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Judgments -- Sharp and Others v. Woolwich Building Society

HOUSE OF LORDS

  Lord Browne-Wilkinson   Lord Keith of Kinkel   Lord Jauncey of Tullichettle
  Lord Steyn   Lord Clyde

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE

SHARP AND OTHERS
(RESPONDENTS)

v.


WOOLWICH BUILDING SOCIETY
(APPELLANTS)
(SCOTLAND)

ON 27 FEBRUARY 1997



LORD BROWNE-WILKINSON


My Lords,

          I have read in draft the speeches prepared by my noble and learned friends Lord Jauncey of Tullichettle and Lord Clyde. For the reasons which they give, I would allow the appeal.



LORD KEITH OF KINKEL


My Lords,

          For the reasons set out in the speeches prepared by my noble and learned friends Lord Jauncey of Tullichettle and Lord Clyde, which I have read in draft and with which I agree, I would allow this appeal. The first plea-in- law for the appellants should be sustained and the action dismissed.



LORD JAUNCEY OF TULLICHETTLE


My Lords,

          This appeal raises the question of what is meant by the word property in a floating charge and in section 53(7) of the Insolvency Act 1986 ("the Act of 1986") which provides for the effect of the appointment of a receiver by the holder of such a charge in the following terms:

    "(7) On the appointment of a receiver under this section, the floating charge by virtue of which he was appointed attaches to the property then subject to the charge; and such attachment has effect as if the charge was a fixed security over the property to which it has attached."

The facts may be summarised as follows:

          (1) On 2 July 1984 Albyn Construction Ltd. ("Albyn") granted a floating charge over the whole of its property which might from time to time be "comprised in our property and undertaking". The floating charge was duly registered with the Registrar of Companies.

          (2) Albyn entered into missives with a brother and sister, the Thomsons, for sale of a flat in Aberdeen at a price of £40,000 which was duly paid by the Thomsons having been borrowed from the appellants. Entry was given on 14 April 1989.

          (3) On 9 August 1990 Albyn delivered an executed disposition of the flat to the Thomson's solicitors.

          (4) On 10 August 1990 the respondents were appointed as receivers by the holders of the floating charge.

          (5) On 21 August 1990 the disposition together with a standard security granted by the Thomsons to the appellants were recorded in the general Register of Sasines.

          (6) Thereafter a dispute arose between the respondents on the one hand and the Thomsons and the appellants on the other as to whether the floating charge attached to the flat on 10 August 1990.

          In 1992 the respondents raised an action against the Thomsons and the appellants for a declarator, inter alia, that the floating charge attached to the flat on their appointment as receivers, and that they were entitled to exercise their power to sell it. After a hearing in Procedure Roll the Lord Ordinary granted decree de plano and the First Division adhered. In the course of a carefully reasoned judgment during the course of which he analysed many authorities the Lord President concluded that since in the law of Scotland there could be no fragmentation of the concept of ownership and since property in heritage passed only on recording of the relevant deed in the appropriate register it followed that the property in the flat remained in Albyn at the time when the floating charge attached. Lords Sutherland and Coulsfield expressed similar views.

          Before turning to consider the arguments in more detail I propose to make a few general comments upon the underlying purpose of registration of deeds transferring heritable rights and upon the impact of the introduction of floating charges into the law of Scotland. The Act 1617, cap. 16 which re-enacted prior legislation requiring the registration of certain writings dealing with heritable rights was described by Lord Fullerton giving the judgment of the majority of the whole court in Young v. Leith (1847) 9D 932, 934 as, placing the requirement of registration:

    ". . . on its true ground, viz., the security of persons dealing with the apparent proprietors, against the effect of latent deeds qualifying or limiting their ostensible rights."

Accordingly the purpose of registration is not to strengthen the position of the grantee of a deed against actings on the part of the granter but to enable third parties to deal with a registered proprietor safe in the knowledge that there are no hidden qualifications or impediments in his title. In addition a recorded title is in normal circumstances good against third parties as well as the granter.

          In Carse v. Coppen 1951 S.C. 233 Lord President Cooper observed, at p. 239:

    ". . . that it is clear in principle and amply supported by authority that a floating charge is utterly repugnant to the principles of Scots Law and is not recognised by us as creating a security at all."

