A. Sharp, Burnett and the General Principles of Insolvency Law
Insolvency is the acid test of property rights. Bankruptcy law and the law of corporate insolvency give – or should give – definitive answers to the question “who owns what?” It was in the quest for such definitive answers that I first befriended Robert Rennie. And over the years he has taken great delight in introducing me at his annual dinner for the brightest students in his property law honours class at the University of Glasgow as counsel on the losing side in Sharp v Thomson.1
In that case I was junior counsel for the receivers of Albyn Construction Ltd and Robert gave expert advice to the purchasers of a basement flat at 10 Whinhill Road, Aberdeen, or (as I suspect) the professional indemnity insurers of their solicitors. The flat was a modest property for which the purchasers paid only £40,000 in 1990. But it was not the flat itself that was the object of the litigation. Rather the insolvency profession wanted some clarity in the rules of insolvency law on the transfer of ownership) of heritable property: did real rights matter? What the insolvency practitioners
1 1996 SC (HL) 66.
© Lord Hodge, CC BY 4.0 http://dx.doi.org/10.11647/OBP.0056.06
wanted was a case involving personal bankruptcy in order to test whether there was a race to the register between the trustee in sequestration and the disponee. But such cases occur only very rarely as it requires the purchaser’s solicitor to be very dilatory before a trustee can get to the register first. As a result, the only case which arose at that time as a vehicle for testing the issue of property law was Sharp v Thomson, which, as is well known, had the added complication that it involved a floating charge.
That complication proved fatal to the receivers’ case in the House of Lords. Having obtained a magisterial judgment from Lord President Hope in the First Division on the structure of the Scots law of property,2 an opinion which will stand the test of time, our ship foundered in London on the rock of the floating charge. Such a charge was imported from English law in which it operates in equity as an equitable security. As Professor W A Wilson set out in an article in the Scots Law Times in 1962,3 the floating charge was also capable of analysis in a way that was consistent with traditional Scots insolvency law. However, such an analysis appeared strange, indeed shocking, to an English Chancery judge who was used to equity looking on that as done which ought to have been done. In particular, in the contract of sale of land equity would have transferred the beneficial interest in the land to the disponee, thereby protecting him from the seller’s insolvency. Thus, after Colin Campbell QC (now Lord Malcolm) had made a very skilful indeed brilliant – speech in opening his appeal, my senior, Ronald Mackay QC (now Lord Eassie) faced a bench which was hostile to his arguments. At one point when he was being assailed on all sides, we heard the mournful sound of bagpipes from a boat on the Thames. Ronald Mackay suggested to the court that it was a lament for Scots property law.
Several years later, the insolvency profession had an opportunity to revisit the issue when, most unusually, the question arose in a personal insolvency: was there a race to the register between the disponee and the trustee in sequestration? I was not involved at first instance but came into the case, Burnett’s Trustee v Grainger,4 on an appeal to the sheriff principal.
Again, the disputed property was not of great value but the action served as a vehicle to clarify the law. The issue was stark: did the property, to which the seller retained title, fall within the sequestration of his estates
2 1995 SC 455.
3 W A Wilson, “Floating Charges” 1962 SLT (News) 53.
4 2004 SC (HL) 19; 2002 SC 580 (Inner House); 2000 SLT (Sh Ct) 116 (Sheriff Principal).
after he had received the purchase price and had delivered the disposition to the purchaser?
Reading the judgments of the House of Lords in Burnett’s Trustee one can gain the impression that the case was concerned solely with personal insolvency legislation. In a sense that is true because the central rules of the Scots law of personal insolvency are statutory. But in reality it concerned the building blocks of Scots property law. In particular, the judgment of the House of Lords supported the clear distinction between the law of property and the law of obligations which is common to many legal systems which have been strongly influenced in their structure by Roman law. It reaffirmed the decision of the whole bench of the Court of Session in Young v Leith that:5
[A] completed real right, good in a question between granter and grantee, and bad against all the rest of the world, is an absolute legal contradiction in terms.
