IP Briefing: Decision of the Inner House of the Court of Session in the case of David MacMillan v T Leith Developments Limited (in receivership and liquidation)

The Factual Background

In November 2000, T Leith Developments Limited (‘T Leith’) granted a floating charge in favour of Clydesdale Bank.  In October 2006, David MacMillan (‘DM’) obtained an inhibition on the dependence of proceedings against T Leith for breach of contract.  Decree was subsequently granted in favour of DM in 2010.  Clydesdale Bank appointed receivers to T Leith in February 2011, following which DM sought the appointment of a liquidator.  It is accepted that the whole of the bank’s debt under the floating charge, as at the date of receivership, was incurred after the inhibition. DM raised proceedings in the Court of Session seeking declarator that the inhibition constituted ‘effectually executed diligence’ in terms of S.60 of the Insolvency Act 1986 and that as such, the debt due to him should be paid in preference to any distribution to the bank.

The Decision at First Instance and Subsequent Appeal

At first instance, the commercial judge found, on the basis of the long standing authority of ‘The Lord Advocate v RBS’ that an inhibition was not ‘effectually executed diligence’ which would give rise to a preference.  It was held, however, that an inhibition did nevertheless create a preference over post-inhibition advances under a floating charge, which in itself was sufficient to allow DM to receive payment of his debt in preference to the bank.  The decision of the Outer House was appealed by T Leith and a cross-appeal was lodged by DM who argued that The Lord Advocate had been wrongly decided because ‘effectually executed diligence’ simply means any diligence not rendered ineffectual by the subsequent liquidation of the company within 60 days. 

The Decision of the Inner House

It was held by the Inner House that the case of The Lord Advocate had been wrongly decided because the ordinary meaning of the words ‘effectually executed diligence’ is simply that the diligence has been properly carried out and not struck down within 60 days.  The court then had to consider whether it was appropriate, given (i) the history of the legislation; and (ii) the settled nature of law and practice, to overrule The Lord Advocate

The ‘Barras principle’, taken at its highest, essentially means that where a statutory provision which has been the subject of judicial consideration is re-enacted by Parliament without revision or modification, Parliament must be taken to have endorsed the judicial interpretation.  In this case, it was recognised that a statutory provision dating back to 1972 had been re-enacted in S.60 of the Insolvency Act 1986, however the court found that the subsequent legislation was intended to consolidate the law rather than make substantial alterations and as such, the Barras principle did not apply.  The court also recognised that although it should be slow to reverse a decision which has led to a settled commercial practice, the court was not convinced, in this case, that there was any substantial reason to prevent them from overturning the decision in The Lord Advocate.

Advice for Insolvency Practitioners

This is an interesting and important case for Insolvency Practitioners to be aware of, not least because it now clarifies the meaning of ‘effectually executed diligence’ and its subsequent effect on the rules of preference in receiverships.  Given, however, that receiverships are by virtue of the Enterprise Act 2002 now fairly uncommon and that prospectively inhibiting creditors no longer have a preference on subsequent insolvency, it is recognised that the practical day to day effects of this decision are likely to be fairly limited.

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb [AT] bbmsolicitors [DOT] co [DOT] uk) or Sheana Campbell (smc@bbmsolicitors.co.uk). This briefing note is current as at 28 March 2017 and is our understanding of the position described at that date.  Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).

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