Ranking of pledges etc.
Section 60 – Ranking
275.This section provides for the priority of payment of secured obligations in a competition between creditors. It applies to both possessory (common law) pledges and statutory pledges, as well as rights in security other than a pledge.
276.Subsection (1) sets out the general rule that a pledge will rank against another security according to when the right is created, and reflects the fundamental principle of property law prior tempore potior jure (earlier by time, stronger by right).
Example
Patrick grants a statutory pledge over his painting to Quentin on day one. On day two, Quentin registers the pledge in the Register of Statutory Pledges and this is the final step in creating the pledge. On day three Patrick creates a possessory pledge over the same painting by delivering it to Robert. The statutory pledge ranks before the possessory pledge because the former was created first.
277.Subsection (2) deals with the case of competing statutory pledges where the property was not the provider’s at the time of the pledge being granted. In such cases, registration may not be the final step which creates the pledge – the final piece of the puzzle may be the property becoming the provider’s (see paragraph 224 of these Notes). A system which ranked pledges only according to when they are created would result in them being ranked equally despite one being registered before the other. As such, subsection (2) provides that the key factor in this instance is to be which pledge was registered earlier. For these purposes, only effective registration counts. This provision would apply equally to a statutory pledge created by means of a constitutive document and to one created by means of an amendment document.
278.Subsection (3) regulates the ranking of pledges and of rights in security arising by operation of law (such as the right of a repairer to retain property submitted for repair as security for payment of the bill) so that the right in security has priority. This mirrors the rule between such rights in security and floating charges, as set out in section 464(2) of the Companies Act 1985.
279.Subsection (4) gives a pledge priority for the entirety of the sums secured, both current and future. It follows that there is no procedure under which a party can limit the priority of the secured creditor in a higher ranking pledge by serving a notice to that effect on the creditor (as is the case for standard securities over land under section 13 of the Conveyancing and Feudal Reform (Scotland) Act 1970)). The effect is that a party seeking a higher ranking security than is otherwise available for sums not yet due under an earlier pledge will have to negotiate a ranking agreement with the creditor in that pledge.
280.Subsections (5) and (6) provide for it to be possible to have a ranking agreement in respect of a pledge and another security right (including another pledge), but it needs to be in writing. Any such agreement will only have contractual effect, and cannot be registered in the Register of Statutory Pledges.
Section 61 – Amendment of Companies Act 1985 and of Insolvency Act 1986
281.This section amends the Companies Act 1985 and the Insolvency Act 1986 to give effect for statutory pledges to the general rule that a real right in security (broadly, a ‘fixed charge’ for insolvency purposes) will, if created prior to the attachment of a floating charge, rank above the floating charge. It does so in each case by amending the relevant definitions of “fixed security” in those Acts, with the effect that a fixed security includes a statutory pledge.
Section 62 – Effect of diligence on pledge
282.This section governs the priority of a pledge as regards a diligence executed against the encumbered property. Diligence is the term for various processes of debt enforcement in Scottish law and includes things such as arrestment or attachment of a debtor’s moveable property (both of which are effectively seizure mechanisms). The basic rule is prior tempore potior jure (earlier by time, stronger by right). If the diligence is executed first then it has priority, and if the statutory pledge is created first then it prevails.
283.Subsection (2) provides for a special rule relating to further voluntary advances made by the secured creditor after diligence has been executed. It has the effect that an advance made under a pledge after the diligence is executed does not have priority over the sum attached by the diligence unless there is a prior contractual obligation or undertaking to make the advance.
Example
Acme Ltd grants a statutory pledge over machinery for all sums due and become due to the Oban Bank, and the Bank advances £20,000 in reliance on the pledge. Louise, an unsecured creditor of Acme Ltd, then attaches the machinery for a £5,000 debt. The next day the Bank advances another £8,000 to Acme Ltd. The Bank’s priority over Louise in respect of the value of the pledged property is limited to the initial £20,000, unless it was contractually bound to lend the further £8,000.
