Scottish Sheriff Court Decisions

SHERIFFDOM OF LOTHIAN AND BORDERS AT EDINBURGH

 

[2016] SC EDIN 70

A56/14 [Jedburgh]

JUDGMENT OF SHERIFF PRINCIPAL MHAIRI M STEPHEN QC

 

In the appeal

 

3D GARAGES LIMITED

 

Pursuers and Appellants

 

Against

 

PROLATIS COMPANY LIMITED

 

Defenders and Respondents

 

Pursuers and Appellants:   Davies, Advocate

Defenders and Respondents:   Bell, Advocate

 

EDINBURGH, 30 September 2016

The Sheriff Principal, having resumed consideration of the cause, refuses the appeal; adheres to the sheriff's interlocutor of 27 May 2015 and appoints the cause to a procedural hearing on a date to be fixed to consider further procedure and all questions of expenses in connection with the appeal.

 

Note:

[1]        This appeal is taken against the sheriff's interlocutor of 27 May 2015 pronounced following debate.  The effect of that interlocutor is to refuse the pursuers' and appellants' first and third craves and allow proof before answer on their remaining craves.  The first crave is in the following terms:

"1.  To find and declare that the following Standard Securities are void and unenforceable, namely (i) Standard Security dated 17 January 2011 and registered in the Land Register for Scotland on 10 February 2011 over the heritable subjects known as Grantshouse Filing Station and Garage, Grantshouse, Duns, Berwickshire TD11 3RW ("Grantshouse Filling Station and Garage"), and registered in the Land Register for Scotland under title number BER2485; (ii) Standard Security dated 17 January 2011 and registered in the Land Register for Scotland on 10 February 2011 over the heritable subjects known as the Wheatsheaf Inn, Main Street, Reston, Eyemouth, Berwickshire TD14 5JS ("The Wheatsheaf Inn"), and registered in the Land Register for Scotland under title number BER2447; (iii) Standard Security dated 17 January 2011 and registered in the Land Register for Scotland on 10 February 2011 over the heritable subjects known as Eyeview, Grantshouse, Duns, Berwickshire TD11 3RW ("Eyeview"), and registered in the Land Register for Scotland under title number BER3201; (iv) Standard Security dated 17 January 2011 and registered in the Land Register for Scotland on 10 February 2011 over the heritable subjects known as The Toll House, Grantshouse, Duns, Berwickshire TD11 3RW ("The Tollhouse"), and registered in the Land Register for Scotland under title number BER2779; and (v) Standard Security dated 17 January 2011 and registered in the Land Register for Scotland on 10 February 2011 over The Toll House Ground and registered in the Land Register for Scotland under title number BER5584 and that the Pursuers are entitled to have said Standard Securities discharged."

 

[2]        The appeal, which I heard over two days in October 2015 and August 2016, focuses on this crave.  Crave 3 seeks rectification of the Land Register in the event that the standard securities referred to are void and unenforceable.  At the beginning of the appeal hearing it was accepted by the appellants that the power to rectify any inaccuracy of this nature by virtue of section 9 of the Land Registration (Scotland) Act 1979 had been repealed.  Part 8 of the Land Registration (Scotland) Act 2012 contain the current operative provisions.  Accordingly, Crave 3 as currently framed is incompetent.

[3]        The background to these proceedings is an agreement which settled separate litigation in the High Court of Justice, Chancery Division in London.  A copy of that agreement is 5/11 of process.  The appellants are a party to the settlement agreement of 17 January 2011 (party 16).  The respondents are not a party to the agreement.  They are referred to in the interpretation section of the agreement (1.1) as the security trustee as follows:-

"Security trustee: means Prolatis Company Ltd, having their registered office at Arch.Makarios Avenue, No 9 Lazaros Centre, Office 104, 1^st Floor, Post Code 6307 PO Box 40899, Larnaca, Cyprus."

 

The settlement agreement is an agreement to settle proceedings commenced in the Chancery Division by parties (1) – (9) against parties (10) – (15) and another regarding the disputes which had arisen.  Parties to the agreement include party (16) who are the appellants in this action.  The parties to the settlement agreement accept that its terms are binding.  The agreement records at Clause 3.1 that the parties (10) to (16) shall pay to parties (1) – (9) (or David Gill as their nominee) the total sum of £1,500,000 by no later than 4pm on the day that is one year from the date of this agreement.  It is also recorded that it is the intention of the parties to raise the settlement proceeds by way of sale of properties.  Clause 3.6 provides that David Gill is obliged to accept any instalment payments and that he shall be entitled to nominate a recipient to whom any instalment shall be paid in addition to or in place of him.

[4]        The appellants are the heritable proprietors of five properties situated in the Borders.  They granted standard securities over each of the properties in favour of the defenders on 17 January 2011 and these were registered in the Land Register on 10 February 2011.  It appears that the standard securities were granted in security of all sums due or to become due to David Gill in terms of the settlement agreement.  The obligation to provide security for the payment due in the terms of agreement arises from part 4 of the agreement which is in the following terms:-

"4.1   3D Garages shall provide security for the payment of the £1,500,000 by way of standard securities over the Wheatsheaf Inn, Garage Grantshouse Filling Station, Eyeview and the Tollhouse and Ian Darroch shall provide security for the payment of the £1,500,000 by way of a standard security over 1 Montgomerieston Street each in favour of the Security Trustee (each such standard security being a "standard security" and "standard securities" shall be construed accordingly)".

