Floating Charge PDF

**Securities** **Introducing Securities**\ 1. In this lecture, we will begin by considering the concept of a security in general terms, making reference to personal and real securities.\ 2. We will then discuss real securities in more detail. Later in this lecture and in the next lecture, we will c...

**Securities** **Introducing Securities**\ 1. In this lecture, we will begin by considering the concept of a security in general terms, making reference to personal and real securities.\ 2. We will then discuss real securities in more detail. Later in this lecture and in the next lecture, we will consider in some detail the most important real security that affects heritable property; this is the standard security.\ 3. In the second lecture, we will then proceed to examine other real securities that affect heritable property, including the floating charge.\ 4. In the third lecture, reference will be made to real securities that can be created in relation to moveable property. **Securities Generally (1)**\ 1. What is a "security"?\ 2. A good starting point is the definition found in Gloag and Irvine's classic work, Rights in Security (1897) p.1-2. They state that a right in security 'is any right which a creditor may hold for ensuring the payment or satisfaction of his debt, distinct from, and in addition to, his right of action and execution against the debtor under the latter's personal obligation.' **Securities Generally (2)**\ **Two further general points.**\ 1. First, before there can be a security for an obligation, there must be an underlying obligation. Put another way, the security is accessory to the loan. So, if the obligation is to repay a loan, and the loan is repaid, the security is extinguished. See Rankin v Arnot (1680) Mor. 572. See also Nisbet's Creditors v Robertson (1791) Mor. 9554.\ 2. Second, note that there are two different types of rights in security that may be created. First, there are personal securities. Second, there are real securities. Of course, in Property law our focus is on real securities. **Real Securities: General Principles (1)**\ 1. As you know, a real security is a "right held by a creditor in property in security of a debt" (Reid, Property, para.5(2)).\ 2. The creditor's right here can be said to be real because it is in the asset, and enforceable against the whole world. In other words, it is enforceable in preference to any other creditors who may have a claim in personam against the debtor.\ 3. One may add that because a valid real security is a right in rem, in the thing, it is also in principle enforceable against the singular successor of the granter. **Real Securities: General Principles (2)**\ 1. A real security, then, is enforceable in rem by the creditor against the world. That includes singular successors of the granter unless the security has been properly discharged.\ 2. Due to this characteristic, it is generally thought that rights in security should be publicly known, and thereby comply with the publicity principle discussed in an earlier lecture. Note Bank of Scotland v Liquidators of Hutchison Main & Co. Ltd. 1914 S.C. (H.L.) 1.\ 3. As we will see, the publicity principle is satisfied in various different ways, depending on the real security in question. **Real Securities: General Principles (3)**\ 1. Can real securities in respect of a property be transferred from one creditor to another?\ 2. Can multiple real securities exist in respect of a single piece of property?\ 3. What real securities, then, does Scots law recognise? Some can only be created in relation to heritable property, whilst others can only be created in relation to moveable property. We will consider the major real securities affecting heritable property first, these being the standard security, the charging order and the floating charge. 4. Subsequently, reference will be made to the major real securities that can be created in relation to moveable property. **Standard Securities: Creation (1)**\ 1. Let us consider standard securities. Standard securities are governed by the Conveyancing and Feudal Reform (Scotland) Act 1970, as amended.\ 2. Over what sort of property can a standard security be granted? The Conveyancing and Feudal Reform (Scotland) Act 1970 states it can be created over "any land or real right in land". See s. 9(2). This includes any right which can be held separately and registered in the Land Register or recorded in the Register of Sasines.\ 3. However, there are exceptions to this. The most important exception is that a standard security cannot be granted over a real burden. For these points, see s. 9(8)(b). **Standard Securities: Creation (2)**\ 1. What sorts of obligations can a standard security secure? This is\ considered in the Conveyancing and Feudal Reform (Scotland)\ Act 1970 s.9(8)(c). Note obligations ad factum praestandum.\ 2. Who can grant a standard security? Obviously, the owner of a\ property can grant a standard security over it. However, there\ are separate rules governing the granting of securities by some\ parties, including companies. In addition, note that the holder of\ a registered lease may grant a standard security in respect of\ that lease (see the 1970 Act ss. 9(2) and 9(8)(b)). **Standard Securities: Creation (3)**\ 1. How can a standard security be created? It must be in writing\ (see the Requirements of Writing (Scotland) Act 1995 s.1(2)(b)).