           Thus when floating charges were introduced by the Companies (Floating Charges) (Scotland) Act 1961 they were a novel concept in the law of Scotland. They require to be registered after granting but only in the register in the companies office. They may never crystallise. However if they do and thereby attach to heritage it has been generally accepted that they have the immediate effect of a recorded standard security. The result is to create a real right in land which has not been recorded in the appropriate register of heritable rights and which takes precedence over any prior grant of heritable rights which has not already been recorded. This is indeed a significant innovation.

          The appellants accepted that a good feudal title to the flat could only have been acquired by recording Albyn's disposition but they argued that property for the purposes of the floating charge and section 53(7) was not synonymous with a feudal title to heritage. Rather did property in the context of heritage connote the current beneficial interest in the subjects which was capable of lawful disposal. In this case Albyn, by accepting the purchase price and delivering the disposition, ceased to have any beneficial interest in the subjects and could not lawfully intromit therewith in any way. The respondents on the other hand maintained that the property in the flat was at all material times in Albyn, that the delivery of the disposition did no more than carry a defeasible personal right enforceable against the disponers. In the law of Scotland property in heritage was always vested in the holder of the recorded title thereto.

          The argument for the respondents which was accepted by the First Division produces a most inequitable result for the Thomsons and the appellants who have between them paid the full price for the flat and will be left to rank with other creditors in any proceedings to recover what they have paid. Conversely the holders of the floating charge will have available as a fund out of which to satisfy Albyn's indebtedness to them, not only so much of the purchase price as remains in bonis of Albyn but also such sum as they may realise on any sale of the flat. Albyn's property for the purposes of section 53(7) theoretically includes both the purchase price and the flat itself. On any view this would be a most unjust result. However if the undoubted effect of the relevant legislation is to produce such a result injustice cannot stand in the way of a decision in favour of the respondents. It must then be for Parliament, if so advised, to remedy the situation.

          It was accepted by both parties that there were effectively three stages in a completed sale of heritage, namely, (1) the conclusion of missives, (2) the delivery of the disposition to the disponee and (3) the recording of the disposition by the disponee. However there was dispute between them as to the effect of stage (2), the appellants arguing that it was significantly different to that of stage (1) in that it transferred all beneficial interest in the subjects to the disponee and the respondents maintaining that there was no material difference between the effect of the two stages.

          At stage 1 the seller of heritage is divested of no part of his right of property in the subjects (Gibson v. Hunter Home Designs Ltd.1976 S.C. 23, 27 per Lord President Emslie), and the buyer has merely a personal right or jus crediti against the seller to enforce the latter's obligations in the missives. At stage 2 however the position has changed because the seller has done all that is required of him in terms of the contract and it is action by the buyer alone which is required to complete a feudal title. Furthermore the buyer's position is significantly altered inasmuch as he can, inter alia, dispose of the subjects to a third party by a conveyance in which he deduces his title from the person last infeft (section 3 of the Conveyancing (Scotland) Act 1924). He may create a security over it (section 12 of the Conveyancing and Feudal Reform (Scotland) Act 1970). He may also pursue possessory remedies in relation to the subjects (see Earl of Fife v. Duff (1862) 24D 936, 941). However in the end of the day it is not what rights the buyer acquires by delivery of the disposition with which this appeal is concerned but what rights are left in the seller. The appellants submitted that the seller is bereft of all beneficial enjoyment and is left with a bare title while the respondents argued that he owns the property by virtue of his title. Support for the appellants' submission is to be found in Professor Halliday's Conveyancing Law and Practice Vol. I, 1--13 where the author states:

     "The basic rule of Traditionibus non nudis pactis dominia rerum transferuntur applies to the effect that in a question between the parties the document of transfer or conveyance, when duly delivered, transfers a right of ownership to the grantee. As between the granter or his executors and the grantee or his representatives delivery of the document of transfer or conveyance excludes the property from the ownership of the granter. 16" (Footnote 16 refers to Thomas v. Lord Advocate 1953 S.C. 151).

