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 some of the key provisions of the Bill itself and, in particular, how the registers to be set up will be used by finance companies on a day-to-day basis.
We have previously considered in detail the new forms of security to be introduced by the Bill: statutory pledges and the new process for assigning debts, referred to in the Bill as "Assignation of Claims", and a summary of these is set out below by way of reminder.
Summary of some of the Key Provisions of the Bill
- For the first time ever a new form of fixed security over goods, intellectual property and financial instruments (including shares in Scottish companies) is to be introduced on the current Bill passing through the Scottish Parliament - the Statutory Pledge
- The Statutory Pledge can be over future as well as currently owned property as long as the future property fits the description in the pledge
- It takes effect as a fixed security on registration in the new Register of Statutory Pledges or, in the case of future property, on the later of that registration and the asset being owned by the provider. If the pledge is granted by a company or LLP it needs to be registered at Companies House within 21 days of its date irrespective of when it is registered in the Register of Statutory Pledges
- The Statutory Pledge is a fixed security and, unlike a floating charge, it ranks on the provider's insolvency ahead of the preferred debts, the portion reserved for unsecured creditors, and the administrator's expenses
- The ability to grant Statutory Pledges is not restricted to corporate entities. Consumers, sole traders and partnerships can also grant a Statutory Pledge. There are some limitations on the property which consumers can pledge; these limitations also apply to sole traders but not in respect of their business assets
- On insolvency of the provider:
- the pledge is effective over the property pledged provided it comes into the ownership of the provider before the onset of the insolvency.
- there can be more than one pledge over the same property, in which case they rank in order of registration in the Register of Statutory Pledges, though the creditors can amend this by written agreement
- in competition with creditors doing diligence on the pledged property, the pledge ranks first if created before the diligence is executed but only for sums already advanced before that execution or which the creditor was bound to advance
Assignation of claims
- The Bill introduces a formal process for assigning debts, referred to as "claims" (but basically this covers the right to performance of an obligation, hence a debt, a sub-hire agreement or a bank account will all be captured).
- The assignation can be over existing claims as well as future claims, provided they are adequately described so they can be identified as falling within the relevant description given in the Bill. Therefore, it is competent to assign a claim which at the time the assignation is given is not held by the assignor (and indeed the claim may not exist at that time). That's an important clarification of an area of doubt in Scots law.
- The claim (or debt) is transferred either by the intimation of the claim (giving of notice) to the debtor, as in current practice, or, under the new regime, registration of the assignation document with the new Register of Assignations ("ROA"). In respect of future claims, the assignment comes into effect on the later of the claim coming into existence and registration with the ROA.
- Where the assignation in question is a security assignation, it is treated as being a fixed security on registration at the ROA and there is no time limit for registration albeit if the assignation is granted by an LLP or company it still needs to be registered at Companies House within 21 days of its date, irrespective of when it is registered in the ROA.
- If notice hasn't been given to the debtor, then such debtor paying the assignor in good faith is protected by the Bill and is discharged of his obligation to pay the assignee.
- 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
We have also considered how the changes proposed by the Bill will interact with Scots insolvency law.
This article looks in more detail at how all of this will work in practice, and how the registers to be established will function, assuming that the Bill is passed in its current form.
When it came to determining how the new regime would work, it became clear that given the differences between the two types of transaction (an assignation being a transfer of a right, and a pledge being a creation of a right), it would be preferable to have two separate registers instead of one register with two distinct parts as had originally been intended.
1. Register of Assignations ("ROA")
As we have previously mentioned, an assignation of claims will be completed by either intimation (notification in English law) to the debtor/account party or registration in the new ROA. The procedure for intimation is now set out in the Bill and was considered in a previous article.
In terms of the alternative, the Bill provides that a new register will be added to the stable of registers already administered by the Keeper of the Registers of Scotland (the "Keeper") such as the Land Register, Register of Sasines and the Books of Council and Session, on the same self-financing basis as most other registers. The costs of the register would be covered by fees for registration, for searches etc. The exact detail of the ROA will be left to the Keeper, but it is expected that she will consult with key stakeholders in the finance and legal sectors.
The ROA will be a public register which will, in general, be automated and require minimum human intervention (and so applications won't be checked by the Keeper), with registration and searching to be completed online. Subordinate legislation (the "ROA Rules") will be required, and this will regulate the ROA and related matters (including the level of registration and search fees).
Making an application for registration of an assignation of claims will be straightforward. A scanned copy of the assignation document will be submitted for registration (unlike security documents currently registered at Companies House it will not be necessary for the document to be certified, though redaction will be allowed, as is the case under S859G of the Companies Act 2006), along with an application form containing some basic details. Applications should be made by the assignee or their solicitors on their behalf.
The Bill provides that registration will be by the name of the assignor. For companies, not only the company name and registered office address would be required, but also company number (given this is invariable). For natural persons, the entry should reveal their date of birth as well as name and address (again because the person's name is unlikely to be unique). In addition, an application should include a description of the claim, a copy of the assignation document, and be accompanied by the registration fee. Where these requirements are not met, the Keeper should reject the application.
Given one of the main reasons for having a ROA was so that it would be possible to check whether particular persons or entities had granted any assignations, it will be possible to search the ROA under an automated system, and searches would predominantly be against the person (albeit company number, or date of birth (as applicable) could also be used as search terms). Anyone can carry out a search of the register in return for a search fee, so this will be particularly helpful to finance companies when carrying out diligence on a potential borrower.
