Facts: Imperial Hotel (Aberdeen) Ltd barrowed a sum and granted a floating charge to the lender. Financial difficulties struck along with taxes due. The Inland Revenue (The Gov’t), who were owed £4,850 arrested Imperial Hotel’s bank accounts on 23 May 1974. As the financial position worsened, the lender appointed a receiver (Frank Mycroft) on 17 July 1974. Once the company went into receivership, the floating charge attached to all of Imperial Hotel’s assets, including the bank account.
Question for the Court: Who had priority to the bank account? Inland Revenue, who had arrested the accounts two months prior, or the receiver, Mr Mycroft? Did the floating charge trump the arrestment, vís-a-vís?
Held, the Companies (Floating Charges and Receivers)(Scotland) Act 1972 provided a ranking mechanism for priority as being that the receiver prevailed over the creditors unless they had “effectually executed diligence”. Arrestment is a form of diligence, however the court held it was only “effectually executed” if the arrestment had been followed by a furthcoming, prior to the floating charge attaching. Since this had not occurred, the First Division held the receiver prevailed over the arrester.
Analysis: This case is almost universally condemned by academic commentators. The reason why this case is criticize is illustrated by the following example: (i) a company’s bank account is arrested; (ii) the assignation of the company’s bank account to a third party is intimated to the bank; (iii) a receiver is called in and the floating charge granted by the company attaches to the assets; and (iv) the arresting creditor (arrester) seeks furthcoming. The order of ranking in this case is irresolvable, as the arrester takes priority over the third party. The third party takes priority over the receiver. As a result of Lord Advocate v Royal Bank of Scotland 1977, the receiver takes priority over the arrester. The arrester takes priority over the third party who takes priority over the receiver. This conundrum is referred to as a ‘circle of priorities’. The Bankruptcy and Diligence etc (Scotland) Act 2007, which amends the Debtors (Scotland) Act 1987 by adding s 73J, which provides that arrested funds can be released on certain conditions without an action of furthcoming. No judicial consideration has been rendered on this point yet.
Question for the Court: Who had priority to the bank account? Inland Revenue, who had arrested the accounts two months prior, or the receiver, Mr Mycroft? Did the floating charge trump the arrestment, vís-a-vís?Held, the Companies (Floating Charges and Receivers)(Scotland) Act 1972 provided a ranking mechanism for priority as being that the receiver prevailed over the creditors unless they had “effectually executed diligence”. Arrestment is a form of diligence, however the court held it was only “effectually executed” if the arrestment had been followed by a furthcoming, prior to the floating charge attaching. Since this had not occurred, the First Division held the receiver prevailed over the arrester.
Analysis: This case is almost universally condemned by academic commentators. The reason why this case is criticize is illustrated by the following example: (i) a company’s bank account is arrested; (ii) the assignation of the company’s bank account to a third party is intimated to the bank; (iii) a receiver is called in and the floating charge granted by the company attaches to the assets; and (iv) the arresting creditor (arrester) seeks furthcoming. The order of ranking in this case is irresolvable, as the arrester takes priority over the third party. The third party takes priority over the receiver. As a result of Lord Advocate v Royal Bank of Scotland 1977, the receiver takes priority over the arrester. The arrester takes priority over the third party who takes priority over the receiver. This conundrum is referred to as a ‘circle of priorities’. The Bankruptcy and Diligence etc (Scotland) Act 2007, which amends the Debtors (Scotland) Act 1987 by adding s 73J, which provides that arrested funds can be released on certain conditions without an action of furthcoming. No judicial consideration has been rendered on this point yet.
