This long-awaited legislation modernises the law in Scotland in relation to taking security over moveable property and transfers of claims (e.g. contractual rights to demand payment of debts or rental income). The Act aims to help businesses in Scotland access secured finance more easily by remedying and streamlining some archaic processes and concepts.
The current issues
Moveable property in Scots law is essentially everything except land, certain rights relating to land and a small set of contract rights. It can be either:
- Corporeal property: physical items like equipment, vehicles and whisky barrels etc; or
- Incorporeal property: intangible assets like cash, debts, rental income, and contractual rights.
Scots law has some quirks that can make it challenging for businesses to secure finance against moveable assets or to sell incorporeal moveable assets, especially compared to English law. In order for fixed security to be created over corporeal moveable assets in Scotland in favour of a lender, the lender must have physical possession of the asset: this is rarely desirable for either party as it would create practical difficulties by restricting the business from being able to utilise those assets. For incorporeal assets, a transfer or the creation of fixed security requires notifying the relevant counterparty; this can be cumbersome and can reveal commercially sensitive information.
Also, assets that do not exist or are not owned by the seller or borrower can't be transferred or secured under Scots law.
As a result, lenders often take floating security over these types of assets which has some disadvantages: for example, when lending against assets that are secured by a floating charge only, such assets can be subject to claims of prior ranking statutory creditors in an enforcement situation; a consideration which lenders need to take into account. This makes creditors less keen to provide finance against moveable assets under Scots law. From a borrower point of view, those considerations may impact the debt levels that may otherwise be available to it and possibly the cost of borrowing.
The current system is widely viewed as restrictive, impractical and badly outdated.
The new Act
The Act introduces three key changes to modernise the system:
- Statutory Pledge: A new form of security can be taken over certain types of moveable property.
- Easier Transfers: Claims and rights over present and future moveable property can be easily transferred under a new regime.
- New Registers: Two optional online public registers, the Register of Assignations and the Register of Statutory Pledges, will be created and managed by Registers of Scotland.
Once the new system is active, fixed security over corporeal moveable property can be created pursuant to the new statutory pledge and registration in the new Register of Statutory Pledges without depriving the borrower of possession and use of the assets in question. It will also be possible to assign a claim both present and future (so long as such claims are clearly identifiable) by registration in the new Register of Assignations without needing to notify the relevant counterparty. Registration of the security document at Companies House will still be required as applicable, in addition to registration in the new relevant register.
The new Act creates greater flexibility and simplifies processes, in a system which was historically fraught with formal and unwieldy processes and procedures. However, it should be noted that the existing system is not being repealed; it will still be possible to rely on the traditional methods of taking fixed security and assigning claims if that is the appropriate approach agreed between relevant parties, without requiring registration in the new registers. There may be circumstances, for example, where commercial confidentiality is a concern and parties would prefer not to use a public register. Where notice is being served, this can be done electronically or via a website or portal, which is another improvement being made by the Act.
Practical effects
The Act offers practical solutions for the Scottish market. For real estate investment transactions, fixed security over rental income streams and in real estate development transactions, security over receivables under key construction contracts, can in each case be created with ease and without the administrative burden of notifying counterparties. High-value plant and equipment can be secured without transferring possession, allowing easier access to asset finance. Also, the new rules on assigning claims should make it easier for borrowers to access invoice financing products.
However, there are still some areas where the Act does not solve some of the problems under Scots law. When the legislation was first announced, it was hoped that it would deal with how fixed security over shares in Scottish limited companies is taken, which currently involves the legal transfer of the shares to the lender; a very unpopular requirement. Much to our disappointment, the Act does not address this, due to limited devolved powers and technical problems with the UK wide legislation for limited companies which were identified during drafting the bill. Legislators acknowledge this issue and it is hoped that an order will be passed in due course so that the scope of the Statutory Pledge will extend to Scottish shares.
Conclusion
The Act is a welcome reform for businesses, borrowers and lenders, as well as practitioners. It allows borrowers to grant security over high-value assets while retaining possession which may unlock a wider range of, and more cost efficient, financing options.
It allows lenders to obtain enhanced security over valuable assets without difficult perfection requirements. The reforms mark a significant moment in Scots law, albeit a further change is eagerly anticipated.
Our specialist finance team at DWF can assist you through what impact the Act might have on your business and finance options, so please do not hesitate to contact Liana Di Ciacca or Alan Glen.
