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In the Matter of Rayford Homes Ltd v Bank of Scotland Plc & Barclays Wealth Trustees Ltd (2011)


On the proper construction of an intercreditor agreement to which a bank and a trustee were parties, together with the company they funded, the bank's priority as a secured creditor of the company was limited, but not to the figure of £27.5 million as contended by the trustee.


The court was required to determine the priority between the first respondent bank and second respondent trustee as secured creditors of a company (R) in administrative receivership. R was incorporated with the trust as its major shareholder. Its principal activity was investment in and management of property and its initial finance was provided by the bank and the trust. The bank had provided a revolving credit facility with security provided by a first charge on properties purchased and a floating debenture over R's assets. When the principal security documents were executed in January 1999 they comprised debentures in favour of each of the bank and the trustee and an intercreditor agreement (ICA) to which the bank, the trustee and R were parties. Both the bank and the trust's debentures contained covenants by R to pay its indebtedness on demand. The ICA provided by cl.2.1 that the bank's security, defined as all fixed and floating charges held by the bank as security over its debt, should rank in priority to the subordinated security. In a definition clause, the bank's priority was defined as "... Debt not exceeding £ together with interest on that amount and all commission, charges, fees, costs and expenses incurred...". The term "bank priority" was not, however, used in the ICA and no figure was inserted. In June 1999, the bank's facility was increased to £4 million and in July 1999 that figure was inserted in signed copies of the ICA in the "bank priority" clause where previously there was a blank. The bank's credit facility for R was increased again in several stages. In November 2005 its increase to £27.5 million was acknowledged by the trustee in writing, although there was no similar acknowledgement after a further increase to £45 million in June 2007. R later went into receivership and the applicants were appointed receivers. They applied for directions as to the priority between the bank and the trustee as creditors but adopted a neutral stance: the bank and the trustee argued the issue as respondents to the application. The trustee contended that, on the proper construction of the ICA as amended in July 1999 and taking account of its acknowledgment in its letter of November 2005, the manuscript addition of £4 million had the effect of restricting the bank's priority, as regards the proceeds of realisation of property over which the bank had a fixed charge under the terms of its debenture and legal mortgages, to £27.5 million. The bank denied that its priority was affected by the alteration to the ICA and submitted that its priority was not restricted to £27.5 million.


(1) There was no single commercially sensible construction for the effect of the addition to the definition of "bank priority" in the ICA. Both unlimited priority for the bank and a limited priority were entirely plausible, and the instant case was one of the many cases in which commercial plausibility was of no real assistance in construing the parties' agreements. There was, however, no point to the insertion of £4million in the definition of "bank priority" if it was not intended to impose some limit on the bank's priority which was otherwise absolute in all respects. The purpose of the definition was by its terms to limit the bank's priority. The insertion of £4 million in the definition strongly suggested that the purpose was indeed to impose a limit. It followed that a mistake was made by inserting £4 million but not including the defined term in the body of the ICA. All that was required for the court to correct mistakes in documents was that it should be clear that something had gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant, Chartbrook Ltd v Persimmon Homes Ltd (2009) UKHL 38, (2009) 1 AC 1101 followed. On the true construction of the ICA, it was to be read and given effect to as if cl2.1, which provided that bank's security should rank in priority to the subordinated security, had the words "to the extent of the bank's priority" added to it. The trustee was, accordingly, right in its contention that the bank's priority was restricted (see paras 74-83 of judgment). (2) The trustee's debenture contained a definition of "prior charges" which had priority as "any charges created from time to time by the Company which it is expressly agreed shall rank in priority to this Debenture whenever created." Those words constituted an agreement or acknowledgement that any charges in favour of the bank, whenever created, should rank in priority to the trustee's debenture. Accordingly, on its proper construction, the ICA did not limit the priority enjoyed by the bank on its fixed charge as contained in its debenture in respect of property, or on its legal mortgages of such properties, to £27.5m (paras 102-105).

Judgment accordingly

Chancery Division
Judgment date
23 July 2011

​LTL 12/8/2011 : [2011] EWHC 1948 (Ch)