Over the last few weeks, we have looked at how the proposed reforms to the law of arrestment and inhibition and the new diligence of land attachment require to be viewed for the purposes of sections 60 and 61 of the Insolvency Act 1986. In this bulletin, we look at the new diligences of residual attachment and money attachment under those provisions.
The position is most straightforward in relation to residual attachment. The Bill provides that a residual attachment will be created once the schedule of residual attachment is served on the debtor. It also provides that a residual attachment confers on the creditor "a right in security" over the attached property.
Interestingly there is no mention of residual attachment in the proposed amendments 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 Insolvency Act 1986). This seems to fly in the face of the policy which underlies the striking down provisions of equalising the position of creditors in the immediate run-up to insolvency. Perhaps this is because residual attachment immediately confers a right in security and the Executive has decided that, that being the case, it should not be able to be struck down as a diligence? If that is the case, the same thinking has clearly not been applied to land attachment. Land attachments also confer a subordinate real right in the land attached but the new proposed section 37(5B) provides that any land attachment created within six months of sequestration or winding up is to confer no preference on the attaching creditor.
If it is indeed the case that residual attachment has not been mentioned in the proposed amendments to section 37 because the Executive believes that residual attachment is properly classified as a security rather than a diligence, this will also impact upon how residual attachment should be viewed for the purposes of sections 60 and 61 of the 1986 Act. Arguably, if it is a security rather than a diligence, there is no need to consider when it amounts to "effectually executed diligence".
If that is correct, the question that remains is what ranking a residual attachment should receive. Provided it is executed prior to crystallisation, should it rank before the floating charge holder? Alternatively, should it only rank before the floating charge holder if it was executed before the floating charge was registered in the new Register of Floating Charges? By way of comparison, any inhibition or land attachment will only prevail over a floating charge if it has been created before the registration of the floating charge. However, that reflects the general rule that heritable securities are to rank by date of creation and the fact that there is a public register of land interests. The same cannot be said for some of the types of assets that residual attachment is meant to attach.
With no mention of residual attachment in the striking down provisions, it may be that receivers will require to apply to the court under section 61 to obtain the court's authority to sell assets attached in this way and to obtain a ruling upon how the attachment is to rank as against the floating charge holder.
The position is different again in relation to money attachment. Unlike residual attachment and land attachment, money attachment confers no right in security. The question therefore arises as to at what stage in the procedure it can properly be regarded as "effectually executed diligence". Broadly there are five stages in the procedure:-
1. Court officers attach and remove money and issue a schedule of attachment.
2. Within 14 days Sheriff Officers issue a report to the Sheriff.
3. Within 14 days of the report, the creditor applies for release of the funds (may be opposed).
4. The Sheriff makes a payment order, if appropriate.
5. The Court officers pay out the funds and produce a final statement to the Court.
The approach adopted in the case of Lord Advocate v Royal Bank in relation to arrestment was that a diligence was only "effectually executed" once all steps that required to be taken by the creditor had been completed. If that approach was adopted to money attachment it might be said that there is no effectually executed diligence until stage 4 has occurred. However, the rationale behind the decision of Lord Advocate v Royal Bank has, for a number of reasons, many of which are very particular to the law of arrestment, been seriously doubted and accordingly that approach may not be followed by the Courts.
Will anyone be prepared to litigate over this? Where it will be possible for a Receiver to strike down a money attachment under section 185 of the 1986 Act by simply winding up the company, probably not. Section 37 is to be amended to include money attachment in the general striking down provisions which enable certain diligences to be struck down if they were executed within 60 days of the date of sequestration or winding up. However, where a substantial sum of money has been attached more than 60 days previously, someone may have to ask the court to decide at what stage that money attachment should be viewed as "effectually executed diligence".