\ 2. To become a real right, it must be registered. See the\ Conveyancing and Feudal Reform (Scotland) Act 1970 s.11(1).\ 3. Which register should be used? You may remember that under\ the Land Registration (etc.) Scotland Act 2012 s.48(1) the\ Register of Sasines is now closed to standard securities, and\ thus standard securities must be registered in the Land Register\ in order to receive real effect. **Recap of Last Lecture**\ 1. Yesterday, I introduced the law of securities and explained that in this course our primary concern is with real securities.\ 2. I then discussed some general features of real securities, before turning to the specific types of real securities that are recognised in our law. I mentioned the real securities which can encumber land, specifically the standard security, the charging order and the floating charge. I also referred to the existence of real securities that can encumber moveable property.\ 3. Finally, I introduced the standard security.\ 4. Today, we will conclude our discussion of the standard security, before turning to the charging order. The next lecture will then consider floating charges and the real securities that can encumber moveable property. **Standard Securities: Creation (Continued) (1)**\ 1. Further to the remarks made yesterday regarding the creation of standard securities, please note that the standard security must conform to a specific form.\ 2. This can be seen from the 1970 Act s. 9(2), s. 53(1) and Sch.2. Note Form A and Form B. Form A reads as follows: **Standard Securities: Creation (Continued) (2)**\ I, AB (designation), hereby undertake to pay to CD (designation), the sum of £ (or a maximum sum of £ ) (or all sums due and that may become due by me to the said CD in respect of \..... (here specify the matter for which the undertaking is granted)) with interest from \..... (or from the respective times of advance) at \..... per centum per annum (or otherwise as the case may be) on \..... in each year commencing on \..... ; For which I grant a standard security in favour of the said CD over ALL and WHOLE (here describe the security subjects as indicated in Note 1 hereto): The standard conditions specified in Schedule 3 to the Conveyancing and Feudal Reform (Scotland) Act 1970, and any lawful variation thereof operative for the time being, shall apply: And I grant warrandice: And I consent to registration for execution. **Standard Securities: The Standard Conditions\ **1. Standard conditions can be found in Schedule Three of the Conveyancing and Feudal Reform (Scotland) Act 1970.\ 2. Under s.11(2)-(3) of the 1970 Act, the standard conditions regulate the security unless they are varied by the parties. It is provided under s. 11(3) that it is not possible to vary either the creditor's powers of sale or foreclosure -- of which more will be said shortly -- or SC 11 (the procedure on redemption).\ 3. Most of the standard conditions found in the Conveyancing and Feudal Reform (Scotland) Act 1970 Sch.3 can be divided into two different categories.\ 4. On the standard conditions, see Steven and Massaro, 'Standard securities and variations to the standard conditions' 2008 SLT (News) 271, and Halliday, Conveyancing Law and Practice (2nd ed.) vol.2, Ch.53. **Standard Securities: Default and Enforcement (1)**\ 1. Standard Condition (SC) 9 defines default. It is the debtor's default that triggers the creditor's capacity to enforce the standard security.\ 2. Following default, the creditor must use an appropriate procedure or procedures to enforce the security. These procedures vary depending on the nature of the security subjects; different rules apply for residential and non-residential properties.\ 3. Finally, once the creditor has applied to enforce the security, he may exercise various remedies, including the power to sell the security subjects. These are outlined in SC 10. We will deal with each of these points in turn. **Standard Securities: Default and Enforcement (2)\ **SC 9 states that a debtor is in default in one of three situations.\ 1. Firstly, a debtor is in default where a calling up-notice in respect of the security has been served and has not been complied with. The form of the calling-up notice is laid out in Sch.6 of the 1970 Act. The procedure governing it is laid out in s.19.\ 2. Secondly, the debtor may be in default where there has been a failure to comply with any other requirement in the security.\ 3. Thirdly, a debtor is in default automatically once he is insolvent. **Standard Securities: Default and Enforcement (3)\ **1. Note the pre-2010 position regarding enforcement procedures. It was thought the creditor could use a calling up notice or a notice of default or a warrant obtained from the Sheriff Court under s.24. However, this changed following the important case of Royal Bank of Scotland v Wilson 2010 S.L.T. 1227.\ 2. Section 19(1) of the 1970 Act provides that "where a creditor\... intends to require discharge of the debt \[secured by the security\], and failing that discharge, to \[sell\], he shall serve a notice calling-up the security". As a result, the UKSC held that in all cases where a creditor wishes to exercise his power of sale, then he must begin by issuing a calling-up notice **Standard Securities: Default and Enforcement (4)\ **1. As a result, you might think that no-one would subsequently make any use of the notice of default or the s.24 warrant.