This is one of a series of articles we at Morton Fraser are producing to guide finance companies through the wholesale change proposed in Scots law in relation to security over goods, intellectual property and shares, on the one hand, and invoice finance or the purchase of receivables, on the other. For a general introduction to what the Bill covers, see here. The Bill is slated to move through the Scottish Parliament this session, so, while detail may change during that passage and statutory instruments will be required before it can become effective law, it is now timely to start preparing for the new regime. This article is concerned with the new process for assigning debts, referred to in the Bill as "Assignation of Claims".
Who will benefit from the new Law?
As will become apparent from the detail in what follows, this reform is of crucial importance and assistance for any business which provides or receives funding based on the purchase of or the taking of security over receivables, of whatever kind.
Thus it will benefit:
- Invoice financiers and their clients
- Block discounters
- Back to back funders of contract hire companies or finance companies
- Project finance
- Taking security over rents in property developments
- And many more
We probably need to start with this, as the terms used in Scots law to describe different types of property differ from those used in English law and also from everyday speech. And we need to agree on what terms we are going to use in this article.
In Scots law all property is either heritable or moveable. Heritable property is land and buildings or rights over land; moveable property is everything else. Moveable property is then itself divided in two: corporeal moveables, in other words, things; incorporeal moveables or, in other words, rights not related to land which you can't, as it were, touch (but including in certain respects the right to receive rents). So corporeal moveables (called chattels in English law) are goods and equipment. Incorporeal moveables include debts (the right to be paid, aka receivables), company shares, and intellectual property (patents, trade marks etc.).
In this article we are focusing on "incorporeal moveables" and in particular what the Bill describes as "claims", being the right to the performance of an obligation (but in the Bill this excludes a non-monetary right relating to land or a negotiable instrument). Therefore, as suggested above, "claims" covers debts, the rights under sub-hire agreements and bank accounts. Other forms of incorporeal moveable property such as company shares and intellectual property are covered by the Bill but are captured by the introduction of the Statutory Pledge.
In the Bill the usual concepts are used to describe the parties to an assignation. The person who assigns the claim being the assignor, the person to whom it is assigned being the assignee and the person against whom the claim may be enforced being the "debtor".
The Problem to be Solved
This is explained in detail in the introductory article referred to in the first paragraph above. In summary, the issues, which have the effect of limiting the availability of finance in Scotland compared with England and elsewhere, from the perspective of financings based on ownership of or security over receivables are:
- Scots law does not have the concepts of legal and equitable assignments and in England financiers rely on equitable assignment to protect their title against other creditors of, and an insolvency practitioner appointed to their invoice finance client/borrower. In Scots law, the financier has no title to the debt until notice is given to the debtor;
- It remains unsettled in Scots law whether it is competent to assign a debt before it exists. Therefore, some form of corroborative assignment needs to be provided for when the debt comes into existence;
- In order to circumvent the issues, until now financiers have traditionally relied on a trust created in the finance agreement whereby the client/borrower undertakes to hold the purchased receivables on trust for the financier until the debtor pays, or the financier gets good title by giving notice. In Scotland the transfer of debt into the trust has to be intimated to the beneficiary of the trust (the invoice financier) and that intimation can only be given when the debt has come into existence and has been purchased.
For companies and LLPs, receivables financiers invariably take additional security to support the trust in the form of a floating charge but on the client's insolvency, unlike a fixed security, a floating charge ranks after the preferred debts, the prescribed part (the part of the assets reserved as a preference for unsecured creditors), and the administrator's expenses.
Assignation of Claims
The Bill provides that, in order to assign a claim there must be an assignation document:-
- which is executed either in ink, or (in the case of electronic signature) authenticated by the assignor;
- which identifies the claim or where there are multiple claims, identifies the claims in terms of their identifying class; therefore it would be possible to assign all invoices raised against a particular customer or all invoices rendered in a particular period in the assignation document or all sub-hire agreements by which a hirer hires out cars financed for it by its own funder;
and the Bill makes clear that the assignor may assign a claim which at the time the assignation document is granted is not held by the assignor (whether or not the claim yet exists at that time).
