottish Law Reform Committee that the appointment of the receiver in Scotland would not, at any rate at this stage, be a practical possibility. It is no doubt a pity that it should not be so, but the reason why it could not be done is because the powers and duties of a receiver in England are set out not in any Statute but in a mass of Case Law and judicial decision, very largely in the Chancery Division, and the job of trying to codify it and put it into a Statute would at this stage be quite out of proportion. It has been decided—and I may say it was so decided with the support of the Scottish chartered accountants, who were the only people who gave evidence on this—that the receiver (or, in Scotland, judicial factor) should not come into the picture at this stage. In order to give a safeguard to the holder of the floating charge, however, it was decided that if he thought 1439 his money was going to be in jeopardy he could have the effective ground over and above that which is available in England, of going to the court and asking for a winding up and a liquidation. This, it is considered, would give him satisfactory protection if he thinks his money is in danger.
Clause 5 deals with the details of the ranking of the floating charge in the case of liquidation, and the order in which the holder of it is paid. The first subsection provides that certain fixed securities arising by operation of law are safeguarded—they are such things as the security known as the landlord's hypothecs, which is his power and his security over some of the property of the premises, or a maritime hypothecs. Then next will come the fixed security itself, and various methods by which this is going to be achieved are set out in paragraphs (a), (b) and (c).
I would at this point draw your Lordships' attention to the word "prohibited" in paragraph (c) of subsection (2). It has been suggested to me by one of your Lordships that the word "prohibited" should be in the present and not in the past tense. I think this is not so, because at the stage at which it will be considered the wording of the instrument which set up the floating charge would have been arranged some time before; so I think it is proper that it should be referred to, in this context, as something that is past and already settled. After the fixed securities come the floating charges themselves, if there are more than one of them, and the arrangements are there set out; and it is nice to see that, in subsection (4), thought has even been given to the possibility of the registration of two floating charges arriving by the same post and what is to be done in those circumstances.
Clause 6 is the introduction to the long provisions of the Second Schedule to this Bill. The Second Schedule is an addition which is being made to the Companies Act, 1948, which, as there were no floating charges in Scotland in 1948, did not deal with the matter at all. But this clause, with its Schedule, puts certain provisions into the Companies Act in order to put this right.
The rest of the Bill is either consequential or a matter of interpretation, and your Lordships will see that there 1440 is little more in the main body of the Bill which I need go into. But I would just explain to your Lordships the Second Schedule, which is really no more than a re-writing of Part III of the Companies Act, 1948, into Scottish language. It sets out the same provisions and the same powers and duties that are now in effect in England, and it says that they should apply to Scotland as well. I would add that it is not only floating charges which are being dealt with by this Schedule, but also other general charges as well, and they will all, for the protection of those who are involved, be registered in a new register in Edinburgh, where everyone who is thinking of lending money to a company will be able to see exactly what liabilities and securities have already been raised on the assets of that company.
The only thing that does not appear in Part III of the English Act is the new paragraph 106K on the last page of the Bill. This is put in in order to help the Scottish courts to recognise that there may be valid floating charges created in Scotland on property which exists in Scotland but which belongs to a company which is not registered in Scotland—to an English or foreign company. Heretofore, as there have been no floating charges in Scotland at all, the Scottish courts found it very difficult to recognise that such a thing could exist on any other property in Scotland belonging to a foreign company. This clause is put in to help clear that up, and also to provide that the charges on companies' property in Scotland should go into the register as well.
I commend this Bill to your Lordships. I hope that it puts right a defect which is obviously overdue for correction, but certainly it will be most welcome in Scotland and of great benefit. If there are matters in the Bill which I have not satisfactorily explained to your Lordships, I will try to do so; but subject to that, I ask that the Bill should be given a Second Reading. I beg to move that the Bill be now read a second time.

