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With the Moveable Transactions (Scotland) Bill set to be introduced into the Scottish parliament as early as next month, Scotland's outdated landscape of financing "moveable property" is to be overhauled. The Bill will fundamentally alter a system ill-suited to modern commercial financing needs, removing disadvantages facing both financiers and the client businesses they seek to support.
Statutory Pledge and Statutory Register of Pledges
The Bill creates a new Statutory Pledge: a fixed security whereby possession by the financer is not required, but which is created on the presentation of an executed document which identifies the property changed and the secured obligation. That will then require to be registered in the new Register of Statutory Pledges.
The Statutory Pledge solves one of the key issues with the old law, which required debtors to sacrifice property to the financer to create the security. The reform therefore presents a key commercial advantage, as debtors can offer assets as fixed security for their borrowing without having to part with property essential to their day-to-day operations. Furthermore, lenders will be able to take fixed security over moveables such as shares, and patents, without having to take ownership of them. This is highly desirable as lenders are generally unwilling to take on the burdensome responsibilities which accompany ownership of such assets. While the change north of the border will broadly bring Scotland in line with the English process, the detail of the ultimate regulations will determine whether the English debenture is sufficient to create a statutory pledge over Scottish assets and can be registered in the Register of Statutory Pledges.
Assignations: Register of Assignations
The second mischief of the current law surrounds ?assignation? of claims to payment. The Scottish publicity principle and the requirement of intimation has always been a hindrance in providing invoice finance, particularly confidential/undisclosed facilities, and where it would be commercially unviable to intimate to a large number of them. Moreover, there lay uncertainties around whether future debts could be assigned, and trust mechanisms have always been heavily relied on to mitigate these risks.
The Bill will remove all these issues. Assignations will be created by registration in the new Register of Assignations without the need for intimation. It will also be possible to assign debts which are not yet in existence, thereby affording businesses and lenders greater flexibility in their agreements and borrowing capabilities. By simplifying the burdens for creation and doing away with the need for trusts in this context, the new system removes the additional procedure and expense and thus should encourage financiers to use the assignation process more readily.
However, the process of registration is but an option, as intimation to customers will still be available after the new reforms are implemented. This leaves a potential gap in terms of publicity, so that third parties will not have visibility of assignations created using intimation. While some may view this as defeating the purpose of the register, the option-based approach affords greater flexibility to the market. It also gives businesses the opportunity to use the best route for them based on their circumstances.
Given future debts cannot be assigned using intimation, it is doubtful that debtors will cling to intimation with any ferocity, so a lack of visibility should not pose a huge problem moving forwards in the invoice finance sector.
The future of the floating charge?
At present, security over assets subject to Scots law tends to default to the floating charge. They present their own issues as regards lack of priority ranking - particularly given the elevated priority taken by HMRC with the extension of secondary preferential creditor status - and are only available to companies and LLPs. That the reforms are applicable not only to companies and LLPs, but sole traders and consumers, will inevitably increase access to credit; a necessity to rebuild the commercial landscape following the Covid-19 pandemic. It will be interesting to see how the role of floating changes evolves - whether their use will decline following advantages of the new regime, or whether lenders will still find comfort in its use after being the "go to" in Scotland for so long. Whatever the outcome, taking security in Scotland will undoubtedly be radically overhauled.
For a more detailed analysis of the Moveable Transactions (Scotland) Bill and its impact visit Morton Fraser's website for more articles
Beverley Wood, Partner, Morton Fraser LLP
Following the sold-out Scotland Dinner before the pandemic, UK Finance is delighted to return to the iconic Prestonfield House, in the shadow of Arthur's Seat in Edinburgh on 6 October 2022