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Three Steps Forward, Two Steps Back: A View from Corporate Security Practice of the Moveable Transactions (Scotland) Bill

Document Cited in Related
Vincent
Author
Published date01 May 2018
DOI10.3366/elr.2018.0485
Date01 May 2018
Pages266-273
INTRODUCTION

The Scottish Law Commission (the “SLC”) published a draft Moveable Transactions (Scotland) Bill on 13 July 2017.1 Following consultation, the SLC issued their Report on Moveable Transactions on 19 December 20172 which contained an updated Bill.3 This long awaited Report and Bill4 proposes to modernise the laws of assignations5 and of fixed security over moveable property.6 Scots law suffers from the perception that its security rules are not fit for purpose.7 Updating Scots security law to compete against other jurisdictions in this field should, amongst other things, help attract more capital to Scotland.8

The Bill proposes general amendments to Scots moveable property law.9 For the Scottish security lawyer, this holistic approach to reform presents strengths and weaknesses. The purpose of this article is to review the Report and the Bill and highlight three steps forward that arise from the Bill. Despite being fundamentally welcome, the proposed changes provide two steps back for Scottish secured finance.

 STEPS FORWARD Non-possessory Fixed Security Over (Some) Moveables

Until the Bill is implemented, fixed security over moveable property10 requires (for corporeal moveables) delivery to the creditor11 or (for incorporeal moveables) intimation to the relevant counterparty:12 Scots law in this area seems inflexible.13 The issue is simple: if the creditor requires possession (of corporeal moveable property) to create valid fixed security, that property cannot be utilised by the debtor for profit. Similarly, if fixed security over an incorporeal moveable asset can only be achieved by informing the counterparty to pay the claim to the creditor, the debtor cannot retain the funds for use in their business. The effect of these restrictions on access to credit in Scotland is empirically doubted14 but economically sound.15

The Bill provides for non-possessory security over certain moveable property: it will be possible to pledge corporeal moveable property, financial instruments and intellectual property16 under a new, non-possessory statutory pledge created by registration (in addition to the traditional possessory pledge).17 The Bill provides that delivery (of corporeal moveable property)/intimation (for financial instruments and intellectual property) is not necessary when the statutory pledge is registered.18 This is a significant development: businesses will be able to utilise their assets and, at the same time provide them as effective collateral for access to credit.19 This change is required urgently.

 Multiple and Fractional Securities

The Bill provides that assets may be subject to multiple statutory pledges.20 This enables the majority of Scottish moveable assets to be subject to debt structures with multiple layers of fixed securities over the same asset:21 matching fixed security over heritable properties22 and floating security.23

The Bill also provides for partial assignations24 and partial statutory pledges.25 Accordingly, fractional securities are possible. Multiple securities allow multiple lenders to have fixed security over the entire asset. Fractional securities, conversely, allow multiple lenders to each receive fixed security over a fraction of the asset, enabling lenders to receive fixed security over part of an asset and still leave some of the asset unencumbered and available for subsequent first ranking security. As credit backed by second ranking securities normally attracts higher interest rates than first ranking securities,26 this flexibility is helpful. Under the current law, multiple fixed securities over the same moveable asset or fractional securities over corporeal moveable assets are not possible:27 different creditors can be beneficiaries of the same security, but this normally involves heavily negotiated and therefore expensive agreements between the creditors.

 Enforcement of Pledges

The Bill provides that the secured creditor can appoint insolvency practitioners to statutorily pledged subjects.28 So long as an individual is not involved, statutory pledges will not require a court order for enforcement.29 This ease of enforcement is economically...

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