§ LORD STRATHCLYDE
My Lords, I rise only for a moment or two, to say a word in connection with this Bill, because, after the clear, concise, able and 1441 indeed brilliant exposition of the content of the Bill which has been given by my noble friend Lord Colville of Culross, I feel that your Lordships may be under the impression that here is a revolutionary change in the law of Scotland which hitherto has been long out of date. I should like to say in that connection, and particularly in view of my noble friend's closing remark that this Bill will be most welcome in Scotland, that I doubt it to a large extent. It may be welcome in certain quarters; it is certainly not welcome in others.
One of the things that I was told as a young accountant was that one of the great advantages of the law of Scotland over the law of England was that you could not have a floating charge, which we regarded, and which I still regard, as an unfair method of getting a preference in the case of liquidation. After all, my noble friend has said that you can secure a prior debt by this means. You may have two creditors, both of them supporting a debtor, one of them to a greater extent than the other. But the other man may discover that the debtor is weak, and may give him some small advance to secure a floating charge for the whole of his debt to the prejudice of the other creditors of the company.
I am not at all satisfied that this is a good move. It is a further sign of Scotland getting more and more akin to England—in many respects not a bad thing, but in some quite a bad thing. I think that this is one of the bad things. After all, the law of Scotland is the law of Scotland. It should remain the law of Scotland, and not be dragged into the law of England. That is my submission on this matter. Again I assure your Lordships that this Bill is not altogether welcome in Scotland. Indeed, the Scottish Chartered Accountants agreed to the Bill only after much heart-searching.

§ LORD CRAIGTON
My Lords, I, too, listened with admiration to my noble friend expounding so lucidly this complicated Bill with its simple purpose. I congratulate my noble friend and the honourable Member for West Aberdeen in another place for having so quickly given effect to the Law Reform Committee for Scotland's recommendation: 1442 after all, the recommendation was made only a year ago, and here we have already a Bill under discussion. The Bill is welcomed by the Government. It has been welcomed by all political Parties and, according to my information, by all the learned and commercial interests in Scotland who will be concerned in its operation. I am sorry to hear my noble friend Lord Strathclyde denigrate the Bill. I can assure your Lordships that his is the first unwelcoming voice that I have heard in regard to the Bill.
At this time, when the Government are actively concerned with every facet of our economic expansion in Scotland, this Bill is, in our view, especially valuable. It removes, as my noble friend said, a legal obstacle which we believe has unfairly penalised Scottish industry, particularly the smaller firms on whom we rely so much. The sincerity of our welcome is underlined by the fact that my right honourable and learned friend the Lord Advocate has readily given assistance in getting the measure through in its present form. I commend the Bill to your Lordships.

§ THE EARL OF LUCAN
My Lords, I should like to apologise to the noble Viscount and to your Lordships for the fact that my noble friends on this side of the House who are qualified to speak and to comment on this Bill are unavoidably absent. I have, however, been told by them—I say this without any intention of driving a wedge between different parts of Scotland—that there is nothing that we should wish to object to in this Bill. We regard it as an excellent Bill.

VISCOUNT COLVILLE OF CULROSS
My Lords, for two welcomes, at any rate, I am very grateful to your Lordships. It is good news to me to hear from the noble Earl, Lord Lucan, that he and his colleagues on that side of the House welcome this Bill. Of course, I am very grateful to my noble friend Lord Craigton for the support and help that he and the Government have given on this matter.
I would say only this to my noble friend Lord Strathclyde: that if I thought this Bill was going to prejudice someone who had lent money to the company by the later creation of a floating charge 1443 I also should be concerned that this should be put right. However, I do not altogether believe that this is so, because there is written into the provisions of this Bill one particular requirement: that if a floating charge is raised on the assets of a company twelve months or less from the date of its going into liquidation, that charge shall not be valid at all unless it can be shown that, after the date on which it was created, the company was still solvent. Therefore it seems to me that anybody who is lending money to a company after it declares it has become insolvent, and at a stage when the floating charge itself might become invalid, is perhaps not acting with the best business acumen. Therefore, I hope that the fears which my noble friend has propounded will not prove to be well founded at all. With that, I thank your Lordships for the welcome to this Bill.