Taking security after the enactment of the Moveable Transactions (Scotland) Act
With the passing of the Moveable Transactions (Scotland) Act (MTSA) (likely to pass into law in 2024) the way in which we take security over rights and assets in Scotland will be brought firmly into the 21st century, doing away with the need to rely on statutes from as long ago as 1862 and a smattering of case law which has fostered uncertainty in the market for almost as long.
The MTSA seeks to clarify and codify the law of security as it relates to assignations in security and pledges to make them simpler, clearer and more practical. However, with any change as big as this there comes a raft of questions. We have set out to try and answer some of the key ones to help you navigate through this new landscape.
What does the MTSA change?
Very simply, it introduces the concept of statutory pledges and a register of pledges and assignations into Scots law to supplement and replace in part the existing law on pledges and assignations hopefully making it easier to grant this type of security.
Why?
In their most basic form, Pledges are security over things and Assignations in Security are security over rights.
The current unclear and often quite historic law in Scotland on taking this type of security means it can be difficult or unpalatable for creditors to take fixed security over these types of assets.
This security requires one or more of the following:
- Possession of or title to the thing being secured to be transferred to the secured creditor.
- Properly divesting control of any rights which are being secured (i.e if you are assigning a right to be paid money, technically you can’t still receive that money and then pass it on to the secured creditor).
- Intimating (serving notice on) the counterparty who is obliged to perform the right which is being assigned (e.g. if you assign a right to be paid, you need to tell the person who is obliged to make that payment).
This often leads creditors to rely on the general protection afforded by a floating charge which is on occasion a hammer to crack a nut and also not available to all types of chargors (e.g. partnerships (other than [[Ps) and individuals cannot grant floating charges).
In Scotland there is no legal concept of “perfection” of security, which is a term incorporated from English law where it is possible to create an “imperfect” type of security and perfect it by taking certain steps. For example, an English law share charge can be created without transferring shares to the secured creditor, but then be “perfected” by transferring shares. Rights can be assigned in security to a secured creditor and this security can be “perfected” by informing the parties who had the obligation to perform those rights. In either case though, security would be created (the basic distinction being whether it is equitable or legal).
However, in Scotland if the steps required to “perfect” the security are not taken, then no security is created at all.
Pledges of things (rather than shares, which are a separate issue) also required the pledgor to transfer control and title to the secured creditor. For this reason it is seldom used in Scotland. If the secured creditor has control of, for instance, a fleet of cars the pledgor owns, then it is very difficult for a pledgor to use that fleet of cars without control being lost and the security potentially failing.
The above is the very basic position, there are many degrees of interpretation across the market when taking these types of security which is part of the reason the MTSA has been brought in. It will also bring Scotland into line with what can be done in some other jurisdictions and in some cases move us further ahead.
What’s changing?
Well, everything and nothing. Secured creditors will still be able to take pledges and create assignations in security the way they have always done (or haven’t) but they will be able to benefit from the provisions in the MTSA to take them in a new and hopefully simpler way if that works for them.
- Statutory Pledge
- Exceptions
- What cannot be pledged?
- Assignation of claims
- Who can grant?
- Is registration at companies house still required?
- Does the secured creditor still need to go on the register of members?
- Does a secured creditor need to use the new rosp or roa?
- Should i still intimate?
- If still intimating, is there any clarity on how that should be done?
- Future claims
- Will the roa and rosp be searchable?
Secured Creditors will now be able to take pledges over physical (corporeal) or non physical (incorporeal) assets of a chargor or third party without needing to take control of the pledged assets or have shares transferred into their name. Secured creditors will simply take the pledge and, provided the property belongs to the party pledging it, it is identifiable as the property being pledged and the pledge is registered in the new Register of Statutory Pledges (ROSP), then the pledge is created at that point.
Secured creditors can only take pledges over incorporeal assets by registering in the ROSP, no delivery etc as an alternative is possible.
Ships and aircraft generally.
