A new era for moveable transactions in Scotland

October 2022  |  SPECIAL REPORT: FINANCIAL SERVICES

Financier Worldwide Magazine

October 2022 Issue

On 25 May 2022, the Moveable Transactions (Scotland) Bill was introduced in the Scottish parliament, the culmination of an in-depth project of review, consultation and proposed reform of moveable transactions law first suggested by the Scottish Law Commission (SLC) in 2005 and formally launched in 2010.

In volume one of its Report on Moveable Transactions (SLC Report No 249), the SLC itself notes that this is arguably the area of commercial law where reform is longest overdue and most needed. However, practitioners’ and funders’ patience has been rewarded, with the final proposals recommending a major modernisation of the law in this area, better suited to the needs of UK businesses and the UK financial market in 2022.

These recommendations are, for the large part, reflected in the Bill. We expect the changes to be of interest to funders and prospective borrowers who, in the future, wish to leverage these assets to provide or obtain broader financing options.

In Scots legal terminology, ‘moveable property’ is all property other than land and buildings and rights in those (for example, leases). ‘Moveable property’ is also the umbrella term for its two sub-categories, being: (i) ‘incorporeal moveable property’ – property which exists without a physical presence, for example shares in a company, claims in respect of debts and intellectual property rights; and (ii) ‘corporeal moveable property’ – property with a physical presence, for example vehicles, stock and equipment.

The Bill recognises and reflects the distinct natures of these subcategories and the specialist rules regarding intellectual property. Part 1 contains provisions modernising the law applicable to certain incorporeal moveable property, namely claims, being rights to the performance of obligations (in the context of funding, usually the right to receive payment of a debt). Part 2 contains provisions modernising the law applicable to corporeal moveable property and certain other incorporeal moveable property.

Security over claims

Claims against third parties can be a high-value asset for trading businesses. Under the current law, these claims are able to be leveraged to secure funding, to an extent, by assigning (transferring) the creditor’s interest to a funder, or its agent, to then collect on the debt. Assignations can be ‘absolute’ – as in the case of invoice financing arrangements where claims are sold on to the factor – or ‘in security’ – i.e., ostensibly but not inevitably of a more temporary nature and subject to an obligation to retrocess (reassign) the interest back to the assignor upon the funder being repaid in full.

In either case, it is essential that the assignation itself is intimated to (i.e., notice served on) the third-party counterparty; intimation itself perfecting the assignation. Also essential is that the claim transferred is in existence as at the date of the transfer. It is, at best, uncertain that transfers of claims which arise after that date are competent and, as such, best practice is to structure transactions in a way that does not seek to do so.

In its review, the SLC highlighted the requirement for intimation as unnecessarily confusing as, having developed over case law, there is lack of clarity as regards how a valid intimation is achieved, and especially burdensome, particularly as compared to other jurisdictions, including England (a full comparative analysis can be found in Appendix B of the SLC’s initial Discussion Paper on Moveable Transactions (Discussion Paper No. 151)).

The Bill proposes that, going forward, assignations will be effected by way of an ‘assignation document’, i.e., a written document, but claims being assigned may be identified as a class without the need to identify each claim separately. The Bill also expressly permits the assignation of ‘future claims’, i.e., claims not in existence at the date of the transfer; the grant of an assignation subject to a (documented) condition which requires to be purified prior to the transfer and section 5 of the Bill provides for an assignation of part of a claim where, in the case of a monetary claim, the debtor consents or the claim is divisible and the assignation of part does not result in the obligation becoming “significantly more burdensome” on the debtor.

A further significant change exciting practitioners and funders is the creation of the long-heralded Register of Assignations. The Bill proposes that effective Registration of the Assignation document in the Register operates to perfect the assignation, providing an alternative route to intimation. The Register of Assignations is to be maintained by the Keepers of the Registers of Scotland, alongside existing registers such as the Land Register and Register of Inhibitions and Adjudications.

At present, perfection of assignations of multiple assets by way of intimation can be cumbersome and time and cost-hungry in the context of commercial funding transactions. Equally, where those assets are replaced or superseded on a regular or semi-regular basis, the need to enter into additional, fresh assignations (over the then extant assets) can be a source of frustration for both borrowers and lenders.

We regularly see parties conclude that the time and costs are prohibitive, which can leave businesses unable to leverage against a high-value asset, restricting their access to funding. The provisions of part 1 of the Bill and its codification and modernisation of this area of law, including more attractive, commercial and cost-effective options for perfecting assignations, is to be very welcomed.