          Professor Halliday is not there saying that the buyer on delivery of a disposition acquires a real right but rather that as between buyer and seller the latter has no longer any beneficial rights in the property. The respondents traversed this submission by arguing that such rights as are possessed by the buyer are merely personal which must give way to the real right remaining in the seller by virtue of his infeftment and that in law the position of the seller is the same under stage 2 as it is under stage 1.

          Central to the appellants' argument was the decision of this House in Heritable Reversionary Co. Ltd. v. Millar (1892) 19R. (H.L.) 43 (Millar). In that case it was held that heritable property to which a bankrupt had an unqualified feudal title but in which he had no beneficial interest was not his property for the purposes of section 102 of the Bankruptcy (Scotland) Act 1856 and therefore did not vest in his trustee. Although the disposition to the bankrupt was in unqualified terms he had acquired the subject on behalf of his employers and had executed a formal declaration by which he acknowledged that he held the subjects in trust. Lord Herschell said, at p. 44:

              "Wherever, therefore, it has to be determined whether heritable or any other estate vested in the trustee, the first question which arises is, was it the 'property of the debtor?.' The expression is not a technical one, but is obviously intended to comprehend all that would ordinarily be understood as covered by it. It cannot be doubted that it includes all beneficial interests possessed by the bankrupt, even though the property be vested in other persons as trustees for him. On the other hand, I cannot think, unless compelled by authority to take that view, that it includes or was ever intended to include, estates of which the bankrupt was a bare trustee, and in which he had no beneficial interest."

Lord Watson in a long and carefully reasoned speech after referring to section 102 of the Bankruptcy (Scotland) Act 1856 continued, at pp. 49-50:

              "Were the subjects in dispute the property of M'Kay, within the meaning of that enactment, at the date of his sequestration? Upon the language of the statute, that appears to me to be a very simple question, admitting only of a negative answer. An apparent title to land or personal estate, carrying no real right of property with it, does not, in the ordinary or in any true legal sense, make such land or personal estate the property of the person who holds the title. That which, in legal as well as in conventional language, is described as a man's property is estate, whether heritable or moveable, in which he has a beneficial interest which the law allows him to dispose of. It does not include estate in which he has no beneficial interest, and which he cannot dispose of without committing a fraud. It is true that the law will sustain a right created by his fraudulent alienation in the person of a bona fide alienee for value, but not, as has been already pointed out, upon the ground that the thing alienated was the property of his author."

          Lord Watson had earlier pointed out (p. 47) that the validity of a right acquired by a bona fide disponee for value from a trustee who was in breach of trust depended on the principle that a true owner who chooses to conceal his right from the public is barred from challenging rights acquired by innocent third parties. Lord Watson said, at p. 50:

    "I venture to think that the property described in these four Acts as falling within the sequestration includes no heritable or other estate of which the bankrupt was not the true owner. That construction gives effect to the literal meaning of their language; and it is to my mind hardly conceivable that the Legislature should have intended to confiscate the property of persons other than the bankrupt for the behoof of his creditors, by requiring him to execute a disposition in favour of their trustee, which but for the statute he could not have granted without being guilty of the crime of breach of trust and embezzlement."

          In the First Division the Lord President in relation to Millar expressed the opinion that the exception which excluded property held in trust from a bankrupt's estate was well established but was an exception which was sui generis and not capable of being extended to other situations contrary to the established rules of Scots property law (Sharp v. Thomson 1995 S.L.T. 837, 853G). Not surprisingly the respondents relied on these observations. I have two comments to make on the views of the Lord President. In the first place this House in Millar was seeking to determine what fell within the description of property for the purpose of the Bankruptcy Act. Lord Macnaghten observed, at pp. 52-53:

    "It was argued that the question depends upon the feudal law of Scotland and upon certain provisions of the Bankruptcy Act of 1856. I venture to think that it turns wholly upon the language of the Act, and that a decision in favour of the company would not in the slightest degree trench upon the principles of the feudal law."