I believe that the exercise of clarification, which the insolvency profession initiated, will bring lasting benefits to Scots law. The distinction between real rights and personal rights, which is the hallmark of civilian legal systems, gives a simple and principled framework to property law. It can readily be understood by the non-specialist lawyer and provide a simple template for legal analysis. But that does not mean that we should become obsessed about real rights and personal rights and treat as heretical or unprincipled any reform proposal which creates an exception to general rules. The effect of Sharp v Thomson is that a floating charge will not attach property for which a disponee has paid the purchase price and of which the disposition has been delivered. It is an exception to the general rule in insolvency that priority in insolvency is determined by the prior acquisition of the real right. That exception can be justified by the unusual nature of the floating charge, both in its origin as an equitable charge in English law and also in the way it creates a real right in security over land without registration in the Land Register. To deny the ability of the law to create exceptions to general rules would be to introduce inflexibility. It would risk consigning Scots property law and commercial law to an ossuary. In my view the real value of the clarification which Sharp and Burnett’s Trustee
5 (1847) 9 D 932 at 945.
have provided is that there is a clear structure which law reformers can use to develop our law.
B. Exceptions to the General Principles
The effect of the floating charge in Burnett’s Trustee is not the only departure from the general rules of insolvency law. There are also special rules for transactions specifically induced by the debtor’s fraud and also for trusts.
The title of a debtor which has been acquired through fraud is voidable in the hands of an attaching creditor and thus also in the debtor’s insolvency.6 In such cases fraud passes against creditors. But the scope of the doctrine is not clear; fraud in a contract is not a vitium reale. Professor Thomson suggests that it is only where the insolvent’s fraud specifically induced the transfer of the ownership of the property, which would not otherwise have passed, that the property will not fall to the trustee in sequestration.7
It is well established in our law that property which a debtor holds in trust for another does not fall within the sequestration of the debtor’s estate.
That rule extends to land and to latent trusts,8 and since 1985 has been the subject of a statutory provision.9 Until recently, Scots lawyers and South African lawyers have analysed the right of the beneficiary as an unusual personal right against the trustee which prevails in the latter’s insolvency – the protected personal right. Recently, it has become more fashionable to analyse trust rights in terms of a separate patrimony. The trustee has separate patrimonies. He has his own patrimony, which comprises his personal assets and liabilities, and a separate trust patrimony which comprises the assets and liabilities of the trust.10
It is also well settled in Scots law that an obligation to assign a security over property or an obligation to grant a conveyance does not create
6 Bell, Comm I, 309-10; Mansfield v Walker’s Trustees (1835) 1 Sh & Macl 203; A W Gamage Ltd v Charlesworth’s Trustee 1910 SC 257.
7 J M Thomson, “Fraud,” in The Laws of Scotland: Stair Memorial Encyclopaedia, vol 11 (1990) para 778; K G C Reid, “Property” in The Laws of Scotland: Stair Memorial Encyclopaedia, vol 18 (1993) para 694.
8 Heritable Reversionary Co Ltd v Millar (1892) 19 R (HL) 43.
9 Bankruptcy (Scotland) Act 1985, s 33(1)(b).
10 Lord Malcolm has recently supported this analysis: Glasgow City Council v The Board of Managers of Springboig St John’s School [2014] CSOH 76 at paras 16 and 17. So also has Lord Drummond Young in Ted Jacob Engineering Group Inc v RMJM 2014 SC 579 at para 90. See also Scottish Law Commission, Report on Trust Law (Scot Law Com No 239, 2014) para 3.4.
a trust in respect of that property.11 This rule is of central importance to the Scots law of property and distinguishes it from English property law in a fundamental way. In Mansfield v Walker’s Trustees,12 Lord Brougham pointed out the absence of equitable estates in Scotland and described English equitable titles thus:13
An agreement to convey an estate for a valuable consideration executed is with us, to all substantial purposes, a conveyance which vests the property in the purchaser. … Whatever is covenanted to be done is held in equity as done, so that a title by mere agreement is quite as paramount to any subsequent incumbrance, or other puisne title, as a legal conveyance. This is not the law of Scotland.
The last sentence is of central importance. The absence in Scots law of that rule of equity has generated academic controversy as to the scope of a constructive trust to confer rights which would prevail in a debtor’s insolvency. In the rest of this essay I consider that question in the context of a recent decision of the UK Supreme Court on the English law of constructive trust: FHR European Ventures LLP v Cedar Capital Partners LLC.14