At the end of 2017 the Scottish Law Commission published its report recommending reform of moveable transaction law in Scotland. If implemented, there will be a Scottish equivalent of a chattel mortgage for the first time, and security assignments of receivables will no longer have to be notified to the debtor to be effective.
This note will focus on the security aspects of the reform.
What’s the issue?
It is important to understand the type of property that will be impacted and the current challenges in Scotland when raising finance and security over such assets. The review focuses on moveable property, basically all property other than land and buildings. Such property is then classified into two further types:
1. “corporeal moveable property” that has a physical presence such as equipment and cars;
2. “incorporeal moveable property” which is moveable property without a physical presence, such as intellectual property rights and company shares.
The most common forms of security taken in Scotland are:
(a) the standard security which creates a fixed charge over land and buildings situated in Scotland;
(b) the floating charge, which hovers over all the assets of a company with the company free to deal with those assets in the normal course of business until such time as the floating charge attaches to them.
Unlike English law, Scots law has no concept of an equitable fixed charge or an equitable fixed mortgage. So the principal way of creating fixed security over corporeal moveable property in Scotland (except when dealing with assets such as ships and aircraft) is the Pledge, but that requires the asset to be physically delivered to the pledgee. In a financing scenario, that means the lender has physical control of it. Whilst that might work in limited situations for example whisky stored in a warehouse it is normally impractical for businesses who need the relevant assets in order to trade.
Aside from the Floating Charge, security can only be created over incorporeal moveable property by assigning it to the lender and making the assignment public. That poses various practical issues, for example where the lender wants to take a charge over the shares in a Scottish company. The only way to do so is for the lender to be registered as the holder of those shares on the Register of Members of the Company. That is often commercially unattractive to the borrower and the introduction of the Persons of Significant Control (“PSC”) Register brings with it further complications in how to deal with this appropriately under Scots law.
Taking security over Intellectual Property (“IP”) is also difficult to achieve in practice - assignation remains the only way in Scotland to use IP for security purposes (apart from the floating charge) but that means transferring the IP to the lender and registering the transfer in the relevant public register such as the Trade Mark or Patent Register. Again, that is often commercially challenging.
What will change?
The aim of the reform is to give more options to those seeking to use their moveable assets for asset finance purposes. In practice that will mean a new security right for moveable property would be introduced called a Statutory Pledge. This new form of security would be:
(i) the moveable property equivalent of the Standard Security over land;
(ii) be a “fixed security” so lender consent would be required to release property from it, unlike the position with the Floating Charge;
(iii) be used to create security over a limited class of incorporeal moveable property such as company shares and IP rights and all corporeal moveable property (except ships and aircraft which are already registered in the relevant Statutory Registers).
The property charged would not need to be delivered or in the possession of the lender, and it will be able to be granted by any person, not just companies;
There will be a new Register of Statutory Pledges (“RSP”) on which each Statutory Pledge document would be registered and indeed required in order for the pledge to be created. This would be administered by the Keeper of the Registers of Scotland and be a public searchable register.
Rules in respect of possessory pledges would be clarified, and Floating Charges will be retained. There will be a generally uniform enforcement regime for enforcing both the possessory and statutory pledge, with remedies including sale, lease and licensing. If the statutory pledge is granted by an individual, a court order will be required to enforce.
If the draft Bill is adopted into law, it will introduce enormous change in the ability to take security in Scotland, bringing us far more options and hopefully making asset finance transactions easier to facilitate north of the border.
If you would like to read the detail of the proposals the Report by the Law Commission can be found here.
First published as part of a series in Leasing World magazine, issues 123, 124 and 125.