Customs & Excise v Royal Bank of Scotland Plc

Whether a debenture-holder has taken possession under section 196 of the Companies Act 1985 depends on the substance of the transaction. A consensual payment may qualify where the charge-holder actively participates in arrangements that release charged assets and earmark their proceeds for payment of the secured debt. Ordinary payment of a debt from charged assets does not automatically have that character. Under section 175 of the Insolvency Act 1986, the realisation mechanism is immaterial, but the property received must have been comprised in or subject to the relevant charge. Assets separately assigned to the debenture-holder, over which it never had a charge, fall outside section 175.

Oval 1742 Limited transferred parts of its business and assets to subsidiaries, which were then sold to Barcud Derwen Limited. The transactions involved a release by RBS of its floating charge and payment of non-deferred and deferred consideration through solicitors under an undertaking to RBS.

The Commissioners claimed that preferential creditors had priority over RBS under section 196 of the Companies Act 1985 and section 175 of the Insolvency Act 1986. The issue was determined on RBS’s application under CPR Part 24. The court considered which sums were subject to the statutory priority provisions.

1. The court held that section 196 is directed principally to acts which, in substance, realise the security conferred by a floating charge. It does not apply automatically whenever a company pays a debenture-holder from assets subject to the charge.

2. The substance of the transaction must be examined. Payment may amount to taking possession where the debenture-holder actively participates in arrangements under which charged monies are earmarked for payment, particularly where the charge is released over specified assets and the arrangement places the parties substantially in the position that would have resulted from a receiver taking possession. The reasoning in IRC v Goldblatt [1972] Ch 498 was applied.

3. RBS’s receipt of the non-deferred consideration amounted to taking possession under section 196. The relevant contractual debts owed by the subsidiaries were property comprised in or subject to RBS’s floating charge when the release took effect. The solicitors’ undertaking did not create an independent entitlement defeating that analysis; the court examined the substance rather than the form.

4. The same analysis applied to the deferred consideration received before liquidation. Any part received after liquidation was caught by section 175, under which the manner of realisation was immaterial.

5. The sums realised from book debts assigned directly to RBS were different. Those were assets of the subsidiaries over which RBS had never held a charge. They were therefore not property comprised in or subject to the floating charge, and section 175 did not apply.

6. The wider proposition relied on from Buhr v Barclays Bank plc [2002] EWCA Civ 1223 was not determinative. That case concerned mortgaged property and did not decide the effect of releasing assets from a floating charge. The findings did not dispose of the entire action; costs and the precise order were adjourned for submissions.