Rayford Homes Ltd v Bank of Scotland Plc & Anor [2011] EWHC 1948 (Ch)

[2011] EWHC 1948 (Ch)

Case No 10269 of 2010

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

COMPANIES COURT

Date 23/07/2011

IN THE MATTERS OF RAYFORD HOMES LIMITED

(IN ADMINISTRATIVE RECEIVERSHIP)

and

IN THE MATTER OF THE INSOLVENCY ACT 1986

Before

MR JUSTICE DAVID RICHARDS

Between

MARTIN GILBERT ELLIS AND JOHN GERARD MONTAGUE (AS JOINT ADMINISTRATIVE RECEIVERS OF RAYFORD HOMES LIMITED)Applicants

(1) BANK OF SCOTLAND PLCRespondents

(2) BARCLAYS WEALTH TRUSTEES (GUERNSEY) LIMITEDRespondent

Marcus Haywood (instructed by Dundas & Wilson LLP) for Applicants

Nicholas Peacock QC and Matthew Smith (instructed by TLT LLP) for First Respondent

Adrian Beltrami QC (instructed by Quinn Emanuel Urquhart & Sullivan UK LLP) for Second Respondent

Hearing Hearing dates: 9 and 13 June 2011

Judgment

Introduction

[1]This case concerns the priority between two secured creditors of Rayford Homes Limited (the company), now in administrative receivership. The issue arises on an application for directions made by the administrative receivers under s.35 of the Insolvency Act 1986. The administrative receivers have adopted a neutral stance and the issue has been argued between the secured creditors as respondents to the application.

[2]The secured creditors are Bank of Scotland plc (the bank) and Barclays Wealth Trustees (Guernsey) Limited (the trustee) as trustee of the RYF Horney 1987 Settlement – Children’s Fund (the trust). The trustee was previously called Orbis Trustees Guernsey Limited and in that name entered into the documents relevant to the issue.

[3]The beneficiaries entitled to the income of the trust are three adult brothers, Carl, Jason and Damon Horney. The trustee has power to appoint the capital of the trust in one-third shares to each of the brothers but, in default of appointment, the share of each brother passes on his death to his children. The whole of the issued share capital of the company has at all material times been owned by the trust. The brothers were three out of the five directors of the company when the trust advanced money to the company. The advance was made at their request and they indemnified the trustee against all claims in respect of the advance.

[4]The company was incorporated in May 1998, with the trust becoming its shareholder and the Horney brothers becoming directors before it commenced business. Its principal activity was investment in and management of freehold and leasehold property. Properties were regularly bought and sold. When the administrative receivers were appointed on 18 November 2009, the company’s property portfolio comprised 186 residential properties, 18 retirement apartments acquired on a sale and leaseback basis, two commercial properties and a small development site, all located in the south of England. They were valued in the statement of affairs as at 18 November 2009 at just over £41.5m. Apart from properties, the company’s other assets comprised quoted investments valued in November 2009 at about £129,000 and a small fluctuating balance of debts other than rent. By 12 June 2011, total realisations by the administrative receivers from sales amounted to just over £25m, with rent and other receipts amounting to about £2.4m. The receivers estimate that total realisations will amount to about £39m. The principal liabilities are to the secured creditors, with £40.86m owed to the bank and £2.25m owed to the trustee as at 30 November 2010.

[5]The initial finance for the company’s business was provided by the bank and the trustees, on terms which were negotiated between the parties in the latter part of 1998.

[6]The bank offered to provide a revolving credit facility of up to £2m under the terms of a facility letter dated 26 November 1998. It is not in evidence but it is clear that the company was required to provide security comprising or including the debenture to which I refer below and first charges on all properties purchased by the company.

[7]At a board meeting of the company on 18 December 1998, the Horney brothers as the directors resolved to accept the bank’s offer on the terms of the facility letter and that “security being the first change on properties purchased and a floating debenture over the company’s assets be granted for the commercial benefit of the company”. It will be seen that the terms of the debenture conferred more than floating security.

[8]The principal security and other documents were executed on 11 January 1999. They comprised debentures in favour of each of the bank and the trustee and an inter-creditor agreement to which the bank, the trustee and the companies were parties.

Debenture in favour of the bank

[9]The bank’s debenture contained in clause 1 a covenant by the company to pay on demand “the Secured Liabilities”, defined in clause 18.2 in comprehensive terms as all monies and liabilities as may be due to the bank, without limit as to amount or the transaction under which any indebtedness arose.

[10]Clause 3 contains the charging provisions. Clause 3.1 provides as follows:

