Rayford Homes Ltd v Bank of Scotland Plc & Anor

A charge over future-acquired property may be a fixed charge where the chargor cannot realise the property without the chargee’s consent or release. The chargor’s ability to use surplus sale proceeds after that release does not convert the charge into a floating charge.

A repayment provision in a facility agreement does not, without clear words, restrict the extent of security created by a debenture or legal charge. Where an inter-creditor agreement contains an obvious drafting mistake, the court may construe it by correcting the language if the mistake and the required correction are clear. A contractual priority provision is construed in its commercial and documentary context and requires clear words before a fixed charge is subordinated.

Administrative receivers of a property investment company sought directions under section 35 of the Insolvency Act 1986 concerning the priority between security held by Bank of Scotland plc and Barclays Wealth Trustees (Guernsey) Ltd as trustee.

The bank held a debenture and legal charges over the company’s property. The trustee held a later debenture and an inter-creditor agreement stated that the bank’s security ranked first. A definition of “BoS Priority” was later amended to insert a monetary figure, although the defined term was not used in the operative clause.

The issues were whether the amendment limited the bank’s priority, whether the bank’s property security was fixed or floating, and, if the bank’s priority were limited, how the securities would rank.

1. Fixed charges over property. The bank’s fixed charge over future-acquired freehold and leasehold property, and its legal charges over individual properties, were effective fixed charges securing all monies due. The company could not realise any property free from the bank’s security without the bank’s release. That distinction was decisive. The company’s ability to use surplus sale proceeds after repayment of property-related advances did not make the charges floating charges. The reasoning in In re Spectrum Plus Ltd [2005] 2 AC 680 was distinguished on that basis.
2. Facility repayment provisions. The facility letter’s requirement that advances referable to a property be repaid on its sale governed repayment. It did not modify the extent of the security created by the debenture and legal charges.
3. Construction of the inter-creditor agreement. The insertion of £4m into the definition of “BoS Priority” had no sensible descriptive purpose and was intended to impose a limit. Applying Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, the court construed clause 2.1 as if it ended with the words “to the extent of the BoS Priority”. The limit concerned priority conferred by the inter-creditor agreement; it did not remove the bank’s priority under its fixed charges and legal mortgages over property.
4. The trustee’s debenture acknowledged that charges in favour of the bank, whenever created, ranked ahead of it. The inter-creditor agreement did not reverse the ordinary priority of fixed charges over a floating charge. Clear words would have been required to achieve that result.
5. Issue 3 was conditional and therefore did not arise. If the bank’s priority over property had been limited, the two debentures would have ranked pari passu because the agreement contained no provision giving the trustee priority above the limit.

Judgment was given for the bank on issues 2 and 3, and for the trustee on issue 1.