 

Part 4 goes on to give further specification of the method by which the standard securities are delivered and registered.  Likewise it provides for discharge and enforcement of the rights of the creditor in the standard security.  In particular the parties agree that the Security Trustees on behalf of parties (1) and (9) shall be entitled to enforce the Standard Securities if certain instalments of the debt are not paid timeously.  Party No (1), David Gill, has particular prominence in this part of the agreement.  He has responsibility for registering the standard security in terms of Clause 4.4 and he has the obligation to provide a release and discharge of the security (or procure the lodgement by his nominee) with the solicitors acting in any sale of these properties.  The proceeds of any sale under deduction of legal costs, etc., are to be paid into an account nominated by David Gill (Clause 4.6).  Clause 4.7 provides as follows:

"4.7  In the event that less than £125,000 of the £1,500,000 has been paid three months from the date of this agreement then it is agreed that the security trustee on behalf of parties (1) to (9) shall be entitled to enforce the standard securities, sell the properties and apply the net proceeds of sale against the sums payable under this agreement and so that they shall be apportioned first against any unpaid part of any instalment and thereafter against the next instalment or instalments that shall be due."

 

"4.8  In the event that less than £550,000 of the £1,500,000 has been paid six months from the date of this agreement then it is agreed that the Security Trustee on behalf of Parties (1) to (9) shall be entitled to enforce the standard security, sell any Properties then unsold and apply the net proceeds of sale against the sums payable under this agreement so that they shall be appropriated first against unpaid part of any instalment and thereafter against the next instalment or instalments that shall be due."

 

The respondents, being the security trustees in terms of the agreement, on 24 May 2012 and on 30 August 2013 served "calling up" notices demanding payment of all sums due to the respondents failing which they would sell the security properties or exercise any other powers available on default.

[5]        It is in that context that these proceedings were raised in Duns Sheriff Court in 2013.  The appellants, having granted the standard securities in favour of the respondents as required in terms of the agreement and calling up notices having been served, seek, in terms of their first crave, a finding that the standard securities are void and unenforceable.  In short, their argument is to the effect that there are no sums due by the appellants to the respondents which are secured by the standard securities.  The appellants argue that the Conveyancing and Feudal Reform (Scotland) Act 1970 ("the 1970 Act") provides that the person in whose favour a standard security is granted must also be the creditor in the obligation secured by the standard security.  As these standard securities purport to be in security of debts owed to a third party (David Gill) they are not in conformity with that legislation and Scots law.  They are therefore void and unenforceable.  Only the creditor in respect of the debts secured by the standard security may enforce the right in security.

 

Submissions for Appellants

[6]        Counsel for the appellants prepared and lodged commendably comprehensive submissions.  He referred to these submissions in oral argument.  Therefore I do not propose to set these out at length.  I was invited to allow the appeal;  recall the interlocutor of 27 May 2015 with the exception of that part which repels the first plea in law for the defenders and grants sanction for the employment of junior counsel.  I should sustain the pursuers' first and second plea in law.  Mr Davis conceded that Crave 3 may require amendment therefore the pursuers' third plea in law in support of that crave should neither be sustained nor repelled.  The corresponding pleas in law for the defender should be repelled.  Counsel for both parties were agreed the cause was suitable for the employment of junior counsel and sanction should be granted.  The preferred course was to deal with expenses and further procedure at a later date once I had determined the issues to be argued on appeal.

[7]        The principal submission for the appellant was that any right in security, including a standard security, required to be held by the creditor in the personal obligation.  In this case the respondents were not the true creditors.  The standard securities are in respect of sums due to Mr David Gill rather than the respondents.  In essence the appellants' argument is that the standard security is void however if valid at all is unenforceable.  It is an "empty husk" as described in Watson v Bogue 2000 SLT (Sh Ct) 125.  The standard securities are not in a form recognised by the law of Scotland and are therefore void and unenforceable.

[8]        The appellants granted standard securities in favour of the respondents in security for debts owed to Mr Gill in terms of the settlement agreement.  Title to the security subjects lies with the appellants however the creditor in the debt constituted by the settlement agreement is Mr Gill not the respondents.  To be valid the standard security must be granted in favour of the creditor in the personal obligation secured by it.  The standard security is a heritable security or right in security and if such a right in security is held by a creditor it is accessory to the principal obligation owed to the creditor.  It is a means of enforcing the debt or payment of the debt.  I was referred to Gloag and Irvine "Rights in Securities" as authority for the proposition that a right in security is accessory to the principal debt.