“3.1 The Company charges to BoS as a continuing security and with full title guarantee for the payment or discharge of the Secured Liabilities:- 3.1.1. by way of legal mortgage all the freehold and leasehold property (including the property described in the Schedule) now vested in it whether or not the title to the property is registered at H.M. Land Registry together with all present and future buildings, fixtures (including trade and tenant’s fixtures), plant and machinery which are at any time on the property; 3.1.2. by way of fixed charge:- 3.1.2.1 all future freehold and leasehold property belonging to the Company together with all buildings, fixtures (including trade and tenant’s fixtures), plant and machinery which are at any time on the property: 3.1.2.2 all present and future interests of the Company in or over land or the proceeds of sale of it and all present and future licences of the Company to enter upon or use land and the benefit of all other agreements relating to land to which it is or may become party or otherwise entitled and all fixtures (including trade and tenant’s fixtures), plant and machinery which are at any time on the property charged under this Debenture; 3.1.2.3 all the Company’s goodwill and uncalled capital for the time being; 3.1.2.4 all present and future stocks, shares and other securities owned (at law or in equity) by the Company and all rights and interests accruing or offered at any time in relation to them, all rights and interests in and claims under all policies of insurance and assurance held or to be held by or inuring to the benefit of the Company and the benefit of all rights and claims to which the Company is now or may be entitled under any contracts; 3.1.2.5 all patents, patent applications, trade marks, trade mark applications, trading names, brand names, service marks, copyrights, rights in the nature of copyright, moral rights, inventions, design rights, registered designs, all trade secrets and know-how, computer rights, programmes, systems, tapes, disks, software, all applications for registration of any of them and other intellectual property rights held or to be held by the Company or in which it may have an interest and the benefit of all present and future agreements relating to the use of or licensing or exploitation of any such rights (owned by the Company or others) and all present and future fees, royalties or similar income derived from or incidental to any of the foregoing in any part of the world; 3.1.2.6 all present and future book and other debts and monetary claims of the Company whether payable now or in the future and the benefit of all present and future rights and claims of the Company against third parties relating to them and capable of being satisfied by the payment of money (save as charged under sub-clause 3.1.2.4); 3.1.2.7 all present and future plant and machinery not otherwise charged under this Clause 3 and all other present and future chattels of the Company (excluding any of the same for the time being forming part of the Company’s stock in trade or work in progress); and 3.1.2.8 all present and future bank accounts, cash at bank and credit balances of the Company with any bank or other person whatsoever and all rights relating or attaching to them (including the right to interest); 3.1.3 by way of floating charge all the Assets not effectively otherwise charged by this Clause 3 including (without limitation) any immovable property of the Company in Scotland and any Assets in Scotland falling within any of the types mentioned in sub-clause 3.1.2 but so that the Company is prohibited from creating any fixed security or mortgage or any other floating charge over the Assets having priority over or ranking pari passu with the floating charge created by this sub-clause (otherwise than in favour of BoS) and the Company will have no power without the consent of BoS to part with or dispose of any part of those Assets except by way of sale in the ordinary course of its business.” 3.1.1. by way of legal mortgage all the freehold and leasehold property (including the property described in the Schedule) now vested in it whether or not the title to the property is registered at H.M. Land Registry together with all present and future buildings, fixtures (including trade and tenant’s fixtures), plant and machinery which are at any time on the property; 3.1.2. by way of fixed charge:- 3.1.2.1 all future freehold and leasehold property belonging to the Company together with all buildings, fixtures (including trade and tenant’s fixtures), plant and machinery which are at any time on the property: 3.1.2.2 all present and future interests of the Company in or over land or the proceeds of sale of it and all present and future licences of the Company to enter upon or use land and the benefit of all other agreements relating to land to which it is or may become party or otherwise entitled and all fixtures (including trade and tenant’s fixtures), plant and machinery which are at any time on the property charged under this Debenture; 3.1.2.3 all the Company’s goodwill and uncalled capital for the time being; 3.1.2.4 all present and future stocks, shares and other securities owned (at law or in equity) by the Company and all rights and interests accruing or offered at any time in relation to them, all rights and interests in and claims under all policies of insurance and assurance held or to be held by or inuring to the benefit of the Company and the benefit of all rights and claims to which the Company is now or may be entitled under any contracts; 3.1.2.5 all patents, patent applications, trade marks, trade mark applications, trading names, brand names, service marks, copyrights, rights in the nature of copyright, moral rights, inventions, design rights, registered designs, all trade secrets and know-how, computer rights, programmes, systems, tapes, disks, software, all applications for registration of any of them and other intellectual property rights held or to be held by the Company or in which it may have an interest and the benefit of all present and future agreements relating to the use of or licensing or exploitation of any such rights (owned by the Company or others) and all present and future fees, royalties or similar income derived from or incidental to any of the foregoing in any part of the world; 3.1.2.6 all present and future book and other debts and monetary claims of the Company whether payable now or in the future and the benefit of all present and future rights and claims of the Company against third parties relating to them and capable of being satisfied by the payment of money (save as charged under sub-clause 3.1.2.4); 3.1.2.7 all present and future plant and machinery not otherwise charged under this Clause 3 and all other present and future chattels of the Company (excluding any of the same for the time being forming part of the Company’s stock in trade or work in progress); and 3.1.2.8 all present and future bank accounts, cash at bank and credit balances of the Company with any bank or other person whatsoever and all rights relating or attaching to them (including the right to interest); 3.1.3 by way of floating charge all the Assets not effectively otherwise charged by this Clause 3 including (without limitation) any immovable property of the Company in Scotland and any Assets in Scotland falling within any of the types mentioned in sub-clause 3.1.2 but so that the Company is prohibited from creating any fixed security or mortgage or any other floating charge over the Assets having priority over or ranking pari passu with the floating charge created by this sub-clause (otherwise than in favour of BoS) and the Company will have no power without the consent of BoS to part with or dispose of any part of those Assets except by way of sale in the ordinary course of its business.”

[11]As regards cl.3.1.1 there was no property described in the schedule. However, on 19 January 1999, the company executed legal charges in favour of the bank on 11 properties.

[12]Clause 3.4 contains a negative pledge, whereby the company agreed not without the previous written consent of the bank to create any mortgage, charge or other encumbrance on “any Asset charged under this Debenture” or to dispose of any Asset or in any way to dispose of the equity of redemption of or any interest in “any Asset”, with the company covenanting to apply to the Land Registry for a restriction to that effect to be entered on the title register of all present and future registered property. “Assets” are defined in cl.18.1 as “the whole of the property (including uncalled property) which is or may be from time to time comprised in the property or undertaking of the Company”.

[13]Clause 3.6 provides that the company will on demand in writing execute “a legal mortgage of any freehold or leasehold property of the Company which is not effectively charged by sub-clause 3.1.1 and of any freehold or leasehold property acquired by the Company after the date of this Debenture” and also a fixed charge or assignment in security of any asset subject to a floating charge under cl.3.1.3.

[14]Clause 4 provides for the security to be a continuing security for the Secured Liabilities. Clause 7 contains the power to appoint administrative receivers of all or any of the Assets.

[15]Clause 9 provides for the application of security proceeds as follows:

“Any moneys received under the powers conferred by this Debenture will, subject to the repayment of any prior claims, be paid or applied in the following order of priority. 9.1 in satisfaction of all costs, charges and expenses properly incurred and payments properly made by BoS or the Receiver and of the remuneration of the Receiver; 9.2 in or towards satisfaction of the Secured Liabilities in whatever order BoS may require; 9.3 as to the surplus (if any) to the person(s) entitled to it.”

Debenture in favour of the trustee

[16]The debenture in favour of the trustee contains in cl.2.1 a covenant to pay to the trustee on demand “the Indebtedness”, which is defined in comprehensive terms to mean all the company’s present or future indebtedness to the trustee.

[17]The security is created by cl.2.2 as follows:

“As security for the payment and discharge of the Indebtedness the Company hereby charges to the Lender with full title guarantee: 2.2.1 by way of fixed charge all the goodwill and uncalled capital for the time being of the Company 2.2.2 by way of fixed charge all book debts and other debts now and in the future due or owing to the Company 2.2.3 by way of fixed charge all intellectual property rights choses in action and claims now and in the future belonging to the Company 2.2.4 by way of floating charge all the Company’s present and future undertaking and assets whatever and wherever including (for the avoidance if doubt) the Property”

[18]It will be noted that it does not create or provide for any mortgage or fixed charge of freehold or leasehold property, which is subject only to a floating charge.