Corporeal moveable property and intellectual property

Funders of owners of Scottish corporeal moveable property such as stock and equipment are well-versed in the limitations of the current law as regards security over these assets. At present, assets are able to be leveraged to secure funding only where they are able to be delivered to and possessed by the funder. In the case of intellectual property (IP), possession takes the form of the funder, or its nominee being recognised as ‘owner’ in the relevant ownership register.

While usual practice is to provide for contractual workarounds for IP (agreeing a licence back to the chargor), there is no established workaround for corporeal moveable property and these assets are then generally excluded from discussions on asset value for fixed security purposes. This is all in contrast to the position under English law which recognises mortgages over chattels – the English law term equivalent to corporeal moveable property – and permits both equitable assignments and fixed charges over IP rights as less onerous and more cost-effective security options.

Recognising that, and a desire for commercial law across Scotland and England to be broadly similar, the Bill provides for a new security right, termed a ‘statutory pledge’, created by a ‘provider’ by way of a ‘constitutive document’, i.e., a written document. The Bill permits the pledge to be granted over corporeal moveable property, other than aircraft and ships (which are both subject to their own separate statutory regimes) and IP.

Although the statutory pledge has been designed to reflect a standard security (the only effective fixed security over land in Scotland) more than an assignation, the terms of part 2 applicable to ‘constitutive documents’ are consistent with certain provisions that relate to an ‘assignation document’ under part 1, i.e., the property to be pledged may be identified as a class without the need to identify each item separately, and a statutory pledge may be granted over property not yet owned by the provider at the date of the pledge.

Also in keeping with the structure of part 1, part 2 of the Bill provides for the creation of a new Register of Statutory Pledges. As regards corporeal moveable property, effective registration of the constitutive document in the register provides an alternative – and much more pragmatic – route to delivery of the asset as a means of creating the pledge. As regards IP, or moveable property, which is deemed to be both corporeal and incorporeal, registration is the only means of creating the pledge. As with the Register of Assignations, the Register of Statutory Pledges is to be maintained by the Keepers of the Registers of Scotland.

While beyond the scope of this article, it is worth noting that it is possible for individuals to grant a statutory pledge, although the Bill seeks to safeguard individual providers, providing that their ability to grant this security is on a more limited basis.

At present, businesses are not able to easily leverage their corporeal moveable property to secure funding, which underutilises and undervalues those assets and their contribution to the business. In addition, the complexity of process and cost of perfecting security over IP rights can be judged disproportionate to their own asset value. Being able to better utilise these asset classes as security will, we expect, increase access to debt funding for owners with assets available to leverage, as well as providing cost-effective options for larger corporates, which may then wish to use the opportunity created by the changes to embark on discussions regarding optimal security structures going forward. To that end, the provisions of part 2 of the Bill and its creation of the statutory pledge as an additional security option is also to be welcomed.

The Scottish parliament concluded its further consultation on the Bill and its terms on 6 September 2022. We expect the Bill to now continue its passage through parliament and anticipate it receiving Royal Assent in Spring of 2023. One highly anticipated amendment is the extension of the scope of the statutory pledge to include shares in Scottish companies, as proposed by the SLC.

At present, perfection of security over shares also requires the funder or its nominee to be recognised as ‘owner’ in the company’s register of members, which can cause understandable concern on the part of the funder. As company law is reserved to Westminster, the Scottish government’s Delegated Powers Memorandum, published alongside the Bill, confirms that it is seeking an order which it hopes will then extend the scope of the statutory pledge in this way. We are watching the Bill’s progression through the Scottish parliamentary process, keeping a keen eye on how it will develop throughout the journey.

 

Amy McVey is a director at Burges Salmon. She can be contacted on +44 (0)131 314 2142 or by email: amy.mcvey@burges-salmon.com.

© Financier Worldwide

BY

Amy McVey

Burges Salmon

©2001-2024 Financier Worldwide Ltd. All rights reserved. Any statements expressed on this website are understood to be general opinions and should not be relied upon as legal, financial or any other form of professional advice. Opinions expressed do not necessarily represent the views of the authors’ current or previous employers, or clients. The publisher, authors and authors' firms are not responsible for any loss third parties may suffer in connection with information or materials presented on this website, or use of any such information or materials by any third parties.