Variation

control of all the assets which are subject to the charge, and has power to do juridical acts in the name of the company. He can thus sell individual assets or -- and this is common -- the whole active side of the patrimony. ‘Liquidation’ in Scotland means two things: (1) the winding up of a solvent company and (2) formal insolvency proceedings in respect of an insolvent company. Liquidation can be (in either case) either judicial or extrajudicial.

The f loating charge is unlike ordinary security rights in many ways. One difference is that, once the charge has been created, any assets acquired by the debtor become subject to the charge without the need for any new juridical act by the debtor. Another difference is that as soon as an asset is alienated by the company it ceases to be subject to the charge, without the need for any juridical act by the creditor.

Whereas ordinary rights in security have a ranking which is prior to statutory preferences (preferential claims) such as tax claims, the f loating charge is ranked posterior to such preferences. But it will rank in priority to ordinary unsecured claims. On the question of whether there is priority over creditors who execute against assets of the debtor company before the charge attaches, there has been considerable controversy.92

Whether a f loating charge is (1) over the whole of C’s patrimony or (2) over some defined part of the patrimony, such as all movable property, is a matter for the parties to agree. In practice most f loating charges are over the whole patrimony.

The law does not place any limits on the value of the collateral in relation to the amount of the debt. It would be lawful to have a f loating charge over the whole patrimony of a debtor company to secure a debt of £1. The same is true of other security rights.

Variation

If a debtor grants a security for a pre-existing debt, and later becomes insolvent, the security may be voidable. Scots law has received the actio Pauliana, though there are many complexities and specialities.

The general principle, which is applicable not only to f loating charges but to any security, is that if (1) the security was granted for a pre-existing debt, and (2) the debtor was at that time already factually insolvent, in the sense that the total value of his patrimony was negative,93 and (3) the

92For a summary see Skene, Insolvency Law in Scotland 256--260.

93That is to say, the value of the assets was less than the value of the liabilities.

514 s e c u r i t y r i g h t s i n m o va b l e p r o p e r t y

debtor becomes insolvent within six months94 thereafter, then (4) the security can be reduced, which means declared by the court to be invalid. Fraudulent intent is not relevant. The action can be by any creditor, but in practice the action is almost always by the insolvency administrator. This area of law is known as that of ‘unfair preferences’.95

Reduction (judicial avoidance) is not the only possible remedy. Other remedies are also possible, depending on the circumstances of the case. Thus, in the example, if, a few weeks after the creation of the security A enforced it and sold to X, and X was in good faith, then X’s position could not be attacked. In that case the creditor who has received the unfair preference could be required to restore, by a money payment, the benefit which he has received.

Curiously, there is, in addition to the general law which has just been outlined, a special rule for f loating charges, whereby the suspect period is not six months but one year or (if the creditor is connected with the debtor company in certain defined ways) two years.96 Since this suspect period is longer, actions to avoid f loating charges are in practice raised under this special rule rather than under the general rules.

Scots law divides the actio Pauliana into two parts. One is the law of ‘unfair preferences’, which has just been outlined. The other is the law of ‘gratuitous alienations’. An unfair preference does not diminish the net patrimony (estate) of the debtor, for any diminution in the value of the assets is balanced by an equal diminution in the value of the liabilities. A gratuitous alienation, by contrast, is a juridical act which diminishes the net value of the estate.97 A donation is an example, but other examples are sales at overvalue, purchases at undervalue, and gratuitous discharges of debts. The remedies available are the same as for unfair preferences. However, the time-limits are more generous. A gratuitous alienation within two years before insolvency can be attacked, and if the beneficiary was an ‘associate’ the period is extended to five

94In some cases (namely where the action is a ‘common law’ one) a longer period may be applicable.

95The law about unfair preferences rules is contained mainly in the Bankruptcy (Scotland) Act 1985 s. 36. The 1985 Act does not apply to registered companies, but

s. 243 of the Insolvency Act 1986 extends s. 36 of the 1985 Act to registered companies. For analysis of the law see McBryde, Bankruptcy and Skene, Insolvency Law in Scotland.

96Insolvency Act 1986 s. 245.

97The law is contained mainly in the Bankruptcy (Scotland) Act 1985 s. 34 and the Insolvency Act 1986 s. 242, the latter applying to companies and the former to all other persons. The provisions are effectively identical.