\ 2. However, note the effect of the Home Owner and Debtor Protection (Scotland) Act 2010. This amended the 1970 Act by generally requiring creditors to apply to a Sheriff Court for a s. 24 warrant in order to enforce standard securities in residential properties.\ 3. Under s. 24(1B) of the amended 1970 Act, a creditor in a standard security relating to residential property may apply to the court to exercise his remedies where the debtor is in default.\ 4. Under s. 24(1C), he may only succeed in this if he has complied with the pre-action rules laid out in s. 24A. **Standard Securities: Default and Enforcement (5)**\ 1. In conclusion, in relation to standard securities in non- residential properties, the creditor must use a calling-up notice to enforce the standard security.\ 2. That is the effect of the decision in Royal Bank of Scotland v Wilson, interpreting s.19(1) of the 1970 Act. In relation to standard securities in residential properties, the creditor must use both a calling-up notice -- due to the decision in Wilson -- and a s.24 warrant to enforce his security.\ 3. This last point results from the Home Owner and Debtor Protection (Scotland) Act 2010. **Standard Securities: Remedies (1)**\ 1. On the debtor's default, and on enforcement of the standard security according to the correct procedure, the general rule is that the creditor has the remedies found in the Conveyancing and Feudal Reform (Scotland) Act 1970 Sch.3 SC10.\ 2. These are the power of sale, the power to enter into possession of the security subjects and the right to apply for a decree of foreclosure.\ 3. Let us consider each remedy in a little more detail. **Standard Securities: Remedies (2)\ **1. As regards the power of sale, see s.25.\ 2. The proceeds are distributed in accordance with s.27. The creditors' costs associated with the sale must be paid from the sale proceeds first.\ 3. Then the creditor must pay any sums due under any prior security -- any standard security registered before his own -- to which the security subjects are subject.\ 4. Thirdly, the creditor may then recover the secured debt owed to him from the sale proceeds. At the same time, he must pay creditors who have securities that rank equally with his own.\ 5. Fourthly, he must pay any creditors whose securities rank after his own.\ 6. Finally, whatever is left (if anything) must be returned to the debtor or his representatives. Under s.26, after all this happens the real rights of the creditors are extinguished. The buyer will then receive a title clear of all securities. **Standard Securities: Remedies (3)**\ 1. We can consider the other two remedies more briefly.\ 2. As just stated, creditors may enter into possession, for example to let the security subjects for up to seven years so as to recoup their losses. See SC 10(3)-(6).\ 3. A decree of foreclosure makes the creditor the owner of the secured subjects (s. 28).\ 4. It will only be granted in exceptional circumstances, usually where the creditor has made significant efforts to sell the security subjects and failed to do so. See SC 10(7). **The Charging Order**\ 1. Note that other securities can be constituted over land. One is the charging order. The charging order is a fixed security, in the sense that it affects specific pieces of land or tenements.\ 2. It is imposed to secure a debt due to a local authority. Alternatively, it can be used to secure debts owed to other particular public bodies, if this is permitted. Generally, the creditor will be local authority.\ 3. Charging orders can be used to secure a variety of debts. Examples can be found in the Housing (Scotland) Act 2006, as discussed in Gretton and Steven para. 22.84. **Introduction**\ 1. In the last lecture, we considered two securities that may encumber heritable property.\ 2. It remains to consider the floating charge, and other securities that may encumber moveable property. **The Floating Charge (1)**\ 1. The floating charge can be constituted in respect of both heritable property and moveable property. In brief, floating charges are best understood by considering their history.\ 2. The Scottish common law position. What was required was a device that allowed companies to retain possession of moveable property whilst using it as security for obligations.\ 3. In English law such a device was recognised. This was the floating charge. Lord Cooper noted the inconsistency of this device with the Scottish common law in Carse v Coppen 1951 S.C. 233. **The Floating Charge (2)**\ 1. However, in 1961 the floating charge was introduced to Scotland in the Companies (Floating Charges) (Scotland) Act. The current law in relation to this is to be found in the Companies Act 1985 ss.462-487 and the Insolvency Act 1986 ss.50-71.\ 2. The fact that the floating charge was a creature of English equity meant that it was difficult to transplant it into Scots law. Note the Bankruptcy and Diligence (Scotland) Act 2007 ss. 37-49.