[19]Clause 3.1 contains negative pledges, including that the company shall not:

“3.1.1 (except for the Prior Charges or charges to the Lender created under or pursuant to this Debenture) create or permit to subsist any mortgage charge or lien on any of its undertaking or assets”

[20]The “Prior Charges” are defined in cl.1.1 to mean “any charges created from time to time by the Company in favour of the Bank which it is expressly agreed shall rank in priority to this Debenture whenever created”.

[21]Clause 3.2.1 requires the company to deposit with the trustee all deeds and documents of title and all insurance policies relating to the assets of the company “other than those the subject of the Prior Charges” and to notify the trustee “on acquiring any Property after the date of this Debenture”. Property is defined in cl.1.1.8 to mean “all freehold or leasehold property owned by the Company from time to time whether or not charged to the Bank by a Prior Charge”.

[22]Clause 4 provides for the appointment of administrative receivers and cl.5.3 provides for the debenture to be a continuing security.

[23]Clauses5.5.1 and

5.5.2 provide as follows:

“5.5.1 In the event of any proceedings being taken to exercise or enforce any powers or remedies conferred by the Prior Charges the Lender may redeem such Prior Charge or may procure the transfer of it to itself and may settle and pass the accounts of the Bank and any accounts so settled and passed shall be conclusive and binding as well between the Bank and the Company as between the Lender and the Company. 5.5.2 All principal money interest costs charges and expenses paid or incurred by the Lender in redeeming or procuring the transfer of the Prior Charges as stated in Clause 5.5.1 and in procuring any proper entries to be made in the register of the above title shall be paid by the Company to the Lender on demand with interest on them from the date of the same having been paid respectively at 4% above base rate for the time being of Bank of Scotland Plc and until payment the Property shall stand charged with the amount so to be paid with interest ”

Summary of the effect of the debentures

[24]Pausing there, the combined effect of the two debentures may, for relevant purposes, be summarised as follows. First, as regards freehold and leasehold property, the bank had by the terms of its debenture a legal mortgage on all (if any) property vested in the company at the date of the debenture, a fixed charge on all future property and the benefit of a covenant by the company to execute a legal mortgage of any property acquired after the date of the debenture. I will note here and return later to a submission by Mr Beltrami QC for the trustee that the fixed charge on future property and, to an extent, legal charges taken on individual properties took effect only as floating charges.

[25]Second, the bank had fixed charges on a wide variety of other present and future assets. Fixed charges on future assets take effect in equity, as specifically enforceable agreements to grant a fixed charge once the asset is acquired by the company. They create effective security as against unsecured creditors and, in the absence of negative pledges of which the fixed chargee has notice, as against the holder of a floating charge. Particular problems may arise as regards fixed charges on present and future book and other debts and bank balances, to which I refer below.

[26]Third, the bank had a floating charge on all present and future assets which were not the subject of effective fixed charges under the other provisions of cl.3.

[27]Fourth, the bank’s debenture, by its own terms, makes no concession to the debenture in favour of the trustee. Clause 3.1.3 prohibits the company from creating any fixed security or mortgage or any floating charge over the assets having priority over or ranking pari passu with the floating charge in favour of the bank. Clause 3.4 requires the previous written consent of the bank to any mortgage or charge over any present or future asset charged under the debenture.

[28]Fifth, and by contrast with the bank’s debenture, the debenture in favour of the trustee created no mortgage or fixed charge over present or future freehold or leasehold property, which was subject only to the floating charge in favour of the trustee. Any fixed charge over freehold or leasehold property created before crystallisation of the trustee’s floating charge would therefore, in the absence of agreement to the contrary, rank ahead of it.

[29]Sixth, fixed charges are created by the trustee’s debenture over some of the same categories of present and future assets as are subject to fixed charges in favour of the bank.

[30]Seventh, the negative pledge in cl.3.1.1 of the trustee’s debenture is subject to an exception for “the Prior Charges” which is defined as charges in favour of the bank. There is an issue of construction of the definition as to its extent, to which I will later return.

[31]Eighth, the rule against tacking in s.94 of the Law of Property Act 1925 would in the absence of other agreement prohibit the bank from achieving priority for loans to the company, in excess of the revolving facility of £2m which it was committed to provide at the date of the debenture, over the trustee’s security for its loan to the company, as regards those charges which they had in common. So, for example, the effect of s.94 in the absence of other agreement would be that the bank’s fixed charge on goodwill or intellectual property rights would have priority for only £2m over the trustee’s fixed charge over those assets. This would not apply as regards freehold and leasehold property, over which the bank had fixed charges and, usually, legal mortgages and the trustee had only a floating charge.

The bank’s charges over freehold and leasehold property: fixed or floating?

[32]The trustee’s submission that the bank’s fixed charge of future-acquired property was on a proper analysis a floating charge relies on the provisions of the bank’s debenture as regards payments to the company, the provisions of the facility letters, the provisions of the legal charges granted over individual properties and evidence as to the way in which properties were purchased and sold, and on the application to these provisions and evidence of the principles established in In re Spectrum Plus Ltd

[2005] 2 AC 680

[33]As regards payments to the company, cl.3.8 of the bank’s debenture provides:

“The Company will pay into its account with BoS (or as BoS may direct) all moneys which it receives in respect of any policies of insurance or assurance, fees, royalties, income or book or other debts or any other of the rights and claims charged to BoS under sub-clause 3.1.2 and until such payment hold all moneys so received upon trust for BoS and will not without the prior written consent of BoS charge, factor, discount or assign any of those policies, fees, royalties, income, debts, rights or claims in favour of any other person or purport to do so.”

[34]This provision contains no restriction of the company’s right to draw on the account to which the payments referred to must be made. At the time when the debenture was executed, this provision would have been regarded as providing the bank with sufficient control over the account to ensure that the charge on book debts was effective as a fixed charge, in the light of the decision in Siebe Gorman Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep. 142. This is no longer tenable following the decision of the House of Lords in In re Spectrum Plus Ltd.