The date and time of a registration are crucial for priority purposes. The Keeper’s computer system will determine when the relevant entry is made up and that date and time should be stated in the entry
The purpose of the ROA is to alert third parties to the existence of the assignation of a claim. As such, there needs to be a certain standard of precision in applications in order to allow accurate searches of the ROA to be a carried out. Minor errors which do not mislead the searcher will be permissible, but where an entry in the register contains a seriously misleading inaccuracy, for example the wrong name was given for the assignor, the registration would be ineffective. Corrections should be made by the Keeper where she becomes aware of a manifest inaccuracy in the record, and what is needed to do to correct it is manifest (if it is not, the Keeper should note the inaccuracy on the record). The courts will also have the power to direct the Keeper to correct an inaccuracy. A registration which is ineffective should become effective if and when the entry is corrected.
2. Register of Statutory Pledges ("RSP")
The Bill provides that a statutory pledge becomes effective on registration of the pledge in the RSP.
The new RSP, like the ROA, will be public. It will also be administered by the Keeper. The Bill states that, subject to the requirements laid down by the Bill, the Keeper has discretion as to the form in which the RSP is kept. The Bill does not mandate that the register be kept in electronic form but given that several registers maintained by the Keeper are online registers it seems more than likely that the RSP will be an electronic register and therefore searchable online. The same is true of the ROA.
Subordinate legislation (the "RSP Rules") will regulate the register and related matters (including the level of registration and search fees).
In addition to registration of a statutory pledge, a document amending a statutory pledge by adding to the pledged property or increasing the extent of the secured obligations should also be registered in the RSP. Interestingly, where a statutory pledge is assigned, restricted or discharged, this does not require registration in the RSP (though electing to take this additional step will obviously make the RSP more accurate).
The online application should be accepted by the Keeper if the application (i) conforms to the RSP Rules in relation to applications, (ii) includes a copy of the constitutive (or, where applicable, amendment,) document and (iii) the registration fee is paid. Applications should be made by the secured creditor (or their solicitors).
Registration would be by the name of the provider of the statutory pledge (normally the debtor), with possible exceptions, for example for motor vehicles where registration could perhaps be both by provider name and by Vehicle Identification Number (VIN). Again, for companies, not only company name and registered office address would be required, but also company number. For natural persons, the entry should reveal their date of birth as well as name and address.
It would be possible for misleading entries in the RSP to be corrected. The Keeper would have the power to remove those entries which had a manifest inaccuracy such as where there has been a frivolous or vexatious registration. Corrections can also be made by way of court order, as well as an application by the secured creditor. If what is required to correct the error is not manifest, the Keeper should instead note the inaccuracy on the register.
Where an entry for a statutory pledge was redundant because the debt had been repaid, the provider of the security (normally the debtor) could demand that the secured creditor deletes the entry.
For a fee, searches of the RSP could be made against the provider's name. Some encumbered property will have a unique serial number (such as a VIN in the case of a car, van or other motor vehicle). This will be particularly helpful to asset financiers, looking to finance vehicles or similar assets capable of recognition by way of unique serial number, or to motor traders who can check to ensure a part exchange vehicle isn't the subject of a registered security.
What about registration at Companies House?
Where the assignation in question is a security assignation, it is treated as being a fixed security on registration at the ROA and there is no time limit for registration, albeit if the assignation is granted by an LLP or company it still needs to be registered at Companies House within 21 days of its date, irrespective of when it is registered in the ROA.
A statutory pledge takes effect as a fixed security on registration in the new Register of Statutory Pledges or, in the case of future property, on the later of that registration and the asset being owned by the provider. A statutory pledge granted by a company or LLP also needs to be registered at Companies House within 21 days of its date irrespective of when it is registered in the Register of Statutory Pledges.
We've considered the anomalies between Companies House registration and ROA/RSP registration in a previous article.
Requests for Information
An "entitled person" has the right to ask a pledge-holder (as shown in the RSP) to provide:
- if the creditor still holds the pledge, a written statement describing the secured obligation and whether or not the property the entitled person asks about is encumbered by the pledge, or
- if the creditor has assigned the pledge, the details of the assignee (or that the creditor has never been the secured creditor).
An "entitled person" also has the right to ask an assignee (as shown in the ROA) to provide a written statement as to whether:
- a specific claim by the entitled person is assigned by the assignation document; or
- a specified condition to which the assignation is made subject, has been satisfied.
In both cases, the creditor has 21 days to comply with the request but may recover costs reasonably incurred in doing so. The creditor is excused from doing so if the requester is not an entitled person, if it's manifest that the pledge is inapplicable or the registration of the assignation is ineffective, or if the creditor has already responded to a similar request from the same person within the past three months.
An "entitled person" is a person who has right to the property specified in the request, or who has or will have the right to do diligence against the property or assigned claim, or who is of a type to be prescribed by statutory instrument and has the consent of the provider to make a request.
These requests could quite easily become very onerous, and difficult for creditors with large books to comply with in the tight timescales.
Registration of security granted by companies or LLPs is almost second nature to most creditors (and certainly their solicitors). It is likely that, once the Bill is passed into law and the registers become more frequently utilised, registration of assignations and statutory pledges will happen habitually and become a key part of finance transactions in Scotland, thus ensuring that finance can be made more readily available over Scottish moveable assets to assist with economic recovery following the Covid-19 pandemic.
The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Morton Fraser LLP accepts no responsibility for the content of any third party website to which this webpage refers. Morton Fraser LLP is authorised and regulated by the Financial Conduct Authority.