Key Differences between Scottish and English Security - Part 4

Morton Fraser Senior Associate Lauren Hart
Lauren E Hart
Senior Associate
02 September 2021

Ranking and Intercreditor Agreements


In the earlier summaries of the key differences in taking security between Scotland and England, I summarised the Scottish position on assignation, taking share security over Scottish shares and the legal niceties surrounding the Scottish floating charge respectively.  This is the fourth summary in our five part series and considers ranking and intercreditor agreements which relate to Scottish security interests.


The terms "ranking agreement" and "intercreditor agreement" are used interchangeably but generally refer to the same types of agreement - being those which regulate the priority of repayment of indebtedness owed to the creditors of an obligor.  Strictly speaking, a ranking agreement is the Scottish equivalent to the English law deed of priorities and is typically used for shorter form ranking arrangements.  As is the case in England, a Scottish intercreditor agreement is typically reserved for more complex arrangements and usually ranks both securities and liabilities in point of priority.  The latter will typically include provisions which subordinate debt, in addition to security interests; something ranking agreements generally do not.

The Scottish rules which apply to Scottish ranking agreements are set out in Section 16 of the Conveyancing and Feudal Reform (Scotland) Act 1970 (in the case of those which vary standard securities) and Section 466 of the Companies Act 1985 (in the case of those altering floating charges, including floating charges contained within English law debentures, which are granted by Scottish companies or LLPs).  Before considering the Scottish requirements which need to be factored into a completion process, it is worth summarising how Section 464 of the Companies Act 1985 works and what it says about the ranking of floating charges where no ranking agreement exists.  In summary, Section 464 provides as follows:

  • if a floating charge granted by a Scottish company or LLP contains provisions prohibiting or restricting the creation of any fixed or floating charge having priority over, or ranking pari passu with, the floating charge, those provisions confer priority on that floating charge over any such fixed or floating charge created after it;
  • fixed security interests arising "by operation of law" have priority over a floating charge;
  • except where ranking of a floating charge is determined in accordance with the above rules, floating charges rank in relation to other floating charges or fixed securities over a company’s property in accordance with the provisions of subsections (4) and (5) of Section 464 which provide that:
    • (subsection 4): (unless otherwise determined in accordance with the other provisions of Section 464):
      • a fixed security, the right to which has been constituted as a real right (i.e. a standard security) before a floating charge has attached to all or any part of the property of the company, has priority of ranking over the floating charge;
      • floating charges rank with one another according to the time of registration with the Registrar of Companies; and
      • floating charges which have been received by the Registrar of Companies for registration by the same postal delivery rank with one another equally; and
    • (subsection 5): if the holder of an existing floating charge has received notice in writing of the subsequent registration of another floating charge over the same property or any part thereof, the preference in ranking of the first floating charge is restricted to security for:
      • the floating charge holder’s present advances;
      • future advances which the creditor may be required to make under the instrument creating the floating charge or under any ancillary document;
      • interest due or to become due on all such advances;
      • any expenses or outlays which may reasonably be incurred by that floating charge holder; and
      • (in the case of a floating charge which secures a contingent liability, such as a guarantee) the maximum sum to which that contingent liability is capable of amounting whether or not it is contractually limited.

The nature of Section 464 is such that the position of a first ranking creditor relying on a floating charge is generally protected, both in relation to subsequent floating charges and subsequent fixed security interests provided the floating charge expressly prohibits the creation of those charges and provides that it shall rank ahead of any such charge.  Clearly, Section 464 does not work to help the interests of a subsequent floating or fixed charge holder, other than in relation to any further subsequent charges which may be granted after that subsequent floating charge (albeit an administrator is bound to recognise the existence of any fixed security interest in an administration).  In order to give any subsequent security holder priority either in relation to specific assets or ahead of the existing floating charge holder in relation to all assets of that company, a ranking or intercreditor agreement is required.

The terms of those documents are similar to those used in England but the following Scottish requirements must be factored into the drafting:

  • Section 16 of the Conveyancing and Feudal Reform (Scotland) Act 1970: in order to vary an existing standard security so as to create priority over it, any ranking agreement should be expressed to take effect as a variation to that existing standard security within the meaning of Section 16.  That is generally dealt with by way of a standalone clause;
  • Section 466 of the Companies Act 1985:
    • any ranking or intercreditor agreement which "alters" a Scottish floating charge must be signed by each of the existing floating charge holder, the new creditor and the company who granted the existing floating charge (i.e. it is not enough to create an agreement between the creditors only); and
    • a certified copy of the ranking or intercreditor agreement together with a statutory statement of particulars must be registered with the Registrar of Companies within the relevant statutory period (being 21 days), otherwise the agreement will be void against the liquidator or administrator and any creditor of the company, pursuant to Section 466(4A) (note that if that happens, the amount secured by the relevant floating charge becomes immediately payable under subsection 4D).  Note also that, unlike in England, this filing is mandatory, not voluntary.

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