[35]The only facility letter before the court was dated 10 November 2005, for the increased facility then granted of £27.5m. It is assumed that the other facility letters were in substantially the same terms. Paragraph 2.2 permitted the company to give notices of drawdown, subject to satisfaction of conditions precedent which included the grant of a first and only legal charge over the property or properties to be purchased with the advance. They had to be identified in the drawdown notice. Paragraph 2.3 dealing with repayment provided, so far as relevant, as follows:

“2.3.1 In the event of the Disposal of any Property by way of sale or otherwise, the Borrower shall repay to BoS the amount of the Advance against that Property as described as the Purchase Price in Schedule 10, together with the amount of any subsequent Advance in respect of any improvements and refurbishments. … 2.3.3 The amount of any Advances made under Part B of the Facility shall be repaid in full within 24 months of the relevant date of Drawdown (or such other period as shall be agreed between BoS and the Borrower). … 2.3.4 The amount of all Advances made under the Facility shall be repaid in full with all outstanding interest, costs and charges, on the fifth anniversary of the execution of this Agreement. ”

[36]Paragraph 5 deals with security and provides for the legal charges on the properties purchased with advances and for additional security if financial covenants are breached.

[37]The legal charges over individual properties contained a covenant by the company to pay to the bank “the Debt when the Bank demands in writing” and charged the property by way of legal mortgage as security for the Debt. Clause 5 provides:

“If the title to the Property is registered at H.M. Land Registry, the Borrower applies to the Chief Land Registrar to enter upon the register of title to the Property a restriction that no disposition of the registered estate by the proprietor of the registered estate is to be registered without a written consent signed by the proprietor for the time being of this Charge.”

[38]“Debt” is defined in the bank’s Commercial Charge Conditions which were expressly applied to the charges. “Debt” is defined in the most general terms as “all sums of money owed and all liabilities or obligations to be carried out to the Bank at any time or from time to time by a Debtor”, whether arising before or after a demand and whether payable presently or in the future and whether actual or contingent. Condition 3 provides that the debtor will repay the Debt to the bank in accordance with the provisions of the applicable facility letter.

[39]The evidence as to how in practice draw-downs were made and repaid was provided by Damon Horney, one of the directors. Not surprisingly, the bank was not involved in the commercial decisions to buy and sell properties. Draw-downs for purchases appear to have followed the procedure set out in the facility letter, with legal charges granted over the purchased properties and registered against the property title at the Land Registry.

[40]The procedure on sale was that, once a sale was agreed subject to contract, the company notified the bank of the basic terms. After exchange of contracts but before completion, the company would inform the bank of the total sale proceeds to be credited to its account with the bank and of the amount needed to repay the advances referable to the property in question, which the bank was requested to debit to the account. It may be assumed that the bank released the legal charge to enable completion to take place. The evidence shows that while the company was a going concern, the bank did not require payment of more than the advances referable to that property.

[41]The net proceeds of sale, after re-payment of such advances, were freely available for use by the company, subject no doubt to the current facility limit.

[42]Against this background, Mr Beltrami submitted that the fixed charge of future acquired property and the legal charge on each property, save to the extent of the advances referable to the property in question, were floating charges. He based this submission on the conclusion in In re Spectrum Plus Ltd that where the company chargor can freely use the proceeds of realisation of charged property in the ordinary course of its business, the charge is a floating charge. He submitted too that there was a mismatch between the terms of the legal charges with their very general definition of “Debt” and the facility letter which, in paragraph 2.3.1, required repayment only of the advances referable to a particular property on its sale.

[43]In re Spectrum Plus Ltd was concerned with a charge on book debts which was expressed to be fixed. The charge contained effective restrictions on any assignment or similar dealing with book debts but it left the company free to collect book debts and free to use the proceeds of book debts it collected once paid into its account with the bank. It was these features which led to the decision that the charge on book debts was a floating charge. The company’s freedom to collect the debts and use the proceeds in its business meant that it was free at any time to withdraw book debts from the charge, and this was inconsistent with a fixed charge. See in particular the speech of Lord Scott of Foscote, which was the leading speech on this aspect of the case, particularly at paragraphs 81, 83, 107, 111 and 112-120.

[44]In my judgment, the essential difference between that case and the present lies in the difference in the ability of the chargor company to deal with the charged property. Spectrum Plus Ltd was entitled to collect book debts without any involvement or prior consent of the bank. In the present case, the company could not realise any freehold or leasehold property without a release by the bank of its legal charge and the fixed charge in the debenture. Indeed, assuming that the charges were registered at the Land Registry against the title to each property as they were required to be (see cl.5 of the legal charges and cl. 3.4 of the debenture), the company could not make good title on an unencumbered transfer without the bank’s release of its security.

[45]By the terms of both the debenture and the legal charges, the charges stood as security for all monies due to the bank. The provisions of the facility letter are not in conflict with the debenture and legal charges. Paragraph 2.3.1 of the facility letter is a provision for repayment: the advances referable to a particular property must be repaid on a sale of that property. It does not affect the extent of the bank’s security on the property. It does not modify the terms of the legal charges, so that they are fixed charges securing only repayment of the sums to which paragraph 2.3.1 refers.

[46]It is always open to the holder of a fixed charge over property to release the charge on payment of less than is secured by the charge, as specifically mentioned by Lord Walker of Gestingthorpe in In re Spectrum Plus Ltd at paragraph 138. The fact that the company is then free to use the surplus proceeds as it wishes does not affect the status of the charge on the property as a fixed charge. For these reasons I conclude that the fixed charge on future-acquired property in the debenture and the legal charges were and are effective as fixed charges securing all monies due from the company to the bank.

The Inter-Creditor Agreement

[47]The inter-creditor agreement (ICA) was made by the company, the bank and the trustee on 11 January 1999, the same day as the debentures.

[48]The purpose of the ICA, as stated in cl.1.1, is as follows:

“In consideration of BoS entering into the Loan Agreement, the Subordinated Creditors agree to regulate their rights under their loan documentation and security as set out in this Agreement.”

The term “the Subordinated Creditors” is defined so as to comprise the trustee.

[49]The ranking of security is provided by cl.2. Clause 2.1 states: “The Subordinated Creditors agree and the Group Companies acknowledge that the BoS Security shall rank in priority to the Subordinated Security.” “The Group Companies” comprise just the company.