I consider that these observations apply equally to the present case. In the second place, so far as their right of property is concerned I see no distinction in principle between the position of the holder of an ex facie absolute recorded disposition who holds as a bare trustee or in security, having granted a back letter, and the holder of such a deed who has delivered a disposition to a disponee in exchange for the price. In neither event has the holder any beneficial interest in the subjects. In the former case he never had it and in the latter case he has effectively disposed of it. The result however is in both cases the same and how it was reached, is to my mind, immaterial to the determination of whether the bare title which remained in the holder at the relevant time amounted to property within the meaning of a particular statute. It is significant that Lord Watson's observations as to what can be described as a man's property were couched in entirely general terms and not restricted to the facts of the case before him.

          The appellants referred to a number of other cases in which the question of what constituted heritable property had arisen in different contexts. I refer only to three. In Bowman v. Wright (1877) 4R 322 the Second Division held that a domiciled Englishman who had sold his only heritage in Scotland prior to the service upon him of a summons was not subject to the jurisdiction of the Scottish courts by virtue of proprietorship of heritage notwithstanding the fact that the disposition which had been delivered to the disponee prior to the service had not by that time been recorded. Lord Justice Clerk Moncreiff said, at p. 325:

              "The only question, therefore, is, was Wright proprietor at the date of citation of any heritage within Scotland, for it is admitted that he has acquired none since? I am of opinion that he was not, for he had sold what he previously had, and the right to it was vested in the purchaser, so far at least as he, Wright, was concerned. I do not think that it matters that under the Act of 1617, cap. 17, the disponee's right might have been evacuated in favour of a second bona fide purchaser first infeft, or might have been burdened by a lease granted after the date of the disposition. These are rights which the Legislature has thought proper to confer on bona fide purchasers, taking advantage of our system of registration, and upon tenants, but not rights remaining in the original seller, who has done all he could to divest himself. It comes to this, that anything which the defender could have done to affect the property would not have been the exercise of a right but the commission of a fraud, and the power to affect property by the commission of a fraud cannot be treated as a right of property.

              "Being thus of opinion that this matter is to be looked on according to the reality and substance of the thing, I am clear that we have no jurisdiction over this defender, and have no alternative but to dismiss the action. His creditor may sue him in his proper forum."

Millar was followed in Forbes's Trustees v. Macleod (1898) 25R 1012 in which it was held that a bond and disposition in security which was the subject of a recorded ex facie absolute assignation with a back letter by the assignee and which had already been redeemed by the assigner did not pass to the trustee in sequestration of the assignee Lord M'Laren said, at p. 1015:

    ". . . even where the title is ex facie unqualified and enters the record as such, the creditors of the ex facie absolute proprietor can take no higher right than he himself possessed. This was the point decided by the House of Lords in the case of the Heritable Reversionary Company v. Millar, and the principle of that decision obviously governs security titles as well as trusts. When Carrick was paid his debt he ceased to have any pecuniary interest in the subjects, his title being then merely nominal. It follows, in my opinion, that the second party is bound to retransfer the subjects unconditionally."

          Thomas v. Lord Advocate 1953 S.C. 151 concerned estate duty on property passing on death under the Finance Act 1894. Lord Patrick, after pointing out, at p. 161, that once a disposition had been delivered by the disponer to the disponee the former could no longer deal with the interest which he formerly possessed in the lands except by a disposition in fraud of the latter, said:

    "It does not seem possible to contend that on delivery of such a disposition no property passes to the disponee. All the property the disponer had passes at once. Recording of the disposition in the Register of Sasines will only make real a right which was previously personal. As between disponer and disponee the transfer of all the former's interests is at once complete upon delivery of the disposition and, if the disposition is gratuitous, the gift of such interests in land as the disponer had to give is complete."

          Although two of these cases related to the meaning of property in contexts somewhat different from the present the Lord Justice Clerk and Lord Patrick approached the matter in a pragmatic way and looked to see what the disponer was left with after delivering the disposition. If there had been a fundamental principle of Scots law that property in heritage could, subject to the exception referred to by the Lord President, only reside in the holder of the recorded title thereto these two cases must have been decided differently. It is interesting to note that in Gibson v. Hunter Home Designs Ltd. 1936 S.C. 23 Lord President Emslie observed, at p. 27:



 
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