[9]        The standard security, although created by the 1970 Act, has the appearance of a new form of security, however, it is simply another form of heritable security.  The law which applies to heritable securities generally applies equally to a standard security.  I was referred to the dicta of Lord Rodger of Earlsferry in the Royal Bank of Scotland plc v Wilson 2011 SC (UKSC) 66 at paragraph [16].  An analysis of the 1970 Act leads to the conclusion that a standard security can only be granted in favour of the creditor in the personal obligation or debt.  A "creditor" is defined as the person to whom the personal obligation secured by the standard security is owed and it is clear from the other terms of the Act that it is the creditor who is to have title to the standard security.  It is the creditor who has vested in him the right to enforce the standard security.  The 1970 Act is based on the premise that the creditor is the holder of the standard security.  If the holder of the standard security is not the creditor then the security is pointless and unenforceable.  If the creditor is not the holder of the standard security then the creditor would have no right or title to enforce the standard security or to sell the security subjects. The standard security would therefore be worthless.  In support of that proposition I was referred to the dicta of Sheriff Principal Nicholson in Watson v Bogue (supra) and Trotter v Trotter 2001 SLT (Sh Ct) 42.  The dicta of the Sheriff Principal are consistent with the decision in McCutcheon v McWilliam (1876) 3R 565.

[10]      It was submitted having regard to the general law applicable to rights in security and the terms of the 1970 Act it is an essential requirement of a valid and effective standard security that the grantee of the security and the creditor of the personal obligation thereby secured are the same person.  This has always been understood to be the position in relation to rights in security generally and to hold otherwise would represent a significant departure from well established principles of Scots law.  It follows that the standard securities in the present case are not in a form recognised by the 1970 Act and are therefore void and unenforceable.

[11]      It is not sufficient to follow superficially the requirements of the 1970 Act.  It is necessary to comply with the substantive requirements of a standard security (Bennett v Beneficial Bank plc 1995 SLT 1105).  The effect of section 9 of the 1970 Act is to prohibit heritable securities which do not conform to the substantive requirements of a standard security.  Accordingly, it was submitted that the standard securities in the present case are void and unenforceable because they purport to create a different form of heritable security not recognised by the law of Scotland in which the holder of the security is a different person from the creditor under the personal obligation or debt.  This is inconsistent with the form of standard security created by the 1970 Act.  The appeal should be allowed and declarator in terms of Crave 1 granted.

[12]      Mr Davies proceeded to deal with the subsidiary arguments which he anticipated would be advanced on behalf of the respondents as foreshadowed in the pleadings.

[13]      The respondents could not be regarded as the true debtor in the principal obligation in the sense that the debts had been assigned to them under the settlement agreement.  Clause 17 of the settlement agreement relates to third party rights.  A third party cannot acquire rights in terms of the agreement.  This excludes the right of any third party such as the respondents to enforce or acquire rights under the agreement.

[14]      The settlement agreement itself does not assign the debts to the respondents.  The requirements for an effective assignation are not present.  (Gallemos Limited (In Receivership) v Barrett Falkirk Limited 1989 SC 230).  In that case the court decided that an effectual assignation must contain words which can be construed as effecting an immediate transference of 'A's' rights against 'C' ('A's debtor) to 'B' (the assignee) and the transfer is completed when intimation of the transfer is made to 'C' who then knows that 'B' has become his creditor in place of 'A'.  'A's' debtor must know the extent of his obligation to the assignee.  In this case there are no words in the settlement agreement which indicate an immediate transference of Mr Gill's rights in favour of the respondents. There is therefore no transference of the debt from Mr Gill to the respondents by assignation.

[15]      The Representative Argument.  This alternative argument proceeds on the basis that Mr Gill is the creditor in the personal obligation but that the respondents are likewise the creditors as the representative of Mr Gill.  The word 'representative' in section 30(1) of the 1970 Act does not mean 'agent' but rather one who acquires title to the debt as the representative of the creditor eg as executor or trustee in sequestration.  That is the proper meaning of representative.  There is no rationale for including an agent in the definition of 'representative' in section 30(1) of the 1970 Act.  The only other use of the word 'representative' in the 1970 Act is in section 19(2) where it is clearly referring to the representative of a deceased proprietor of the security subjects.  This is consistent with the appellants' interpretation of the term.  The term "representative" therefore does not include agent and the respondents' representative argument should be rejected.

[16]      Trust Argument.  It was anticipated that the respondents will argue that the settlement agreement constituted the respondents as "trustees" holding the debts in trust for Mr Gill and others.  The respondents are described as the "security trustees".  Apart from that there is nothing in the agreement to indicate that a trust was created such that the respondents can be considered trustees.  I was referred to Gloag and Henderson (41.05).  The requirements for trust are not present in this case.  There is no declaration of trust.  There is no acceptance of office.  The respondents, it has to be remembered, are not parties to the settlement agreement and there would require to be some other step for a trust to be created.  If there is no trust there can be no transfer of the debt to the respondents.