This is clearly a big change from the existing law which requires intimation to the debtor in order for the assignation to be effective and hence as explained above, whole turnover arrangements dealing with Scottish debts are difficult to facilitate within the current landscape. The Bill removes the limitations in this regard. Businesses will now have the opportunity to assign future debts relating to work in progress before the work has actually been done.
There is an exception for assignations which evidence financial collateral arrangements - the arrangements concerning which are set out in a separate article we have produced in this series. The Bill also makes it clear that an assignation can be made subject to a condition which must be satisfied before the claim is transferred. Such suspensive condition must be set out in the assignation document (or be made by reference to another document) so that it is evident to any third party on reading the assignation whether any conditionality applies.
As is currently the case in Scots law, the Bill provides a default rule that where the whole of a claim is assigned, the assignee is entitled to the benefit of any accessory rights enjoyed by the assignor. Therefore, the assignation will transfer any security which relates to the claim assigned, so for example if the debtor has granted a standard security in security for the debt due, the standard security will transfer when the debt is assigned and the assignor must as soon as reasonably practicable perform any steps necessary to effect the transfer of that security.
Assignation of part of a claim is permitted under the Bill but that is only the case where the debtor consents and the claim is divisible. Assigning it in parts must not affect the obligation to which it relates becoming significantly more burdensome for the debtor. As a default, the assignor is responsible to the debtor for any expense incurred by the debtor due to the fact the claim is assigned in part rather than in whole.
Note that anti-assignment clauses will continue to have effect to the extent they are currently permitted by law.
In assigning a claim for value the assignor is taken to warrant to the assignee that:-
- the assignor is entitled to transfer the claim to the assignee
- the debtor is obliged to perform in full to the assignor
- the assignor has done nothing and will do nothing to prejudice the assignation
In assigning a claim other than for value, the assignor is taken to warrant to the assignee that he will do nothing to prejudice the assignation.
In neither case is the assignor taken to warrant to the assignee that the debtor will perform his obligations to the assignee.
When does the Assignation Become Effective
The assignation becomes effective either (i) on intimation of the assignation, or (ii) the assignation document being registered in the ROA. But that alone is not enough. The assignor must be the holder of the claim, the claim must be identifiable and if there are suspensive conditions to the assignation, then those conditions also need to be satisfied.
If we take the example of the company that assigns to the financier all debts listed in notification schedules from time to time. As soon as the company has executed the receivables purchase agreement the financier registers the assignation with the ROA. No transfer exists at the date of notification - the claims/debts do not exist at that point and cannot be identified. It is only when the first notification schedule is issued, identifying the relevant debts which then exist, that the assignation takes effect.
The procedure for intimation is now set out in the Bill, remembering that where the financier protects its title to receivables by registering in the ROA, intimation or notice will usually only be required where the financier is enforcing its rights and stepping in to collect the receivable. Either the assignee or the assignor may serve notice of the assignation on the debtor. Written notice is required albeit it may be in electronic form. Intimation to a co-debtor is to be treated as intimation to all the co-debtors. The notice must provide the name and address of both the assignor and assignee and details of the claim (or part of it) being assigned. That information may be provided via a link in an electronic communication. The notice doesn't have to be signed, nor does it need to be set out in a single document - so the traditional method of a sticker on an invoice will now be formally approved (whilst the courts have recently been relaxed about this under Scots law, there has always been an element of nervousness about how robust this process is).
Notice can be served by personal delivery, by post or courier (which is deemed to be received 48 hours later unless earlier receipt can be shown) or by electronic transmission (in which case it is deemed to be received after 24 hours). Given that the claim transfers on intimation, the timing of receipt is crucial and hence expressly provided in the Bill. Note that notification by oral means is prohibited.
There is flexibility for the Scottish Ministers to prescribe a style form of notice for the assignation of monetary claims in due course. Whilst the style wouldn't be mandatory it would undoubtedly be welcomed and allow some standardisation across the industry.
Given these new rules on the ability to effect an assignation under Scots law, it is unlikely that receivables purchasers will need to rely on the trust provisions traditionally contained in their documentation suites in relation to Scottish debts - they will eventually be redundant. It remains to be seen whether financiers will continue to take floating charges, but the rationale for doing so will be diluted following the Bill coming into force.
