Taking security over Scotch whisky

With an estimated 22 million casks of Scotch whisky maturing in excise warehouses across Scotland, this presents a (very) high value asset base for lending.

In Scotland, whilst granting (or taking) a security over land and property is common and a matter of routine, there are some added complexities when it comes to taking security over moveable assets (such as paintings…or casks of Scotch whisky). This is due to the need for "actual" or "constructive" delivery of the assets.

All of this may be about to change due to a significant upcoming change in Scots law. The Moveable Transactions (Scotland) Act 2023 will overhaul many aspects of the law of securities over moveable assets; including removal of the requirement for the delivery of assets and the creation of a new Register of Pledges.

When transacting with Scots whisky, care would still require to be taken to ensure compliance with the regulatory regime. However, it is clear that this development in Scots law presents an interesting potential opportunity for both owners and investors looking to secure finance over Scotch whisky (bottles and casks) and lenders in this market.

 

Actual or constructive delivery

At present, under Scots law there is a requirement for actual delivery in order to take security (a "pledge") over moveable assets. This requires, as it sounds, the asset to be physically delivered to the security holder. This can be impractical for both the lender and owner of the asset (with the owner deprived of the use of the asset whilst the security is in place).

Scots law does also recognise the concept of constructive delivery, and this is sometimes used by lenders in practice (for example, paintings displayed in an art gallery). However, there is a "legal question mark" over the effectiveness of constructive delivery in creating a security. This dates back to the case of Hamilton v Western Bank of Scotland Ltd in 1856. The case has been criticised and is often ignored in practice. However, it does remain a potential issue, and some lenders may not agree to accept constructive delivery.

 

The solution?

The Moveable Transactions (Scotland) Act 2023 will radically overhaul how security can be taken over moveable assets in Scotland. While the Act has been passed, it is not yet in force. A date for implementation is awaited, but it is anticipated that this will be in late 2024 or early 2025.

Change is, however, coming. The following provisions of the Act are of particular note in the context of granting security over Scotch whisky:

• The Act makes it clear that delivery can be effected by notifying a third party (who has direct possession or custody of the asset) that they should now hold the asset on behalf of the lender. This removes any remaining doubt about the necessity of actual delivery of assets, or the effectiveness of constructive delivery, in granting a security over moveable assets.
  
  
• Another key feature of the Act is the creation of a new category of statutory "pledge". This is a form of security which register's the lender's interest over the property. Notably, the statutory pledge does not require any possession of the assets (or, for example, to have shares transferred into the lender's name). Instead, the security can simply be registered in the new "Register of Pledges" in Scotland.

It is therefore envisaged that the Act could open up greater options for granting security over Scotch whisky – in particular, casks maturing in excise warehouses. There would be no requirement for delivery of the casks to "complete" the security, or secure the agreement of the warehouse keeper to note the interest of the security holder in their register of owners. Instead, a statutory pledge could be entered in the Register of Pledges.

Whilst this simplification of the process is welcomed, there are some questions outstanding as to how the Act will be applied in practice. For further consideration of the Act, please see DLA Piper's article here.

Further, within the context of securities over Scotch whisky specifically, there are some additional issues to be considered (principally by lenders) due to the regulatory framework. For example, if a lender were to call up a security due to default of the borrower, practical issues require to be addressed due to the restrictions on who can own goods stored in duty suspension in excise warehouses (under the Warehousekeepers and Owners of Warehoused Goods Regulations 1999 (known as "WOWGR")).

 

Comment

Once enacted, the Act will undoubtedly provide opportunities for both owners/investors and lenders; bringing additional options and greater certainty over how security can be taken over Scotch whisky (bottles and casks).

However, the full implications (legal and practical) will need to be considered carefully in advance, to ensure the strength of the security and regulatory compliance, and also preserve the value of the asset. Specialist advice is required.

DLA Piper's Scotch whisky practice based in our Scottish office in Edinburgh have experience of advising parties involved in all aspects of the industry. Our specialist finance and regulatory lawyers would be pleased to discuss any issues which arise from the terms of this article.