[17]      In any event, if any of the subsidiary arguments of the respondents were accepted it would create a self-contradictory situation.  If the debts are assigned to the respondents or assigned to the respondents in trust then these are debts owed to the respondents and not to the real creditor, Mr Gill.  If the respondents' arguments are correct then there is no debt due to Mr Gill which can be said to be secured by the standard securities.  The argument of the respondent is self-contradictory and inconsistent.  These arguments should be rejected and the appeal should be allowed.

 

Submission for Respondents

[18]      On behalf of the respondents, Mr Bell's principal motion is to refuse the appeal and adhere to the sheriff's interlocutor of 27 May 2015.  He accepted that the issue of the respondents' cross appeal with regard to the fourth crave of the Initial Writ should be put to one side and not argued at this stage.  He agreed that further procedure and all questions of expenses should be reserved and dealt with at a later date.

[19]      It was argued on behalf of the respondents that the context to these proceedings is of great importance, that being the agreement to settle or compromise chancery proceedings in London. (5/11 of process)  The appellants by raising these proceedings seek to avoid their obligations in terms of the settlement agreement or prevent the due implementation of that agreement.  The appellants are a party to the agreement who along with their co-defendants agreed to pay the sum of £1.5m to parties (1) to (9) (or David Gill as their nominee) (see Clause 3.1).  The monies are to be raised from the sale of properties four of which are owned by the appellants.  The appellants bind themselves to provide security for the sums due by way of granting standard securities over property owned by them in favour of the respondents as "security trustee".  The appointment of a "security trustee" is a practical commercial measure and an integral part of the consensual arrangements reached between the parties.  The convening of a single entity to enforce obligations on behalf of a number of creditors, as here, is an effective commercial measure.  There should be no doubt as to the intention of the parties as set out in the agreement.  In particular Clauses 4.7 and 4.8 underline the function and purpose of the "security trustee" who acts on behalf of parties (1) to (9).  They are entitled to enforce any of the standard securities.  In effect, the situation which the court is being asked to address is that the appellants having delivered the standard securities in implement of their obligations under the agreement now contend that they are void and unenforceable.  This court should be slow to accept that contention and overturn the sheriff's decision.  It is suggested that the appellants are, in any event, insolvent.  The appellants' precarious financial position had led to the motion for caution which was granted by the court in February of this year.  In terms of Clause 13 the parties accept that they must use their respective reasonable endeavours to give effect to the spirit and intent of the agreement even if one part or provision of the agreement is found to be void or unenforceable.  Accordingly, even if the standard securities are invalid the appellants are still liable in terms of the agreement and in terms of that clause would be obliged to deliver a valid standard security.  The court should not sustain the appellants' argument unless there are statutory provisions which require the court to do so.

[20]      It is therefore necessary to look at the statutory provision that creates the standard security – the Conveyancing and Feudal Reform (Scotland) Act 1970 ("the 1970 Act").  The appellants' contention that the standard security holder must be the creditor in the debt or personal obligation requires to be scrutinised with reference to the statute which creates the standard security.  Section 9 of the 1970 Act provides for a new form of heritable security to be known as a standard security.  Section 9(3) and (8) read together provide that a heritable security for the purpose of securing any debt must be in the form of the standard security.  However it is clear from sub-section 8 that there need be no actual debt.  In this context "debt" means "any obligation due or which will or may become due, to repay or pay money…."  These statutory provisions undermine the proposition advanced by the appellants that the security must not only be accessory to a debt but that debt must also be due by the grantor to the grantee.

[21]      Section 11 of the same enactment deals with the effect of the recorded standard security.  This operates to vest in the grantee a real right in security for the performance of "the contract to which the security relates".  That provision also points to the appellants' argument being misconceived.  There is no need for the grantee to be the same person as involved with the debtor in a debt or under any contract.  In any event, in terms of the settlement agreement, all parties accept that Prolatis as the security trustee may enforce the standard security.  That agreement equiparates with "the contract" as referred to in section 11.  It is therefore competent for the real right to be vested in a trustee for the purpose of implementing any contract or agreement.  The sheriff was therefore correct to hold that the standard security was valid.

[22]      No authority had been cited by the appellants which supports the argument advanced by them in this appeal.  The sheriff was correct to hold that the authorities cited to him were not in point.

[23]      The respondents' subsidiary or esto submission if the appellants' argument is correct in law is to the effect that the respondents are nonetheless the creditors in both the personal obligation and standard securities.  Section 30 of the 1970 Act provides this interpretation of the term "creditor" and "debtor".

"30(1) - in this part of this Act, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say:-

"Creditor" and "debtor" shall include any successor in title, assignee or representative of a creditor or debtor".