\ 3. Under the current rules, the floating charge is created when the constitutive deed is signed by the debtor and delivered to the creditor. However, registration in the Companies Register must then follow within 21 days. If this does not happen, the charge will be null and void against other creditors and insolvency officials. See the Companies Act 2006 s.859H and the discussion in Gretton and Steven at para. 22.56. **Pledge (1)**\ 1. The law relating to pledge has recently been reformed and partially codified by Part Two of the Moveable Transactions (Scotland) Act 2023.\ 2. Prior to the promulgation of the act, it was felt that the floating charge was not a sufficient response to the shortcomings of the Scottish common law relating to securities over moveable property.\ 3. It was also intended that this legislation would deal with the problem that it was not possible at common law to create a security over incorporeal moveable property without actually transferring the property to the creditor through what is termed 'assignation'. **Pledge (2)**\ 1. Part 2 of the Moveable Transactions (Scotland) Act 2023 states that there are two different types of pledge in Scots law.\ 2. One is the possessory pledge, which corresponds to the old common law pledge; indeed, some of the common law rules on pledge still apply to it. 3\. Possessory pledges can only be created in respect of corporeal moveable property (see s.42(2)). They may be created in two ways.\ 1. The first is 'by delivery of the property to the secured creditor, provided that the property is the provider's at the time of delivery' (the 'provider' being the granter of the pledge, see s. 113(1)).\ 2. The second arises 'in a case where the property is not the provider's at the time of such delivery'; in such cases, the pledge is created 'on the property becoming the provider's subsequent to such delivery'. **Pledge (3)**\ 1. Note that the nemo plus rule applies -- delivery of property which does not belong to the provider does not create a real right of pledge for the creditor (the point is stated in s. 42(2)(a)).\ 2. A possessory pledge is termed a pawn when it is granted by a consumer, and it is subject to special rules under ss. 114-122 of the Consumer Credit Act 1974.\ 3. For further information I refer you to Chapter 15 of Gloag and Henderson, The Law of Scotland (15th edn, 2022). **Pledge (4)**\ 1. The other type of pledge that is recognised in Scots law today is the statutory pledge. This is an entirely new device in the law which was introduced in the 2023 Act, and it is created according to the rules laid down in ss. 48-49.\ 2. Unlike the possessory pledge, it can be created in respect of incorporeal as well as corporeal moveables. It has to be created by a constitutive document (s. 45(1)). Under s. 45(2), the constitutive document must (a) be executed or authenticated by the provider, (b)identify the property which is to be the encumbered property, and (c) identify the obligation which is to be the secured obligation.\ 3. The creditor acquires the right in security in respect of a statutory pledge when the constitutive document is registered in the Register of Statutory Pledges (RSP) -- see s. 48(2)(b), and the related rules referenced in s. 48. This is kept by the Keeper, like the Land Register. **Pledge (5)**\ 1. Who can grant statutory pledges?\ 2. In respect of which types of property may statutory pledges be granted?\ 3. What happens when a provider sells on property which is encumbered with a statutory pledge? See ss. 51-55.\ 4. Note the application of the rule prior in tempore, potior in iure. **Pledge (6)**\ 1. How are pledges enforced?\ 2. Normally the question arises when the debtor defaults on the secured obligation.\ 3. A pledge enforcement notice must be served under s. 65 of the 2023 Act. Under s. 67, the secured creditor may thereafter take possession of the secured property in the case of a statutory pledge (he will already have possession in the case of a possessory pledge). **Pledge (7)**\ 1. Under s. 68, the secured creditor may then sell the secured property to satisfy the debt owed to him; he must do his best to secure the best price. Any surplus from the sale is returned to the provider under s. 77.\ 2. Note that special rules apply for the enforcement of pawns. Licensed pawnbrokers' powers of sale arise automatically where the property has not been redeemed within six months; see the Consumer Credit Act 1974 s.116(1)-(3), although this can be varied by agreement. **Lien (1)**\ 1. As Gretton and Steven put it, 'A lien is a real right to retain property until the discharge of an obligation or certain obligations, the property not having been delivered to the retaining party for the purpose of security.'\ 2. See Gretton and Steven para.22.75. The writers give the example of 'a jeweller holding on to a watch until the repair bill is paid'. As with pledge, the real right in security of lien in relation to a thing normally only persists so long as the creditor retains possession of the thing.\ 3. The general rule (and an exception thereto) is stated in Goudie v Mulholland 2000 S.C. 61. **Lien (2)**\ There are two major types of lien -- special lien and general lien.\ 1. Special lien arises where a thing may be lawfully retained for the performance of a single specific obligation (see McKichen v Muir (1849) J Shaw 223).\ 2. General lien arises where a thing may be lawfully retained for the performance of more than one obligation.