Sharp and Others v. Woolwich Building Society

Property subject to a Scottish floating charge comprises assets in which the company has a beneficial interest and which it may lawfully use or dispose of. It does not include heritable property of which the company retains only the recorded title after receiving the price and delivering a disposition to the purchaser.

Delivery does not give the purchaser a real right or displace the need for registration. It nevertheless exhausts the seller’s beneficial interest and lawful power of disposal. The seller’s remaining ability to convey fraudulently is not property to which a floating charge can attach.

A company sold a flat, received the purchase price and delivered an executed disposition to the purchasers. Before the disposition was recorded, receivers were appointed under a floating charge granted by the company. The disposition and the purchasers’ standard security in favour of the appellant building society were recorded after the receivers’ appointment.

The receivers sought declarators that the floating charge had attached to the flat and ranked ahead of the standard security. The Lord Ordinary granted the declarators, and the First Division adhered: 1995 S.L.T. 837.

The central issue was whether the flat remained within the company’s “property and undertaking” when the floating charge crystallised, notwithstanding that the company retained the recorded title but had already delivered the disposition.

1. Appeal allowed unanimously. Lord Jauncey of Tullichettle and Lord Clyde delivered the substantive speeches. Lord Browne-Wilkinson, Lord Keith of Kinkel and Lord Steyn agreed with their reasons. The company’s floating charge did not attach to the flat, and the receivers were not entitled to the declarators sought. Lord Keith stated that the first plea-in-law for the appellants should be sustained and the action dismissed.

2. Per Lord Jauncey, “property” in section 53(7) of the Insolvency Act 1986 and in the statutory provisions governing floating charges was not a technical expression synonymous with recorded feudal title. It meant property available for the company’s use, in which it held a beneficial interest and which it could lawfully dispone or subject to heritable security. The provision concerned assets lawfully available to satisfy the secured obligation, rather than the formalities of feudal title.

3. After receiving the price and delivering the disposition, the company retained the recorded title but no beneficial interest in the flat. It had completed everything required of it to enable the purchasers to perfect their title. Any further conveyance or grant of security by the company would have been fraudulent. The mere capacity to commit that fraud was not a beneficial proprietary right. Accordingly, section 53(7) did not attach the charge to the flat.

4. Per Lord Clyde, the critical question preceded any question about the legal effect of crystallisation or a race to the register. The phrase “property and undertaking” in section 462(1) of the Companies Act 1985 should be construed according to ordinary language and commercial substance. Its scope could take account of beneficial interest as well as title. A narrow construction was additionally appropriate because the floating charge was alien to Scots common law and could create a real security without registration in the land register.

5. The decision did not alter the distinction between real and personal rights or the registration rules governing Scottish heritage. The purchasers held only a personal right until recording, and that right remained vulnerable to a competing title duly perfected by a bona fide purchaser or adjudger. The point was that the company’s bare title was no longer part of its “property and undertaking” for the purposes of the floating charge.

• House of Lords: Allowed the building society’s appeal unanimously, sustained its first plea-in-law and dismissed the receivers’ action.
• First Division of the Court of Session: Adhered to the Lord Ordinary’s decree, holding that the company’s recorded title remained property to which the floating charge attached: 1995 S.L.T. 837.
• Lord Ordinary: Granted decree de plano and the declarators sought by the receivers.