 

The sheriff correctly deals with the proposition that the defenders hold the standard securities in trust for the creditors in the contract or settlement agreement.  The appellants agreed the appointment of the defenders as "security trustee" to hold and enforce the standard securities.  I was referred to Gloag & Henderson (Chapter 41) also referred to by the sheriff at page 65 of his judgment.  The defenders may equally stand as assignees, the debt having been assigned to them as "security trustee" for the purpose of collection and redistribution to the entitled parties in terms of the Agreement.  In Clause 2.1 the parties agree that the terms of the agreement are immediately and effectively binding on them.  The settlement agreement and the standard securities were executed on the same date.  The appellant's reliance on Gallemos Limited (in receivership) v Barrett Falkirk Limited (supra) is misconceived.  In Gallemos emphasis was placed on the need for intimation of the transfer of A's right against C to B.  Here the assignation arises as a result of an agreement to which the pursuers are a party and they therefore know the extent of their obligation to pay the defenders as assignees.  The decision in McCutcheon stressed that any words which express a present intention to transfer are sufficient as an assignation.  When construing a commercial document the court will prefer a construction which gives it binding effect.  (Lord Wheatley in R.J. Dempster v Motherwell Bridge and Engineering Company 1964 SC 308 at page 327).

[24]      The respondents' final esto argument is to the effect that the respondents, in the event that they are neither trustee nor assignee, are the representatives of the creditor or creditors.  The appellant's argument is that the term "representative" is to be read as the personal representative in the technical sense.  The expression "representative" does not require a particular or technical meaning.  It should be given its ordinary meaning namely someone who represents the creditor.  I was referred to the Glossary of Scottish and European Union Legal Terms published by the Law Society of Scotland (Tab 5 of the respondent's authorities) in which representative is defined as "a person who represents or takes the place of another person".  This follows Jowitt's Dictionary of English Law.  To hold that the defenders are the representatives of the creditors is entirely consistent with the settlement agreement.  In terms of section 30(1) of the 1970 Act the respondents possess the common characteristics of the categories mentioned and in each case possess a legal right to enforce the debt.  The defenders have such a right by virtue of Clause 4 of the agreement.  The appellant's argument – that the security trustee, specifically empowered by all parties in the settlement agreement to hold the security for debt, is then not entitled to recover that debt – is unusual and perverse.  The appeal should be refused.  Crave 3 should be refused as incompetent.  All other issues including expenses in the cross-appeal should be dealt with later.

 

Appellant's reply

[25]      Counsel for the appellants repeated his principal argument that any security right must be ancillary to a debt or personal obligation and be constituted between the debtor and creditor.  In these circumstances the standard securities cannot operate and are indeed an "empty husk".  The sheriff erred in holding that the debt had been assigned either absolutely or in trust to the respondents.  The respondents, furthermore, are not representatives of the creditor.  An agent is not a representative.  The sheriff failed to address properly both the argument on validity and the esto argument.  The appeal should be allowed; Crave 1 sustained; expenses reserved and the case put out by order for further procedure.

 

Decision

 

[26]      The appellants' principal argument put simply is this – in terms of the 1970 Act the holder of a standard security must also be the creditor in the obligation secured by it.  In the circumstances of this case, the appellants argue that the standard securities granted by them in implement of their obligations in terms of the settlement agreement to which they are parties and bind themselves, are void and unenforceable.  They say so because the standard securities although they are granted in favour of the respondents purport to secure debts owed to a third party Mr David Gill.  Mr Gill is also a party to the settlement agreement and a person, along with others, who in terms of that agreement is owed £1.5million by parties which include the appellants.  The appellants also contend that a standard security which creates a real right in security may only be granted in favour of the creditor in the obligation secured by it.  Accordingly, these purported standard securities are not in a form recognised by the Law of Scotland and are therefore void and unenforceable.

[27]      The background to these proceedings is the settlement agreement.  The standard securities were granted in favour of the respondents at the same time as the agreement was signed by the parties including the appellants.  The agreement binds the parties to that agreement (Clause 2.1).  Each party warrants and represents to the other that it has right, power and authority to execute, deliver and perform this agreement (Clause 10.2).  The appellants are the sixteenth (16th) party to the agreement and having granted the standard securities the appellants raise these proceedings after calling up notices are served on them in terms of s.24 of the 1970 Act.  The proceedings have as their purpose the setting aside of the standard securities as void and unenforceable (Crave 1).  Crave 3 seeks rectification of the land register in the event of decree in terms of Crave 1.  However, Crave 3 is now incompetent standing the enactment and coming into force of the Land Registration (Scotland) Act 2012.  The sheriff was correct to repel the appellants' third plea in law and refuse Crave 3.

[28]      The appellants' principal argument in support of Crave 1 appears to have as its main purpose the avoidance of their obligations in terms of the settlement agreement.  However, in the event that the appellants' principal argument succeeds the terms of Clause 13 would cause difficulty for them particularly in face of an action for specific implement.  Clause 13 is in the following terms:

"13.   Severability

If any provision of this agreement is found to be void or unenforceable, that provision shall be deemed to be deleted from this agreement and the remaining provisions of this agreement shall continue in full force and effect and the parties shall use their respective reasonable endeavours to procure any such provision is replaced by a provision in which is valid and enforceable, and which gives effect to the spirit and intent of this agreement."