Secured creditors will now be able to take assignations (in security or absolute) over a claim (i.e a right under a contract) without needing control to be fully divested or intimation needing to be made. Secured creditors will simply enter into the assignation and provided the assignor is the holder of the claim, it is identifiable as claim to which the assignation document relates and the assignation is registered in the new Register of Assignations (ROA) then the claim is transferred (i.e the assignation is created) at that point.
Pledges and Assignations can be granted by anyone, including individuals and partnerships. However, individuals must be acting in the course of their business, in the interests of a charity of which they are a trustee or in the interests of an unincorporated association of which they are a member. The property they are pledging must also be used for the business, an asset of the charity of owned on behalf of the association. If it is corporeal property, it must be worth more than GBP3,000.
In the case of a limited company or limited liability partnership, assignations and pledges granted pursuant to the MTSA will have to be registered at Companies House within 21 days.
The specific legislation on share pledges has not been brought forward as yet, but it is not expected that the secured creditor (or their nominees) will need to appear as shareholder on the register of members of a company whose shares are being charged. Lenders who currently do not take Scots law share pledges for this reason may be able to revisit their position and take the benefit of Scots law share pledges. The concerns around potential pensions and environmental liability should also fall away as there would be no transfer of title.
No. Pledges and assignations can still be created in the old way provided the key requirements of transfer of title and control along with any intimation are still met.
If a key element of your assignation is that the money which would have been payable to the chargor should now by payable to the security holder, then the chargor should still intimate to the contract counterparties. If it does not, irrespective of the fact that the assignation is on a public register (the ROA), the counterparties may be protected from any claim against them by the secured creditor if they, in good faith, perform to the person last known to them as being the holder of the claim (i.e. they keep paying the assignor).
Yes. Rather than having to try and interpret the Transmission of Moveable Property (Scotland) Act 1862 (which is being repealed by the MTSA) and how it should apply to notices being served by emails or via websites, the MTSA now sets out clear requirements for both the contents of any intimation and how it may be served (which includes post, email, or linking to a website or portal).
Another big change is that it will be possible to assign future claims (i.e. rights which you do not have yet), provided that the transfer of the claim will only occur when the assignor becomes the holder of the claim.
Yes. Specific information will need to be provided such as VIN numbers for motor vehicles.
Sector specific views
Share pledges
Does a secured creditor need to register as a PSC?
Previously there was a difference of views in the market around whether the holder of a shares pledge would also need to go on the register as a Person with Significant Control. Whilst not specifically addressed yet, if the secured creditor has not been put on the RoM as a shareholder then there should be no reason to be notified or registered as a Person with Significant Control either.
Does a secured creditor still have NSIA notification and approval obligations?
Where a secured creditor is taking a share pledge over a Scottish company that would previously have required the secured creditor to notify and seek approval under the National Security and Investments Act due to the change of ownership, this should no longer be the case.
Securitisation
No more trusts?
Currently, securitisation or borrowing base deals involving Scottish debt claims usually include a mechanism for the granting of Scottish trusts over claims over which security has not yet been properly created (due to lack of intimation) or claims which are not yet existing or acquired by the chargor. The trust gives the lender some comfort that they should still have access to the rights under those claims should the chargor become insolvent, etc.
The MTSA could completely do away with that problem and the need for a Scottish trust mechanism should fall away. It expressly provides for the assignation of future claims provided that the future claim is identifiable in the assignation document as one to which the assignation relates. The claim will then transfer under the assignation whereby the assignor becomes the holder of the claim. It also does away with an absolute requirement for intimation, so you could create security, either on a day one or rolling basis, without needing to tick the box of informing contract counterparties.
For that reason there should no longer be a requirement for ongoing supplemental assignations either.
Asset based lending
- ABL deals in Scotland currently rely on a floating charge as their main source of security as it is difficult to take security over the assets themselves for the reasons mentioned above. It may be that after the MTSA comes into effect that pledges can be used to give fixed security over these assets as well as/instead of the floating charge.