[50]Schedule 5 contains the definitions. “BoS Security” means:

“… all fixed and floating charges and other security and all collateral or substituted securities for the time being held by BoS and given by the Group Companies (or any of them) as security for the payment and/or discharge of the BoS Debt;” “Subordinated Security” means: “… all fixed and floating charges and other security (including the security listed in Schedule 4 to this Agreement) and all collateral, additional or substituted securities for the time being held by the Subordinated Creditors and given by the Group Companies (or any of them) as security for the payment and discharge of any part of the Subordinated Debt;”

The security listed in schedule 4 is the trustee’s debenture. Both the “BoS Debt” and the “Subordinated Debt” mean all present and future liabilities of any kind due from the company to the bank and the trustee respectively. “… all fixed and floating charges and other security (including the security listed in Schedule 4 to this Agreement) and all collateral, additional or substituted securities for the time being held by the Subordinated Creditors and given by the Group Companies (or any of them) as security for the payment and discharge of any part of the Subordinated Debt;”

[51]By cl.2.2, the trustee agrees to release any asset from its security if the bank releases its security to enable the company to sell the asset. By cl.2.3, the trustee agrees that documents of title to assets charged to the trustee will be held by the bank while it also has security over them. Clause 2.4 provides that both debentures rank as continuing securities, subject to the provisions of the ICA. By cl.2.6 each of the bank and the trustee consent to the creation of their respective debentures. Clause 2.5 provides that moneys received by any receiver or manager appointed under either debenture, net of costs and payments to third parties having priority, “from the realisation of the BoS Security or the Subordinated Security or otherwise shall be applied to give effect to the provisions of Clause 2.1”.

[52]Clause 4 contains covenants by the trustee not to demand or claim any part of the Subordinated Debt or to seek security other than as provided by its debenture or to amend the terms of the debenture with the effect of making them more onerous to the company.

[53]Clause 5 contains subordination provisions as regards the debts due to the trustee. Clause 5.1 provides that if any distribution of assets of the company is made to creditors by reason of liquidation or similar process while the BoS Debt remains outstanding, then the debt due to the trustee is “postponed and subordinated” to the bank’s debt, and the remainder of cl.5 contains machinery to give effect to this. Its complexity is made necessary because a simple contractual subordination is not effective in a liquidation.

[54]Clause 7 allows the company to make “Permitted Payments” to the trustee, although the security in the bank’s favour remains undischarged. “Permitted Payments” are defined in sch.5 to mean “the payments in respect of the Subordinated Debt which may be made by [the company] in accordance with the Loan Agreement”, and “Loan Agreement” means the bank’s facility letter as at the date of the ICA.

[55]Clause 8, which would appear to be directed to s.94 of the Law of Property Act and the restrictions on tacking, provides:

“8.1 The Subordinated Creditors agree that the BoS Debt may be refinanced and that any obligations incurred by any Group Company in refinancing the BoS Debt will be BoS Debt within the meaning of this Agreement and will rank ahead of the Subordinated Debt on substantially the terms set out in this Agreement. 8.2 The Subordinated Creditors agree that BoS may, at its discretion, make further advances to any Group Company and each such advance will be deemed to constitute BoS Debt for the purposes of this Agreement. ”

Similarly, cl.9 provides:

“This Agreement shall apply in respect of the BoS Debt irrespective of any intermediate payment in whole of any of the BoS Debt and shall apply to the ultimate balance of the BoS Debt.”

[56]Clause 10 provides that the subordinations effected or intended by the ICA and the trustee’s obligations shall not be affected by any act, omissions or circumstances which might otherwise operate to release the trustee.

[57]Clause 11 provides that any payments received by the trustee in contravention of the ICA will be held on trust for and paid to the bank.

[58]Clause 12 deals with assignment. Clause12.1 provides that the bank is entitled to assign the benefit of the ICA to any person to whom its rights and obligations under any banking documents are transferred. Clause

12.2 requires the trustee to procure that any transferee of the debt due to the trustee shall enter into “a deed of accession in favour of the bank” substantially in the form set out in schedule 3. Clause 3 of the deed of accession provides that:

“The Acceding Party covenants with BoS for the benefit of BoS (including its respective assigns, transferees and successors in title) to be bound by all the terms of the Inter Creditor Agreement capable of applying to it to the intent and effect that the Acceding Party shall be a party to the Inter Creditor Agreement as with effect from the date the Acceding Party is registered as a holder of any part of the Subordinated Debt.”

[59]I have referred to most of the relevant definitions in schedule 5. It contains also this definition:

“ “BoS Priority” means BoS Debt not exceeding £ together with interest on that amount and all commission, charges, fees, costs and expenses incurred in connection with; ”

[60]The curiosity is that the term “BoS Priority” is nowhere used in the ICA. In the ICA, as executed on 11 January 1999, the definition appeared as above, with no figure inserted after the £ sign. On the face of it this would not be surprising given that the defined term was not used in the ICA.

[61]The ICA was based on a standard form Bank of Scotland document, as appears from a fax dated 19 November 1998 from the bank, stating it was attaching “the Bank’s standard form of Inter Creditor Agreement for use where Bank of Scotland is first ranking charge”. It is unclear whether use of the defined term “BoS Priority” had been dropped from the standard form or whether it was not used in the ICA signed on 11 January 1999 as a result of a specific deletion from the standard form.

[62]The bank has produced the current standard form, which uses “BoS Priority Debt” as a term defined as follows:

“BoS Debt not exceeding £ together with interest on that amount and all commission, charges, fees, costs and expenses incurred in connection with it.”

That term appears in cl.3.1:

“BoS and the Subordinated Creditors agree and the Group Companies acknowledge that all security and guarantees conferred by the BoS Security Documents shall rank in priority to all security and guarantees conferred by the Subordinated Security Documents [in all respects] [to the extent of the BoS Priority Debt] irrespective of when the BoS Debt and the Subordinated Debt or any or either of them shall have arisen and irrespective of the order in which or the date upon which any document is executed or registered in any register or notified to any person.”

[63]In May 1999 the bank informed the company that it had mislaid its original of the ICA and asked that duplicates, provided by the bank be signed by all parties. This was done, with the re-signed agreements dated 11 January 1999 and in exactly the same form as the ICA signed on 11 January 1999.

[64]It also seems likely that by a supplemental facility letter dated 13 June 1999 the bank’s facility was increased to £4m.

[65]On 27 July 1999 the bank sent back to the company the ICA, as signed in May 1999, but with two manuscript changes which it asked to be initialled on behalf of the company and the trustee. The first, immaterial to the present case, inserted a number of days in cl.7.2.3 where previously there was a blank. The second inserted “4,000,000 (Four Million Pounds)” after the £ sign in the definition of “BoS Priority” in Schedule 5. These changes were duly initialled on behalf of each party.

[66]There were subsequent increases in the size of the bank’s credit facility for the company. It increased to £6m in 2000, to £10m in November 2001, to £15.75m in May 2003, to £27.5m in November 2005 and to £45m in June 2007. The trustee’s loan remained at its original amount of £2.25m.