 

[29]      In my opinion, the appeal falls to be determined on a proper construction of the 1970 Act Part II which makes provision for the standard security.  The important sections for the purpose of this appeal are sections 9 (the standard security), 10 (the import of forms of and certain clauses in standard security), 11 (the effect of a recorded standard security and incorporation of standard conditions), 24 (application by creditor for remedies on default) and 30 (interpretation of Part II).  Section 9 provides in a straightforward fashion that Part II has effect for the purpose of enabling a new form of heritable security to be created to be known as a standard security and that security is to be expressed in conformity with one of the forms in Schedule 2 to the Act.  It is not suggested that these standard securities do not conform to the statutory requirements in respect of their form.  Section 9(3) is in the following terms:

"(3)   A grant of any right over land or a real right in land for the purpose of securing any debt by way of a heritable security shall only be capable of being effected at law if it is embodied in a standard security."

 

Debt has the meaning assigned to it in sub-section (8) in the following manner:

"(8)(c)  "Debt" means any obligation due, or which will or may become due, to repay or pay money, including any such obligation arising from a transaction or part of a transaction in the course of any trade, business or profession…."

 

Accordingly, a standard security may secure a debt due or an obligation which is in existence together with an obligation which may or will become due in respect of a future or contingent debt.  There is nothing in this provision which suggests that the heritable security or standard security is solely accessory to the principal obligation owed to a creditor as that obligation may not exist when the standard security is created.  The statutory requirements for the creation of a standard security are minimal and fairly straightforward even if the Act as a whole is not without complexity.  There is no provision or requirement in the statute that the creditor in the standard security and principal obligation must be the same person.  Debt has the meaning assigned to it in section 9(8) to which I have referred.  Creditor and debtor have the meaning assigned by section 30.  Section 9(3) establishes that a standard security must be used to effect or create a real right in land for the purpose of securing any debt.  If the intention was to restrict the effect of a standard security to a specific debt the word "any" would not have been selected and the enactment should have been explicit in so doing.

[30]      Section 11 stipulates the effect of the recorded or registered standard security by providing as follows:

"11 (1) Where a standard security is duly registered or recorded, it shall operate to vest in the grantee a real right in security for the performance of the contract to which the security relates".

 

In my opinion that is as far as the statute goes in relating the standard security to the performance of any obligation.  The right in security is concerned with the performance of "the contract to which the security relates".  The statutory provisions do not restrict the ambit of the standard security to the narrow meaning contended for by the appellants.  The appellants' argument necessarily involves the proposition that if the holder of the standard security is not the creditor in the contract or personal obligation then the creditor cannot have a real right in security and the grantee not being the true creditor is the holder of a worthless and unenforceable security.  Neither section 9 nor section 11 stipulate such a restriction.  Instead the effect of registration of a standard security is as stated above and is capable of securing performance of a related contract.  The standard security is a broad instrument and concept, capable of creating a right in security which is flexible and which can operate to enable a wide range of commercial arrangements to be put into effect and secured by a single form of security.

[31]      The appellants further contend that an ex facie valid standard security in the form of these standard securities is unenforceable and to use the terminology of Watson v Bogue (supra) these securities would be: "A mere husk, empty of any content".  However, the 1970 Act provides for enforcement of a standard security by application to the court for remedies on default.  Section 24(1) is in the following terms:

"Without prejudice to his proceeding by way of notice of default in respect of a default within the meaning of standard condition 9(1)(b), a creditor in a standard security, where the debtor is in default within the meaning of that standard condition or standard condition (9)(1)(c), may apply to the court for warrant to exercise any of the remedies which he is entitled to exercise on a default within the meaning of standard condition 9(1)(a)."

 

From that provision it can readily be seen that a creditor in a standard security may apply to the court for warrant to exercise remedies on default.

[32]      For the sake of completeness the interpretation section (section 30) assigns the following meaning to creditor and debtor:

" 'Creditor and Debtor' shall include any successor in title, assignee or representative of a creditor or debtor."

 

Accordingly, an analysis of the statutory provisions provides no obstacle to finding that the standard securities are both valid and enforceable.

[33]      The appellants developed the argument further to the effect that the statute could not be considered in isolation and that a right in security cannot be created which does not accord with the law of Scotland.  It was contended by the appellants that the standard securities here do not create a properly constituted right in security.  It was argued that the authorities cited supported the argument advanced by the appellants that any right in security is subsidiary or accessory to some principal obligation and the parties to the principal obligation must be parties to the standard security (Gloag and Irvine "Rights in Security").