- Consideration will however need to be given to the nature of any assets so secured and the balance between the benefit of a fixed charge and the inconvenience of having to release an asset from the scope of that charge every time the chargor wants to sell one. It may be that different practices evolve depending on whether the assets concerned are trading stock which is being sold regularly or assets used in the business itself.
- As mentioned above there are a number of examples where a purchaser of an asset in good faith, even where it is subject to a statutory pledge, acquires that asset unencumbered by the statutory pledge. This applies to buying from a seller in the ordinary course of business, acquiring for personal, domestic or household purposes and acquiring a motor vehicle.
- The MTSA provides that release of pledges may be effected by a written statement by the secured creditor and it is not yet clear what practice will evolve in relation to this. If you had taken a pledge over the stock of a retailer it could be very onerous for a second creditor if they had to provide a release every time something was sold.
Inventory Finance
Inventory Finance will often include the concept of an Inventory Reserve to allow provision to be made for the loss by the secured creditor on enforcement of any sums which may be owed to unsecured creditors by application of the prescribed part (currently up to GBP800,000) and any sums due to HMRC by way of Crown preference.
The ability to put in place a pledge over inventory, whilst not necessarily doing away with the need for a floating charge entirely, may give lenders some comfort and flexibility about how much weight is attributed to these two elements in the Inventory Reserve and therefore enable a potentially higher rate of borrowing than may previously have been the case, or more relaxed covenants.
Invoice finance
As with securitisation, the need for a Scottish declaration of trust should fall away with the introduction of the ability to assign future claims, provided they are clearly identified.
Construction deals
In construction deals it is not currently possible to take security over offsite materials already paid for/owned by the Borrower, as they cannot (usually) be delivered to the lender to create an effective pledge.
The removal of the requirement for physical delivery provided the security is registered on the ROSP may give lenders another element to their security package which may improve access to funds or covenant requirements for borrowers.
Fund finance
Where it is currently difficult to take security over the interest of a limited partner it will be possible to do this once the MTSA is in place without the risk of actually becoming a limited partner by so doing.
It should also be possible to take security over the interests of a general partner without the secured creditor risking becoming liable for the partnership interests as GP.
You will be able to take security over the right to call for drawdowns without giving notice to all of the limited partners involved in the partnership and this will also extend to drawdown rights for future limited partners provided such rights are identifiable in the assignation.
Supplemental Assignations & Pledges
When increasing the amount of a facility or otherwise making changes where the secured parties remain the same it is common to take supplemental security to mitigate the risk of any argument that the old security only covers the old position resulting in the secured parties being unsecured after the new position is effected, additional debt is lent etc.
In Scotland up until now it has been simple to take certain types of new security (supplemental floating charges and standard securities) but difficult to take supplemental assignations or share pledges.
Because a properly created assignation in security or pledge (which not all are) transfers title to the security holder, the chargor is not in a position to grant a new security over the claim or asset assigned or pledged because it no longer holds that right or asset. What has been done in the past is an assignation of the chargor’s reversionary right in that claim or asset (i.e. the chargor’s right to get the asset back when the security is released) such that the secured party would then benefit from that right instead.
However, this is an imperfect form of security as the doctrine of confusion means that one party cannot hold both the right and the obligation to perform that right at the same time and if a contract purports to do this, then that right to enforce performance against yourself is extinguished (i.e the assignation of reversionary rights may not work if the parties are the same).
This will not change re assignations (which technically includes share pledges, but we await further guidance on how these will be dealt with) but new pledges where physical delivery has not occurred and they have been created by registration on the ROSP may not have this problem any longer.
Confidentiality
To some extent, the utility of new registers on larger deals will be dictated by the confidentiality requirements of the parties to the transaction and how easy it is to identify the claims to be secured without giving away too much potentially sensitive commercially information which would then appear on a public register.