[67]Following the increase to £10m in November 2001, the bank wrote to the company suggesting that the figure of £4m in the definition of BoS Priority in schedule 5 to the ICA should be increased to £10m. A supplemental letter to this effect signed by the bank was not seen or signed on behalf of the trustee. A similar letter provided by the bank in July 2003, increasing the figure to £15.75m, was signed on behalf of the bank and the company. A copy was provided to the trustee for signature, but the trustee declined to sign it. The trustee did, however, write a letter dated 10 November 2005 at the bank’s request, referring to the ICA, noting that the bank facility had recently been re-negotiated and stating that “we…hereby acknowledge that the level of the Bank’s priority will stand at £27,500,000.00 when fully drawn down.” There was no similar acknowledgment when the facility limit was increased to £45m.

The issues

[68]The issues which arise are issues of construction of the ICA, as amended in July 1999 and taking account of the trustee’s acknowledgment in its letter dated 10 November 2005. The first issue is whether the manuscript addition of £4m had any effect at all. The trustee says yes, the bank says no. The second is, if so, did it restrict the bank’s priority as regards the proceeds of realisation of freehold and leasehold property over which the bank had a fixed charge under the terms of its debenture and, in most cases, legal mortgages as well. The bank says no. The trustee says that the bank’s priority is restricted to £27.5m. The third issue is, if so, whether the security rights of the bank and the trustee thereafter rank pari passu or whether, as the trustee says, its security ranks thereafter in priority to the bank’s.

[69]As regards the first issue, the effect of the insertion of £4m in the definition of “BoS Priority”, Mr Peacock QC on behalf of the bank submits that it does not, and cannot have been intended to, impose a limit on the bank’s priority, but was only intended to be descriptive of the amount of the facility in July 1999. This, he submits, is supported by the following factors. First, the defined term is not used anywhere in the ICA. Unless used, it cannot have any operative effect. If it had been intended to impose a limit, the parties would surely have used the defined term so as to achieve that result. Second, the lack of any limit on the bank’s priority is consistent with the terms of the two debentures. Third, the trustee had twice signed the ICA, in January and in May 1999, without any limit on the bank’s priority. It was not the trustee, but the bank, which requested that the parties sign the amended version in July 1999. Fourth, the defined term cannot be brought into the operative parts of the ICA without doing violence to its clear words. By contrast, the insertion of the words for descriptive purposes only is consistent with the terms of the ICA and the debentures and with the increase in the facility limit to £4m in June 1999.

[70]Overall, Mr Peacock submits, the reasonable reader of the amended ICA, with relevant background knowledge, would not conclude that the insertion of £4m in the definition of “BoS Priority” was intended to give the definition a life it does not otherwise have.

[71]Mr Beltrami for the trustee submits that there is a plain ambiguity in the ICA, as amended. The definition of “BoS Priority” imposes a specific financial limit on the extent of the bank’s priority but, because the defined term is not used in the body of the ICA, the ICA does not reflect the limitation set out in the definition in schedule 5. Nonetheless, the deliberate addition of the limit to the definition is reasonably and properly to be read as reflecting an agreement that the inserted limit should apply to the bank’s priority. The mistake made, in having a defined term which does not appear in the body of the agreement, is readily explained by the derivation of the ICA as signed in 1999 from the bank’s standard form agreement (see its fax dated 19 November 1998). In adapting its standard form for this particular case, the bank must have deleted the words containing the defined term. The later insertion of the limit shows that this was not intended.

[72]The trustee submits that its construction is supported by a number of considerations. First, the clear purpose of the defined term “BoS Priority” is, once a limit is inserted, to limit the bank’s priority. The insertion of the limit was specifically agreed and initialled by all parties. Second, the bank’s construction deprives the amended definition of any contractual effect, contrary to the basic proposition that the court will seek to give effect to all provisions of a contract. Third, the amendment is reasonably explicable only by the parties’ decision to agree a priority limit. It is inconceivable that the amendment would have been made if the parties intended there to be no limit. Fourth, the addition of particular words in this contract should carry greater weight than the general words of a standard form contract: Homburg Hautimport v Agrosin

[2004] 1 AC 715

at [11] per Lord Bingham. Fifth, because the ICA is essentially one of the bank’s standard form agreements, the contra proferentum rule works against the bank. I should say here that I do not attach weight to this consideration. This is not a case of a standard form agreement produced on a take it or leave it basis, with no opportunity for real input by the other party as to its terms. The trustee was a professional trust company, then part of the international accounting and business services firm KPMG, with access to sophisticated legal advice if it wished. The ICA was the result of negotiations between the parties: see paragraph 10 of Ms Rachel Bougourd’s witness statement.

[73]Both sides rely on what they say is the commercially sensible construction. The bank says that it was an unrelated third party, making commercial loans on commercial terms. By contrast, the trustee owned the entire share capital of the company and the beneficiaries of the trust as to income were the three family directors to whom the trustee could also appoint the capital. It would not be surprising if the bank were to enjoy priority for all its advances to the company. The trustee argues that an unlimited priority for the bank could have, and has in fact had, a serious adverse effect on the trustee as second chargee, in that very substantial further advanceswere made without reference to it and thereby, in the events which have happened, destroying the value of its charge.

[74]In my judgment, there is no single commercially sensible construction. Both unlimited priority for the bank and a limited priority are entirely plausible. Given the status of the trustee as shareholder of the company and with the directors as beneficiaries, the risk to its position as second chargee from an unlimited priority for the bank is not significant, or at least could be a risk worth running to obtain the bank finance which was essential to the company’s business. If the trustee was kept in the dark, it only had itself to blame for not putting in place proper reporting procedures from the directors who it could appoint or remove and who were themselves beneficiaries.

[75]I agree with Mr Peacock that it would not be surprising if the bank was intended to have an unlimited priority as against loans from the equity owner. But I also think he is right not to put it higher than that. It is plausible that the parties did agree a limit to the priority for the bank given by the ICA.

[76]In my view, this is one of the many cases in which commercial plausibility is of no real assistance in construing the parties’ agreements.

[77]There are telling points in the submissions of both parties, but I am persuaded that there was no point to the insertion of £4m in the definition of BoS Priority if it was not intended to impose some limit on the bank’s priority which was otherwise absolute in all respects.

[78]The bank does not submit that the insertion was a mistake, based on an erroneous view that the defined term was used in the body of the ICA. It accepts that the ICA must be construed as it stands, following the amendments initialled by the parties in July 1999. It accepts that some meaning and purpose must be given to the definition with its amendment.