[34]      I now turn to consider the authorities advanced in support of this appeal.  Watson v Bogue (supra) is an action based on averments of professional negligence and breach of contract.  The defenders are a firm of solicitors and provided legal services to the pursuer (J.W.) who had made an unsecured loan to her brother (W.W.).  When the brother became a creditor of a third party, that party granted a standard security in W.W.'s favour and by Minute of Agreement created a separate personal obligation.  J.W. and W.W. instructed the defenders to act in the assignation of W.W.'s interests in the security to J.W.  The appeal involved the issue whether the assignation of the standard security also carried with it the underlying personal obligation.  This, of course, was argued in the context of alleged professional negligence and the proper interpretation of section 14 of the 1970 Act.  The question on appeal to the Sheriff Principal was whether the assignation of the standard security by W.W. to J.W. effectively assigned the personal obligation also.  Watson v Bogue is not authority for the proposition that a standard security is of no effect without a personal obligation between the same parties.  In my view it does not assist in this appeal.  Watson v Bogue was concerned with the issue of assignation and professional negligence.  It was not suggested in Watson v Bogue that the standard security itself was void and of no effect.  Trotter v Trotter (supra) involved an appeal in an action for financial provision on divorce where the appellant husband sought an ancillary order requiring the wife to grant a standard security over the matrimonial home in relation to the shortfall which the husband would suffer on the sheriff's division of matrimonial property.  The husband's appeal failed as there was no debtor/creditor relationship between the parties at all to which a standard security could properly relate.  The sheriff's order had transferred the husband's interest in the matrimonial home to the wife.  There was no order for a capital sum against the wife and therefore no debt which could be secured by a standard security.  It established that such security can exist only in relation to an obligation and no issue is taken with that proposition.  Trotter however is not authority for the contention that the parties to an obligation must be identical to the parties to the standard security.  Accordingly, I did not find Trotter to be in point.  Likewise, Douglas v McCutcheon (supra) involved an assignation of a bond and disposition in security although not strictly in compliance with statute.  The court held it was an effective assignation and that "any words which express a present intention to transfer are sufficient as an assignation".  I do not find that Douglas v McCutcheon assisted with regard to the principal argument although to I will return to this case later.

[35]      The appellant cited RBS v Wilson (supra) in particular paragraph 16 of Lord Rodger of Earlsferry's Opinion.  RBS v Wilson was concerned with the proper procedure under the 1970 Act where standard security holders wish to exercise their powers under that security to take possession of property and eject the occupiers and granters of the security.  The court held that a calling up notice required to be served by the creditors.  That, of course, reflects the terms of section 24 of the 1970 Act to which I have referred.  It is similarly not authority for the proposition that the creditor or grantee in the standard security must also be the creditor in the personal obligation or contract.  It provides for the proper method of enforcement of the standard security in exercise of the powers under that standard security.  RBS v Wilson is not authority for the proposition advanced in this appeal on behalf of the appellants.  Carse v Coppen 1951 SC 233 involved a purported floating charge.  A Scottish company had borrowed money under two debentures and granted a floating charge in favour of a creditor.  In the winding up of the company the liquidator presented a petition to determine whether the debentures had created a valid floating charge over company assets in England.  No valid or effectual floating charge had been created.  Carse deals with floating charges and an attempt to create such a charge or security which was not then recognised under Scots law.  No security was therefore created.  The appellants advance this case as authority that parties cannot create a security not recognised by Scots law.  In my view, this appeal is quite distinct from Carse v Coppen.  Here the appellants have granted standard securities being securities created by the 1970 Act and recognised in Scots law.  I did not find that Carse v Coppen assisted with the specific argument that a standard security could not be created unless the grantor/grantee are also the debtor/creditor.

[36]      Rankin v Meek 1995 SLT 526 involved a company winding up.  The liquidator raised an action of reduction of discharges of standard securities as gratuitous alienations. It was argued that the standard securities had been granted to secure loans by the company which were never made.  The court held that no right to payment arose until the advances had been made.  In that case there was no suggestion that the standard securities themselves were invalid despite them purporting to secure loans which had never been made.  The securities in this appeal are ex facie valid and their worth is dependent on the obligation created by the compromise agreement which gives them meaning and effect. Bennett v The Beneficial Bank (supra) is another action to reduce a standard security.  It was averred that the securities failed to comply with the requirements of Note 1 to Schedule 2 of the 1970 Act in respect of the postal address.  It was held that the requirement for a particular description was mandatory and that the standard security was invalid for want of such a description only.  In this appeal it is not suggested that the standard securities were flawed as regards their form and that they comply with the requirements of section 9.  Accordingly, I derive no direct assistance from the citation of these authorities in determining the principal issue in this appeal.

[37]      Gloag and Irvine on Rights in Security has been referred to by the appellants in support of their argument.  I did not take it to be disputed or controversial that a right in security subsists as long as the principal debt or obligation to which it relates.  A right in security is a real right or jus in re to realise payment of a debt out of property.  A right in security will be defeasible by payment of the debt, in security of which it is held.  It is not suggested by the learned authors that the debt must be paid to the same person as holds the standard security.  If the sums due under the settlement agreement are paid the respondents have no right to enforce the standard security and the appellants are entitled to a discharge.  The standard security which creates the right in security is accessory to the personal obligation which may be found in the settlement agreement.  It vests in the respondents a real right in security for the performance of the contract contained in the settlement agreement (section 11 of the 1970 Act).  There is no provision in the 1970 Act or in the common law which requires or stipulates that the grantee in the standard security must be the creditor in the contract or personal obligation.  The debtor in the personal obligation need not be the granter of the standard security.  It is well settled that the granter of a standard security may be someone other than the debtor.  This commonly arises when local authority houses are purchased by the sitting tenant but the debtor in the loan obligation may be a relative.  Immediately that tends to undermine the appellants' argument.

