The report is substantial and consists of three volumes. If implemented, there will be a Scottish equivalent of a chattel mortgage for the first time, and we previously explored the significance of that and the substantial impact that is likely to have in getting transactions done in Scotland. In this edition we focus on the assignation (equivalent to assignment in England) provisions and the fact that security assignments of receivables will no longer have to be notified to the debtor to be effective.
What is the current issue?
Assignation is the method of transferring Incorporeal Moveable Property in Scotland (that’s the Scottish term for assets such as receivables, shares and intellectual property). In practice, the rules on outright assignation and assignation in security (for example a customer assigning rental receivables in security for underlying obligations) are broadly the same.
In order to create an assignation under Scots law there are three pre-requisites:-
1) There is a contract to assign;
2) There is an act of assignation in other words an assignment of the claim or receivable from the seller. That need not be in writing but there must be evidence of an actual conveyance or transfer;
3) Notice of the assignment (known in Scotland as “intimation”) is given to the account debtor.
It is the final step which actually transfers the claim and allows title to be completed. Scotland is unusual in that most other legal jurisdictions do not require intimation as a pre-requisite to transfer and naturally this causes issues - in invoice finance and securitisation structures as well as many other commercial transactions including asset finance deals where an assignation in security of the rental stream is intended. In these cases it is totally impractical to intimate to hundreds or thousands of customers. Workarounds have been created over the years, in particular creating trust structures but their use is based on limited case law on the subject and generally don’t help with security as opposed to absolute assignments. It is also common practice for parties to resort to using English law in Scottish transactions to try and avoid the issues, although there is a limit to how effective that is.
What will change?
The reform is limited to the assignation of claims (personal rights), in other words rights to the performance of an obligation by another person. Normally that obligation will be to pay money.
An assignation of claims will be able to be completed either by intimation to the debtor (as is currently the case) or by registration in the new Register of Assignations (“ROA”). One of the key benefits of the latter option will be the ability to create an effective assignation of claims which have yet to come into existence (which may not currently be possible in Scotland) as well as the obvious improvement of not having to give notice to thousands of debtors.
If a funder were to go down the intimation route, that notice could be given by post, courier, electronically or in person, by the assignor, assignee or a representative, and no copy of the assignation would need to be given.
If the funder goes down the ROA route, the assignation document will be registered against the assignor and it will protect the assignee against the assignor’s insolvency. The ROA would be administered by the Keeper of the Registers of Scotland and be a public searchable register.
It is anticipated that the ROA will be primarily used by lenders who provide finance in return for assignation of claims. That will undoubtedly be beneficial to invoice financiers as well as asset financiers who enter into back to back arrangements with their customers and take an assignation in security over the rental streams due under hire agreements. The Commission has also made it clear that an instruction to the debtor to continue to perform to the assignee will not invalidate the assignation, which will further facilitate the ability to take assignations in security in Scotland.
The driver for reform is to alleviate widespread dissatisfaction with the current restrictions in relation to the law of moveables in Scotland. It is generally felt that funding is constrained by virtue of the limitations in both taking an assignation and in taking security over moveable assets and the proposed changes will undoubtedly be welcome and enable businesses in Scotland to raise finance against assets as easily as they can in other jurisdictions.
First published as part of a series in Leasing World magazine, issues 123, 124 and 125.