Registration of the Assignation in Security at Companies House
Is Scots law the Relevant Jurisdiction
Receivables financiers will need to consider what deals are going to be subject to registration in the ROA. Clearly, new transactions which could at any time have a Scottish element should be registered. Registration will be electronic, simple and cheap. The bigger question is whether steps should be taken to review the back book and take steps to register existing deals where there is a known Scottish exposure, remembering that there is no time limit within which registration has to take place from the date an agreement is signed. Our assumption is tending to be that invoice financiers may take the view that they have already accepted the Scots law risks in writing the deal and it will simply be too much effort to go through the back book and set up a series of retrospective registrations. We also think, however, that some other types of funder will be looking to go through the back book and effect registration now - in particular, securitisation vehicles will almost certainly want to take advantage of the new regime to simplify the procedure which is undertaken for each advance of new monies where Scottish receivables are financed. We rather think many block discounters will take the same view and possibly too some back to back funders. It is certainly something which such funders will have to take a view on at board level.
Protection of Debtors
Under the current law a claim will only transfer if it is intimated to the debtor so there is no question of a debtor being unaware of the assignment of the relevant debt. However, given the Bill proposes an alternative method of effecting transfer of a debt by registration at the ROA, it won't necessarily always be the case that a debtor will be aware of the assignation.
A debtor who in good faith, pays an assignor who is no longer the creditor, will still be discharged from the debt to the extent of payment made to the assignor. The fact that an assignation has been registered or deemed to have been intimated does not automatically mean that the debtor does not perform in good faith. It is anticipated that debtors should not have to check the ROA.
However, what happens when the assignor is acting in bad faith? A good faith debtor may still be protected if certain criteria are met:-
- the holder of the claim grants more than one assignation in respect of the same claim
- the claim is transferred by one of the assignations to the true holder (typically by registration at the ROA)
- the assignee in another of the assignations informs the debtor that the claim is assigned to that assignee (the purported holder)
- the debtor then pays the purported holder.
In those circumstances the debtor who pays the purported holder rather than the true holder will be deemed to be discharged from the claim and not need to compensate the true holder.
It will often be the case that the debtor has little or no knowledge of an assignee either before or after an assignation has been intimated (given there is no requirement to include a copy of the assignation document when intimating the assignation). Where notice of assignation has been given to the debtor, the debtor has a statutory right under the Bill to request from the assignee sufficient evidence of the assignation (being written confirmation of an assignor that the assignation has taken place). Similarly, where the debtor has not received a formal written notice of assignation but has reasonable grounds to believe that the claim has been assigned, the debtor may state those grounds (which need not be in writing) and ask the assignor to confirm the position in writing. If there has been an assignation, the assignor must provide the name and address of the assignee. The debtor can withhold performance until they have received the relevant confirmation, albeit they cannot withhold performance if the assignor confirms there has been no assignation. Funders need to be aware of this. It is a potential source of considerable hassle for them, and they will need to put systems in place to ensure requests for information are dealt with promptly by those holding the correct information.
In very basic terms, provided the claim is appropriately identified in the assignation and the claim is in existence at the point of insolvency, then registration in the ROA gives the creditor priority over an insolvency practitioner appointed to the assignor without the need for intimation or notice, which is a big divergence from the current law. However, complexities inevitably arise and will need addressed given that under the current proposals, and in a move away from the current legal position, future claims may be assigned. Insolvency practitioners will now need to consider how those future rights are dealt with and much will depend on the nature of the business and the work in progress involved.
The Bill makes clear that the assignation is ineffective as regards any claim which, though identified by the assignation document as a claim assigned, is not held by the assignor before the assignor becomes insolvent. That seems straightforward. However, this general rule is disapplied in relation to a claim in respect of income from property in so far as that claim (i) is not attributable to anything agreed to be done by the assignor after he became insolvent, and (ii) relates to the use of property in existence at the time the assignor became insolvent. For a detailed analysis of difficulties that need to be considered please click here.
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