Factual and Procedural Background
The Debtor owned heritable property in The State. On 12 February 1879 she executed an ex facie absolute disposition in favour of Bank A. A contemporaneous but unrecorded back-letter stipulated that Bank A was to “hold the said disposition in security and until full and final payment of all sums of money now due or which may hereafter become due” by the Debtor or her firm, after which the subjects would be reconveyed to her.
Subsequently, to obtain further advances, the Debtor assigned to Bank B “her whole right in the heritable property under the right of reversion” arising from the back-letter. Bank B intimated this assignation to Bank A. After receiving that intimation, Bank A nevertheless continued to make additional advances to the Debtor. The Debtor later executed a trust deed for creditors, being unable to meet liabilities to either bank. The value of the property was insufficient to satisfy both debts, giving rise to a dispute over priority.
The Court of Session (by majority) held that Bank A’s security ranked in priority for all sums—both before and after intimation—to the date of the trust deed. Bank B appealed to the House of Lords, which delivered the opinion summarised below.
Legal Issues Presented
- Whether the back-letter limited Bank A’s preference to the amount owed at the date when Bank B’s assignation was intimated, or whether it secured all advances made by Bank A, including those advanced after intimation.
- Whether, in light of the intimation and the nature of the back-letter, Bank A could in good faith extend its security ranking ahead of Bank B for post-intimation advances.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
Character of the Transaction. The House accepted that, although the disposition to Bank A was absolute in form, the unrecorded back-letter converted it into a mere security. Accordingly, Bank A held only a right of retention; the Debtor retained the proprietary (reversionary) interest.
Effect of Intimation. Once Bank B’s assignation of the Debtor’s reversionary interest was intimated to Bank A, Bank A had full knowledge that the beneficial interest had been transferred. Any further advances made by Bank A were therefore made with notice that the Debtor could no longer pledge that interest.
Good-Faith Principle. The majority of Judges in the Court of Session had inferred an implied term forbidding the Debtor from seeking alternative financing. The House rejected that construction, stressing that no such prohibition was expressed in the back-letter. Because each new advance required a fresh agreement, Bank A could not, in good faith, rely on the Debtor’s already-assigned right as security for later loans.
Priority Limited to Pre-Intimation Debt. Treating the back-letter as creating a security only, the House concluded that Bank A’s preferential claim could extend no further than the indebtedness existing when intimation was received. Subsequent advances could not outrank Bank B, whose interest had already attached.
Holding and Implications
HOLDING: The interlocutor of the Court of Session was REVERSED. Bank A’s security ranks preferable only to the extent of the debt outstanding at the date of intimation of Bank B’s assignation; Bank B is preferable for advances made thereafter. Costs were awarded against Bank A in both the Court of Session and the House of Lords.
Implications: The decision clarifies that, in Scots law, an absolute disposition qualified by an unrecorded back-letter is treated as a security inter partes. After intimation of an assignation of the reversionary right, the original security holder cannot rely on post-intimation advances to defeat the assignee’s priority. The ruling safeguards assignees who give value for a reversionary interest and provides guidance on the limits of security created through absolute dispositions with back-letters.