Fiona Cameron: Moving with the times — the Moveable Transactions (Scotland) Bill
Fiona Cameron, banking partner in Shoosmiths’ Glasgow office, examines the significance of the recently passed Moveable Transactions (Scotland) Bill and outlines why it’s likely to be welcomed by Scotland’s banking practitioners and lenders.
To the frustration of Scottish banking lawyers, Scots law has long languished behind other jurisdictions, particularly England and Wales, in facilitating the taking of security over moveable (i.e. non real-estate) assets.
Elsewhere in the UK, fixed security can be taken relatively easily over assets such as book debts, intellectual property, rental income, shares, contractual rights, plant and machinery and inventory. This fixed security position is attractive to lenders, as it improves the likelihood of recovery following a default by a borrower. This reduced risk then makes borrowing cheaper and more accessible for borrowers.
For tangible (known as corporeal) assets, current Scots law requires actual delivery of the asset to the secured party (not unlike the concept of pawn). This is, of course, completely unworkable where it concerns physical delivery of an asset which a business wishes to continue to use in the running of its business, such as vehicles or plant and machinery.
In the case of incorporeal (i.e. intangible) property, such as claims for payment or rental income streams, intimation to third parties such as contract counterparties or tenants is required. Where such counterparties are tenants under short term leases or the recipients of invoices, this can be both unpalatable from a confidentiality perspective and administratively burdensome.
Furthermore, taking security over shares in Scottish companies (a market standard position in England and Wales) requires the lender to become the actual shareholder of record and so is fraught with difficulties and unintended consequences under the current law.
Therefore, using moveable assets as security in Scotland currently requires complex and expensive work-arounds involving trusts, agency or licence arrangements or deemed delivery. This means that such security is only taken in certain limited circumstances.
Consequently, lenders in Scotland currently rely heavily on floating charges, which do not attach to any particular asset when granted. The disadvantage of a floating charge is that the holder is paid out after the costs of the insolvency are settled. This includes following payment of preferential creditors such as employee claims, HMRC and the ‘prescribed part’ ringfenced for unsecured creditors.
As a result, the amounts available to a lender who holds only a floating charge can be significantly reduced when compared with the overall value of the business. This means that the likelihood of there being a shortfall in a lender’s recovery is increased. Notably, this reduces the amounts which lenders are prepared to make available to Scottish borrowers.
Crucially, this antiquated system has arguably curtailed the ability of Scottish businesses to use their assets to obtain finance, arguably to the detriment of the Scottish economy.
In view of the above, it’s unsurprising that the Scottish Parliament’s passing, on 4 May 2023, of the Moveable Transactions (Scotland) Bill (the “Bill”) was met with both delight and relief by Scottish Banking practitioners. Implementing the Scottish Law Commission’s Report on moveable transactions law in Scotland, the Bill aims to change the law in relation to assignation and pledges. It will do this by implementing a new statutory pledge and by setting up two searchable, online registers which will be held by Registers of Scotland.
Register of Assignations
Assignations will be created by registration in the new Register of Assignations, without the need for intimation. The Bill also provides clarity that future debts can be assigned, enabling borrowers and lenders greater flexibility in their arrangements. By removing intimation as a component for perfection, the assignation procedure will be simplified, more cost efficient and more discreet.
Register of Statutory Pledges
By the creation of the Statutory Pledge, the Bill will remove the possession element required by the current law, allowing borrowers to hold onto assets that are essential in the daily running of their business. The Statutory Pledge will be created by executing a document which identifies the property charged and the secured obligation. This will then be registered in the new Register of Statutory Pledges.
The Bill will enable Lenders to take fixed security, without having to assume ownership; a more desirable position for both parties.
Scots law Shares Pledges
Unfortunately, as general company law is not devolved to the Scottish Parliament, pledge of shares in Scottish companies is not included in the Bill itself. However, the importance of this type of security has been well noted by those involved in the review of the law.
Therefore, it’s anticipated that an order will be made by the UK government to change reserved companies legislation to reflect the new Scottish position to facilitate shares in Scottish companies being covered by the statutory pledge. This will be very much welcomed by practitioners and lenders alike.
Continuance of Existing Law
Using registration as a means to effect assignation or pledge will be optional; the existing law of possession or intimation will remain available, giving flexibility for circumstances where this is preferred. Criticism has emerged that this creates a gap in terms of publicity, as third parties will not have visibility of pledges or assignations created using the existing law. Despite this, it’s argued that the option-based register will provide the market with more flexibility and will allow borrowers and lenders to choose whether registration is the best option for their individual circumstances. It is likely that mainstream lenders will opt for the registration route and so this may well become mainstream for practitioners.
The Bill is yet to receive Royal Assent, but it is hoped that it will come in to force in summer 2024. This will depend on the new registers being fully operational, but it is understood that good progress has already been made in this area.
Once in force, lenders will have the ability to more easily take fixed security which was previously not available to them. This will give opportunities for all types of lender, particularly to those in the asset based lending (ABL), inventory funding and receivables finance space.
Significantly, lenders who have restricted the amounts they have been able to make available to borrowers, may be prepared to revisit the amounts they are prepared to lend, on the basis that they will have less exposure to the preferential creditors than where the only security available was a floating charge.
Businesses in Scotland will have the opportunity to leverage off from a wider range of assets, rights and cashflows. This will give them access to cheaper means of financing. It is surmised that this will be of great benefit to Scottish businesses and to the wider Scottish economy.
Lenders, particularly those in ABL, who have existing loans in place to Scottish businesses, may wish to revisit the security they hold and to consider whether the new regime will allow them to improve their current security position. Likewise, businesses looking for further sources of funding may find that they now have alternative collateral against which they can gear up.
Fiona Cameron is a partner in the banking and finance team at Shoosmiths in Glasgow.