Revenue and Customs v Royal Bank of Scotland Plc

For statutory priority purposes, a charge engages the relevant provisions if it was floating when created. It need not remain floating when possession is taken or when liquidation begins. Whether a secured creditor has taken possession depends on the substance of the transaction. Payment under arrangements by which the creditor realises its security, particularly where payment is linked to release or non-enforcement of the security, may constitute taking possession. An ordinary payment in discharge of the debtor’s liability does not. Payments after liquidation fall within section 175 of the Insolvency Act 1986 without any separate requirement of taking possession. Proceeds of debts released from the charge before a later assignment are outside that section.

The liquidators of Oval 1742 Limited brought proceedings under section 112(2) of the Insolvency Act 1986. The preliminary issue concerned whether preferential VAT creditors had priority over Royal Bank of Scotland Plc under section 196 of the Companies Act 1985 and section 175 of the Insolvency Act 1986.

The company transferred its business and assets, including book debts, to subsidiaries. Consideration was paid through solicitors who undertook to remit specified sums to RBS. The High Court held that payments made before and after liquidation were subject to the statutory priority provisions, but that RBS could retain proceeds of book debts assigned to it after the charge had been released. The central issues on appeal were whether RBS had taken possession of the earlier payments and whether the later assigned debts remained subject to its charge.

Sir John Chadwick gave the judgment of the court. Lord Justice Wilson and Lady Justice Smith agreed.

1. Disposition. The court upheld the substance of the High Court’s conclusions concerning payments made to RBS before 29 November 2002. The Commissioners’ cross-appeal concerning the later assigned book debts failed. The declarations made below were nevertheless set aside because the preliminary issue concerned the Commissioners’ real prospect of success on assumed facts.
2. Character of the charge. Under section 196(1) of the Companies Act 1985, and similarly under section 175 of the Insolvency Act 1986, the relevant charge must have been floating when created. It need not have remained floating when possession was taken or when liquidation commenced. Section 251 of the Insolvency Act 1986 confirmed that position. The statutory provisions reversed the point decided in In re Griffin Hotel Co Ltd [1941] Ch 129.
3. Taking possession. The monies received by the solicitors were held for the company, and the company’s interest in them remained subject to RBS’s charge. The payments to RBS were made pursuant to undertakings given as the price of RBS not enforcing its security and releasing the transferred assets. Looking at substance rather than form, the payments were acts by which RBS realised its security, not merely ordinary discharges of the company’s debt. RBS therefore took possession for section 196 purposes.
4. Timing and later assignments. Payments received before liquidation engaged section 196. Deferred consideration received after liquidation fell within section 175(2)(b), where the manner of realisation was immaterial. The book debts assigned to RBS after the release were no longer subject to its charge. Their subsequent proceeds therefore did not fall within section 175.
5. Order. The preliminary issue was answered by declaring that the Commissioners had a real prospect of establishing that section 196 of the Companies Act 1985 and section 175 of the Insolvency Act 1986 applied. The case was to proceed on revised directions, or be remitted to the High Court for directions.

• Court of Appeal (Civil Division). In Revenue and Customs v Royal Bank of Scotland Plc [2007] EWCA Civ 1262, the court set aside the High Court’s declarations, upheld the substantive conclusions on the payments received before 29 November 2002, dismissed the Commissioners’ cross-appeal, and answered the preliminary issue in favour of the Commissioners.
• High Court, Chancery Division. Miss Susan Prevezer QC, sitting as a Deputy Judge, determined the preliminary issue in favour of the Commissioners in Revenue and Customs v Royal Bank of Scotland Plc [2006] EWHC 2813 (Ch). She held that the earlier payments engaged section 196 of the Companies Act 1985 and section 175 of the Insolvency Act 1986, but that RBS could retain proceeds of book debts assigned after release of the charge.