[38]      Rights in security are a means of obtaining or enforcing the payment of a debt and are in addition to the debtor's personal obligation to pay the debt.  In this case the additional right gives the "security trustee" a real right over the appellants' property, the appellants being the debtor or one of the debtors in the original agreement.  Absent any provision in Scots law, and certainly none was advanced in this appeal, which prevents the holder of a standard security being someone other than the original creditor there is no reason to say that the standard securities, constituted in terms of section 9 of the 1970 Act, are other than valid.  Further, all parties to the original agreement accept that the respondents are the security trustee who will implement the agreement including by enforcing the standard securities and, if necessary, selling the properties (Clause 4.7 of the settlement agreement).  Accordingly, I detect no error in the sheriff's approach to this argument.  The sheriff concludes at page 60 of his judgment:

"Having already found that the pursuers' submission that the parties must be in the direct relationship of debtor and creditor in the principal obligation is unfounded, I find nothing in the form of the deed itself which would render the deed ex facie invalid and unenforceable: nor do I find any "inaccuracy" of the kind referred to by counsel for the pursuer which could warrant any direction to the Keeper to correct in terms of section 9 of the Land Registration Act 1979".

 

Accordingly, the appeal falls to be refused.

[39]      The subsidiary argument advanced on behalf of the respondents is to the effect that in any event the respondents are the creditors in the principal obligation.  The debt by virtue of the settlement agreement is transferred to the respondents in trust.  The settlement agreement may also be construed as an assignation of the debt to the respondents.  Section 30 of the 1970 Act to which I have referred defines "creditor" and "debtor" as including any successor in title, assignee or representative.  In terms of the agreement the respondents have had conferred on them a right to enforce the debt contained in that agreement.  In my opinion, the proposition that the respondents hold the debt as trustee follows logically from the terms of the settlement agreement in which the respondents are described as the security trustee.  All parties accept that the agreement is fully and effectively binding on them and that includes all terms and meanings within the agreement.  Having agreed to the terms of the settlement the appellants are not entitled to look to Clause 17 to argue that the security trustee has no rights or standing.  The security trustee is clearly defined as a company, namely the respondents, who derive the right to enforce the standard securities from the terms of the agreement itself.  The respondents' rights are restricted to the purpose and enforcement of the settlement agreement.  In my view it would be a fallacious argument to suggest that Clause 17 strikes at the agreement itself.

[40]      It has been observed (Gloag and Henderson Chapter 41) that no special or technical language is required for the declaration of trust.  The terms of the settlement agreement are sufficient to satisfy the second and final steps referred to by the learned authors being respectively "communication" and "transfer".  Intimation of the transfer is made within the body of the agreement.  The trustees who advance the argument in favour of trust are to be taken to accept that these steps have been complied with.  For these reasons I agree with the conclusion reached by the sheriff as to the existence of the trust (page 65 of his judgment).

[41]      The next question relates to assignation.  Has there been an assignation of the debt to the respondents?  The sheriff had little difficulty in concluding that to the extent that it was necessary there had been an effective assignation for the purposes of this settlement agreement.  In my view one needs to look no further than the terms of the settlement agreement itself and to the passage in Chapter 27 of Wilson on Debt (Assignation of Debts) which points to the requirements being satisfied.  At Chapter 27.2 the author states:

"It seems now to be established that a mandate by the creditor authorising the debtor to pay to a third party or authorising a third party to receive payment from the debtor may be equivalent to an assignation."

 

Read as a whole the settlement agreement satisfies these requirements.  The appellants' reliance on the decision in Gallemos Limited (In Receivership) v Barrett Falkirk Limited 1989 SC 239 is misplaced.  Gallemos was concerned with the question of intimation and the debtor’s knowledge of the extent of his obligation to the assignee.  In this case the appellants are the debtors and parties to the settlement agreement which makes clear the extent of their obligation to the respondents and likewise the respondents' right to enforce the debt.  The decision in McCutcheon (supra) also points to the requirements of a valid assignation being satisfied.  In that case the court decided that any words which express a present intention to transfer are sufficient as assignation.

[42]      In these circumstances the issue of whether the respondents are the representative of the creditor pales into insignificance.  However, for the sake of completeness and having regard to the terms of section 30(1) of the 1970 Act; the Law Society of Scotland's Glossary and Jowitts' "Dictionary of English Law" the term representative should plainly be given its normal meaning and should not be restricted to the narrow interpretation argued for on behalf of the appellants.  There is no basis whatsoever for suggesting that the expression "representative" in s.30 of the 1970 Act should have only a technical or legal meaning such as  being a "personal representative" in the sense of an executor.  Accordingly, the respondents are capable of having the character of a representative.  It is not necessary for me to express a view on this in any more detail having regard to my decision on the principal argument and also on trust and assignation.

[43]      The appeal accordingly falls to be refused and in deference to the wishes of the parties I will arrange for the case to be put out for a procedural hearing to determine any other issues of a procedural nature and all questions of expenses.