Two weeks ago, we looked at how reforms to the law of arrestment might impact on the concept of "effectually executed diligence" under sections 60 and 61 of the Insolvency Act 1986. In this bulletin, we consider the reforms proposed for inhibitions and land attachment and effectually executed diligence under those provisions.
Section 61 relates to the ability of a Receiver to deal with secured property and property subject to effectually executed diligence. In our bulletin on arrestments, we explained that a new section 61(1B) was proposed in the Bankruptcy & Diligence (Scotland) Bill. This provides that an arrestment will only be regarded as effectually executed if it was executed prior to crystallisation of the floating charge. The position on inhibitions is quite different. The Bill envisages a new section 61(1)(A) providing that:-
"an inhibition which takes effect after the creation of the floating charge… is not an effectual diligence."
This provision harks back to the proposals in the Bill to reform the law on floating charges; these include the proposal that floating charges will only be created once registered in a new Register of Floating Charges. The Bill also proposes that floating charges should rank with other floating charges and with other fixed securities by date of registration. In other words, a floating charge will prevail over a fixed security that was registered after the charge was registered, regardless of the fact that the charge has not at that point in time crystallised.
Clearly, it would make a nonsense of the proposed reforms to floating charges if an inhibition, which ranked behind a particular fixed security, ranked in front of a floating charge (as "effectually executed diligence") which itself prevailed over the fixed security. This explains the apparent inconsistency of treatment between arrestments and inhibitions in sections 61(1A) and 61(1B).
The process of land attachment will be commenced by registering a notice of land attachment in the Registers and serving that notice on the debtor. The Bill states that the land attachment will be created 28 days after registration of the notice. After the expiry of the 28 day period the attaching creditor will get a right in security over the property (or, as it is expressed in the Bill, "a subordinate real right over the land"). During the 28 day period, the notice is to have effect as if it were an inhibition registered in the Register of Inhibitions but restricted to the property mentioned in the notice of attachment. In view of the fact that until 28 days have elapsed the notice of attachment is to be treated like an inhibition, it cannot at that stage be regarded as "effectually executed diligence" in relation to any pre-existing floating charge, given the terms of the proposed section 61(1A). Similarly, once it obtains the status of a subordinate real right in security after 28 days, it would rank behind the charge in line with the general rule that heritable securities are to rank by date of creation.
The position therefore appears to be straightforward in relation to land attachment: if it is registered before a floating charge it prevails over the charge and if it is registered after the floating charge it does not. However, that is not the whole story. The Bill also proposes a change to the striking down of diligence provisions in section 37 of the Bankruptcy (Scotland) Act 1985 (as applied to winding up by section 185 of the 1986 Act) to deal with land attachment. The proposed new section 37(5B) of the Bankruptcy (Scotland) Act 1985 will provide that no land attachment created within 6 months of sequestration or winding up shall be effectual to create any preference in favour of the attaching creditor.
The Bill also proposes a new section 37(8A) which sets out what a trustee or liquidator will require to do where a sale of attached land is already underway. This will depend upon whether or not missives have been concluded. If they have not, the creditor cannot insist in the land attachment. If they have, the trustee or liquidator will require to concur in or ratify the disposition, in return for which, any net free proceeds are to be sent to him.
In next week's bulletin we will look at residual attachment and money attachment as "effectually executed diligence".