[79]The bank suggests that the purpose of the insertion was simply to state the facility limit as at July 1999. It was a descriptive provision, not intended to have any substantive effect.

[80]I can think of no good reason why the parties should wish to include a statement of the current facility, nor was the bank able to suggest one. On the clear construction of the ICA without the insertion, accepted by both sides, that the priority was unlimited, the facility limit at any particular time was irrelevant. Even if the parties had wished to state the current facility limit, the definition of BoS Priority was clearly the wrong place. The purpose of the definition was by its terms to limit the bank’s priority. The insertion of £4m in the definition strongly suggests that the purpose was indeed to impose a limit. It follows that a mistake was made by inserting £4m but not including the defined term in the body of the ICA.

[81]The correct approach to the construction of documents containing mistakes was stated by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd

[2009] AC 1101

. Lord Hoffmann said at [21] – [25]:

“21 I therefore think that Lawrence Collins LJ was right in saying that ARP must mean the amount by which 23.4% of the achieved price exceeds the MGRUV. I do not think that it is necessary to undertake the exercise of comparing this language with that of the definition in order to see how much use of red ink is involved. When the language used in an instrument gives rise to difficulties of construction, the process of interpretation does not require one to formulate some alternative form of words which approximates as closely as possible to that of the parties. It is to decide what a reasonable person would have understood the parties to have meant by using the language which they did. The fact that the court might have to express that meaning in language quite different from that used by the parties (“12 January” instead of “13 January” in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; “any claim sounding in rescission (whether for undue influence or otherwise)” instead of “any claim (whether sounding in rescission for undue influence or otherwise)” in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 ) is no reason for not giving effect to what they appear to have meant. 22 In East v Pantiles (Plant Hire) Ltd (1981) 263 EG 61 Brightman LJ stated the conditions for what he called “correction of mistakes by construction”: “Two conditions must be satisfied: first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.” 23 Subject to two qualifications, both of which are explained by Carnwath LJ in his admirable judgment in KPMG LLP v Network Rail Infrastructure Ltd [2007] Bus LR 1336, I would accept this statement, which is in my opinion no more than an expression of the common sense view that we do not readily accept that people have made mistakes in formal documents. The first qualification is that “correction of mistakes by construction” is not a separate branch of the law, a summary version of an action for rectification. As Carnwath LJ said, at p 1351, para 50: “Both in the judgment, and in the arguments before us, there was a tendency to deal separately with correction of mistakes and construing the paragraph ‘as it stands’, as though they were distinct exercises. In my view, they are simply aspects of the single task of interpreting the agreement in its context, in order to get as close as possible to the meaning which the parties intended.” 24 The second qualification concerns the words “on the face of the instrument”

. I agree with Carnwath LJ, paras 44–50, that in deciding whether there is a clear mistake, the court is not confined to reading the document without regard to its background or context. As the exercise is part of the single task of interpretation, the background and context must always be taken into consideration. 25 What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied.”

[82]Mr Beltrami was able to suggest a change to the language of the ICA which, in terms of the extent of the surgery rather than its effect, was small. All that was required was to add the words “to the extent of the BoS Priority” at the end of cl.2.1.

[83]I agree with this suggestion and hold that on the true construction of the ICA it is to be read and given effect to as if those words were added at the end of cl.2.1. I therefore find in favour of the trustee on the first issue.

[84]I reach this conclusion without any need to take account of later correspondence involving the bank, the company and the trustee. By the letter dated 10 November 2005 the trustee acknowledged that the level of the bank’s priority would stand at £27.5m when the loan facility existing at that time was fully drawn down. This letter was written at the bank’s request and appears to be intended to change the limit in the definition of BoS Priority, and to that extent it is a document to be read with the ICA.

[85]If the limit was intended to be descriptive only, this letter would have been un-necessary. The issue, however, is one of construction of the ICA and, as it was not suggested that the letter did anything except substitute £27.5m for £4m in the definition of BoS Priority, it is not a document which can alter the proper construction of the ICA as signed by all parties in July 1999. Other correspondence to which reference was made contained no more than negotiations with a view to agreeing various letters and is inadmissible on that ground, as well as on the grounds of post-dating the agreement to be construed.

Issue 2: the effect of the ICA (as amended) on the bank’s priority

[86]On the basis that cl.2.1 is to be read with the addition of the words “to the extent of the BoS Priority”, what is its effect?

[87]In considering the trustee’s submission that the effect is to limit the bank’s priority as regards all its security to £4m, increased to £27.5m by the letter dated 10 November 2005, it is necessary to consider the effect of the terms of the ICA read in their context, which includes the position in the absence of the ICA and the terms of the debentures in favour of the bank and the trustee. I have earlier set out the position if there were no ICA and no specific provisions in the trustee’s debenture. The bank’s fixed charge on freehold and leasehold property, together with legal mortgages taken on individual properties, would rank ahead of the trustee’s floating charge, in respect of all advances made and liabilities incurred before the crystallisation of the trustee’s floating charge. As regards those assets over which both the bank and the trustee had fixed charges, and as regards the floating charges, s.94 of the LPA would preclude the bank from obtaining priority for any advances other than those which it had made or was committed to make when the trustee’s debenture was granted by the company.

[88]In considering the effect of the ICA it is a striking feature that it is drafted in terms which indicate that it is imposing restrictions on the rights of the trustee, but not on the rights of the bank. This may be seen in virtually every clause.

[89]Clause 1.1 refers, as the ICA’s purpose, to the trustee agreeing to regulate its rights under its loan documentation and security as set out in the ICA, in consideration of the bank providing a facility. There is no equivalent provision that the bank is regulating its rights under its loan documentation and security.

[90]Clauses 2.2, 2.3, 3 and 4 confer rights on the bank and impose restrictions on the trustee, not the other way round. Clauses 5 and 6 confer absolute priority on the bank’s personal claims as creditors over the trustee’s similar claims. Clauses 8 and 9 confer an important right on the bank, because it provides the consent required by s.94 to entitle the bank to tack further un-covenanted advances to the security conferred by its debenture.

[91]Clause 10, providing for the waiver of defences, indicates that the ICA is for the benefit of the bank, not the trustee, as appears from its opening general words:

“The subordinations effected or intended to be effected by this Agreement and the obligations of the Subordinated Creditors under it shall not be affected by any act, omission or circumstances which but for this provision might operate to release any of the Subordinated Creditors from their obligations or affect such obligations or such subordinations including without limitation and whether or not known to the Subordinated Creditors or any other person.”

