Revenue and Customs v Royal Bank of Scotland Plc

The Court of Appeal considered whether sums received by a debenture holder under arrangements made immediately before a company ceased to trade amounted to the "taking of possession" of property comprised in or subject to a floating charge for the purposes of section 196 of the Companies Act 1985 and, alternatively, whether section 175 of the Insolvency Act 1986 applied to sums received after the commencement of liquidation. The court emphasised that the questions turn on substance not form: payments which, by arrangement, operate to realise a creditor's security will amount to "taking possession" and so fall within section 196, while sums realised after the commencement of liquidation fall within section 175. The judge's conclusion that RBS had, in substance, realised its security by receiving payments made pursuant to the solicitors' undertakings was upheld, but the Court of Appeal set aside the judge's formal declarations and answered the preliminary issues directed for the High Court.

Background and parties:

• The joint liquidators of Oval 1742 Limited commenced proceedings under section 112(2) of the Insolvency Act 1986. The parties to the preliminary issue were HM Commissioners of Customs and Excise (now HM Revenue and Customs) and The Royal Bank of Scotland Plc (RBS), the holder of a debenture over the company's book debts.

Nature of the claim/application:

• The liquidators sought a declaration whether assets sold to subsidiaries (the "hive down") were subject to a fixed or floating charge immediately prior to sale and, to the extent they were subject to a floating charge, whether RBS was liable to account for the sale proceeds to the liquidators or to the Commissioners as preferential creditor.

Procedural posture:

• The House of Lords' decision in Spectrum Plus led the parties to agree for the purposes of the preliminary issue that the debenture was to be characterised as a floating charge. A preliminary issue was directed in the High Court by order dated 13 April 2006. Miss Susan Prevezer QC determined the preliminary issue in favour of the Commissioners and made declarations on 6 November 2006. Both parties were granted permission to appeal.

Issues framed by the court:

1. Whether receipt by RBS of sums derived from book debts comprised in or subject to the debenture amounted to "taking possession" for the purposes of section 196 Companies Act 1985.
2. Whether sums received by RBS after the commencement of liquidation were subject to section 175 Insolvency Act 1986.
3. Whether sums realised after assignment to RBS in December 2003 were subject to the prior claim of preferential creditors.

Court's reasoning and conclusions:

• The Court of Appeal adopted the approach that the statutory phrase "possession is taken" must be construed by reference to substance not form. Ordinary payments of a company's liabilities out of its assets will not, without more, be "taking possession"; but where the creditor is actively involved in arrangements by which particular monies subject to the charge are earmarked and paid to him (for example where a solicitor undertakes to remit sale proceeds to the bank as part of a package to avoid enforcement), that will amount to realisation of security and thus to "taking possession".
• The court agreed with the High Court that the solicitors received the hive-down proceeds on trust for the company but that those funds remained subject to the bank's charge until the bank's deed of release operated. The payments made by the solicitors to RBS pursuant to their undertakings were, on the agreed facts for the preliminary issue, payments out of monies subject to a floating charge and were acts by which RBS realised its security. Amounts received before the company went into liquidation therefore fell within section 196; amounts received after liquidation fell within section 175. The sums RBS recovered after the 2003 assignments were not subject to the bank's floating charge immediately before assignment and so were not caught by section 175.

Relief sought and disposition:

• The Court of Appeal agreed with the judge's substantive conclusions but set aside the formal declarations made at first instance. The Court answered the preliminary issues by holding there was a real prospect that the Commissioners would succeed in establishing that sections 196 and 175 applied; the matter was to return to the High Court to agree or to have revised directions for trial on the remaining issues.

Appeal allowed in part. The Court of Appeal upheld the High Court's substantive conclusions that payments received by RBS pursuant to the solicitors' undertakings were, in substance, a realisation of security and therefore fell within section 196 (if received before liquidation) or section 175 (if received after liquidation). However, the court set aside the first instance judge's formal declarations on procedural grounds and instead answered the preliminary issues directed on 13 April 2006, and remitted the matter for further case management or trial directions as appropriate.

The proceedings began by originating application issued by the joint liquidators on 3 November 2003. A preliminary issue was directed by order dated 13 April 2006 in the Chancery Division ([2006] EWHC 2813 (Ch) — judgment of Miss Susan Prevezer QC delivered 6 November 2006). Both parties were granted permission to appeal to the Court of Appeal, which delivered the present judgment on 29 November 2007 ([2007] EWCA Civ 1262).