[92]Likewise, cl.11 imposes an obligation that any payments received by the trustee in contravention of the terms of the ICA are to be held on trust for and paid to the bank, but there is no equivalent provision for the benefit of the trustee, nor any provision referring to the bank acting in contravention of the ICA. Clause 12 provides for the bank to be able to assign the benefit of the ICA, while requiring the trustee to procure that any assignee of the company’s debt to the trustee enters into a deed of accession under which it expressly covenants with the bank for the benefit of the bank and its assignees to be bound by the terms of the ICA. There is no similar obligation as regards assignments by the bank.

[93]In my judgment, all these provisions point strongly to the view that the ICA is intended to confer benefits on the bank and restrictions and obligations on the trustee. For reasons already given, it is no answer to say that the ICA is based on the bank’s standard form agreement. The terms of the ICA were negotiated and agreed by the trustee. If it wanted different terms, it was, as a matter of reality not just theory, open to it to negotiate for them.

[94]The ICA confers benefits on the bank in a number of ways. First, it acknowledges the priority of the bank’s charges, so overcoming any uncertainty which might otherwise arise from the contemporaneous execution of the debentures. Secondly, it enables the bank to tack further advances on security common to both debentures. Thirdly, it subordinates the trustee’s personal claim against the company. Fourthly, it imposes particular obligations and restrictions on the trustee, as set out in cls.2.2, 2.3, 3 and 4.

[95]Against this background, cl.2.1 (read with the addition of the words “to the extent of the BoS Priority”) falls to be construed. Consistent with the rest of the ICA it can be read as conferring on the bank a priority, up to the limit of the BoS Priority, for its charges which it would or might not otherwise enjoy. First, it clarifies the priority between those charges which are common to both debentures and, secondly, combined with cls.8 and 9 it permits the bank to tack further advances to those charges up to the limit of the BoS Priority. This reading gives a clear purpose to cl.2.1.

[96]Mr Beltrami for the trustee submits that cl.2.1 does a great deal more, and deprives the bank of priorities which it would otherwise enjoy. He points to the definitions of “BoS Security” and “Subordinated Security” which are in all-embracing terms and submits that it follows that cl.2.1 must be read as confining the bank’s priority for all its charges to the limit of the BoS Priority.

[97]Not only is this reading inconsistent with the remainder of the ICA, but it produces the somewhat startling result that a floating charge can rank alongside or, as the trustee submits, even in priority to fixed charges. This is to reverse the natural order of things, under which a company which has given a floating charge remains free in the ordinary course of business to subject assets to fixed charges which will by their nature rank ahead of the floating charge. It may be possible by appropriate provisions to achieve the position for which the trustee, but it would in my judgment require clear words and an agreement in very different terms to the ICA.

[98]Perhaps recognising the force of this point, Mr Beltrami’s first submission was that the bank’s fixed charge on freehold and leasehold property was not a fixed charge at all but took effect as a floating charge. For the reasons earlier given, I do not consider that this submission is well-founded.

[99]Secondly, he submits that unless cl.2.1 is read as confining the bank’s priority on all its charges, it has no real effect at all. He relies on the actual and intended business of the company as investing in freehold and leasehold property, drawing a distinction with a company which holds property, for example office or factory premises, for the purpose of its business. In the latter case there are likely to be many assets subject to a floating charge but not to a fixed charge on the company’s land and buildings. In the case of a property company, such as the company here, there would not be many such assets.

[100]The factual premise is correct, although there are some assets which do not fall within the fixed charge on freehold and leasehold property. But I do not accept that it assists the trustee. Given the factual position of the company’s business, it is all the more striking that the bank, but not the trustee, was granted a fixed charge on property. It is the clearest indication that the bank’s security on property was to rank ahead of the trustee’s security on property, thus requiring a clear provision if the priority of the bank’s fixed charge was to be restricted.

[101]Moreover, the definition of “Subordinated Debt”, the debt due to the trustee, has no limit. If the trustee were right, it would gain priority after the limit on the bank’s priority for all advances made by it to the company, whenever they were made. This seems highly implausible. Even if all such advances achieved equality, not priority, it would be surprising.

[102]A conclusion that the ICA does not limit the priority which the bank’s security would otherwise enjoy is supported by the trustee’s own debenture. It is in this context that Mr Beltrami submitted that the definition of “the Prior Charges” in its debenture contains a description of charges which have priority but not an agreement as to priority. It is convenient to repeat the definition:

“the Prior Charges” means any charges created from time to time by the Company which it is expressly agreed shall rank in priority to this Debenture whenever created.”

[103]Mr Beltrami submitted that the words “which it is expressly agreed…” to the end refer to such agreements, if any, as may in the future be made as to the prior ranking of any charge in favour of the bank.

[104]In my judgment, this is not the correct reading of those words. They constitute, in my view, an agreement or acknowledgement that any charges in favour of the bank, whenever created, shall rank in priority to the trustee’s debenture. I consider this to be the natural reading of the words “which it is agreed shall rank in priority …” The trustee’s construction would be more obviously expressed as “which has been or shall be expressly agreed to rank in priority …” More significantly, the trustee’s construction deprives the words “whenever created” of any real purpose. An obvious example of “prior charges” are the legal charges created over individual properties once purchased by the company, but there was no agreement by the trustee at the time they were granted that they should rank in priority. Further, as Mr Peacock submitted, there is no point to the exception for Prior Charges in cl. 3.1.1 of the trustee’s debenture if the trustee’s construction of the definition were correct.

[105]On the second issue, I therefore conclude that the ICA does not limit the priority enjoyed by the bank on its fixed charge as contained in its debenture on freehold and leasehold property, or on its legal mortgages of such properties, to £27.5m.

Issue 3: ranking of the trustee’s debenture

[106]This issue would arise only if I had held in favour of the trustee on issue 2. If the bank’s priority on its fixed charge and legal mortgages of properties was limited to £27.5m, would the trustee’s charge thereafter rank in priority to the bank or pari passu with it? Mr Beltrami submits that it must be the former because otherwise the bank’s ability to make further advances secured by its charges could swamp the trustee’s claim if it ranked pari passu. It must therefore have been intended that the trustee’s debenture would rank in priority above the limit of £27.5m. There is however nothing in the ICA which can be said to give the trustee this priority. If the trustee had succeeded on issue 2, it would mean that there was a limit on the bank’s priority. In the absence of a provision which then gave the trustee’s debenture priority, the two debentures would then rank pari passu. There is no such provision and, accordingly, if it arose, I would hold in favour of the bank on the third issue.