Moveable Transactions Reform in Scotland

Overview
Team

The Moveable Transactions (Scotland) Act 2023 (the “Act”) was passed by the Scottish Parliament on 4 May 2023 and came into effect on 13 June 2023. The Act introduces once-in-a-generation reforms to commercial transactions in Scotland and makes the law relating to transfer of rights and security over moveable property fit for purpose.

Background

The act modernises Scots law relating to the transfer by assignation of “claims” and the creation of fixed security over corporeal moveable property (i.e. chattels), intellectual property, financial instruments and other incorporeal rights. These are critical business assets and include stock, plant and equipment, patents, copyright and software rights, debts owed by customers or tenants, bank account balances, shares and general contractual rights (such as under construction or insurance contracts).

Current problems

At present, it can be extremely cumbersome to use Scottish moveable property as collateral to fund a business. This is because transferring or granting fixed security over these types of assets requires giving notices to third parties, making registrations against specific assets or taking possession of specific assets.

The current rules can also restrict the ability of a business to use secured assets on a day-to-day basis (for example pledged stock which must be held by a pledgee) or to transfer them for financing purposes (for example by invoice discounting). As these types of assets often change swiftly as part of the working capital cycle of a business, the requirement repeatedly to give notice to numerous third parties, or to enter into supplemental transfers or security documents in relation to future assets raises significant practical problems.

What key changes does the Act make?

The Actmakes two primary changes to the existing law:

it introduces a new form of security that can be granted over Scottish moveable property (known as the “Statutory Pledge”); and
it creates two new registers to be set up by Registers of Scotland – the Register of Assignations and the Register of Statutory Pledges.

Registration up front in the Register of Assignations of a transfer of, for example, book debts or rental income from property will effect a transfer of present and future book debts and rents as they arise, without the need to give notice to customers or tenants.

Registration up front in the Register of Statutory Pledges of a Statutory Pledge over, for example, equipment, intellectual property and (once further enabling legislation is implemented) shares will similarly create fixed security over relevant present and future equipment, shares or intellectual property without the need for possession to be taken of such equipment, for the security holder to be registered as holder of the shares or for transfers of the intellectual property to be notified or registered.

Registration of an Assignation or Statutory Pledge will take place online and the new registers will also be searchable online. It will not, however, be necessary to use the new registers in order to transfer or grant fixed security over these types of moveable assets because the existing mechanisms will be retained in parallel.

Some of the existing mechanisms will be modernised with, for example, the rules on electronic notice of transfers of claims being clarified. Retaining the existing mechanisms will provide flexibility to take account of the varied types of transactions which take place involving different types of moveable assets in different situations and will also facilitate transition in business systems and practices to the new regime.

What benefits will the Act bring?

The changes introduced by the Act will allow moveable property or rights – including future moveable property or rights – to be transferred or secured without possession or title having to be taken by the transferee, or supplemental transfers or security documents to be entered into.

The reforms should also lead to increased efficiency by facilitating more fully automated online financing systems, for example in supply chain financing. Similarly, greater uniformity of operations in Scotland, England and other jurisdictions may become possible in many situations, for example for umbrella invoice discounting agreements.

Floating charges are currently used to secure Scottish moveable assets in many situations and will remain available along with the new Statutory Pledge. However, as sole traders and partnerships cannot grant floating charges, the new systems will make secured credit more readily available to those types of smaller businesses.

Similarly, with the reintroduction of a UK tax preference over floating charges in late 2020, and the growth in recent years of other claims ranking ahead of floating charges, the new Statutory Pledge will provide practical equivalents in Scotland to fixed equitable interests in England and enable equivalence in credit analysis both sides of the border where moveable assets are particularly significant.

What protections does the Act contain?

Increased availability of fixed security carries some risks and the Act contains specific limitations on the securities that individual persons (i.e. consumers) will be able to grant. The Act also contains provisions designed to ensure that insolvency practitioners will have moveable assets available to them to facilitate ongoing trading to rescue a business.

Similarly, third parties acquiring secured assets will be protected in many situations where they are not expected to be aware of a Statutory Pledge having been granted over the moveable assets they are acquiring. Debtors who continue to pay a transferor without having received notice of an assignation will also be protected.

How will my business or sector be affected by the Act?

The reforms under the Act will affect different types of businesses, sectors and financing and sale transactions in different ways and the following sections seek to note a few more specific applications of the changes and how they will impact specific businesses, sectors and transactions:

Where the company structure includes a target company or group companies incorporated in Scotland, there will be an ability to take a new Statutory Pledge over the shares in a Scottish company without the lender/security trustee or a nominee being registered in the company’s register of members. This will avoid existing concerns a security holder may have in relation to pension deficits, the Persons with Significant Control and National Security & Investment Act regimes, and otherwise from upfront registration.
There will be an ability to take a new Statutory Pledge over high-value Scottish tangible moveable assets and intellectual property owned by a group obligor.
There will be an ability to take fixed security over rights under Scottish material contracts without giving notice to counterparties by registration of assignation in new Register of Assignations.
Fixed security over book debts will be possible by “Day 1” assignation in security registered in the new Register of Assignations and without need for notice, trusts or supplemental assignations for future book debts.
Control rules will be clarified, reducing uncertainty regarding fixed security over bank accounts

The Statutory Pledge will provide a genuine practical equivalent to the English chattel mortgage or fixed equitable charge.
Fixed security over whisky stock will be possible without storing it with a third party custodian.
Fixed security over farmed fish and other livestock will be a practicable option.
The Statutory Pledge will provide an alternative to the sale and hire-purchase back of vehicles, equipment and other assets already owned and other transactions where questions may arise around title acquired by the buyer/funder using title-based financing.
The Statutory Pledge will provide an alternative to reservation of title to stock.
Title-based financing using existing reservation of title, leasing, hire purchase and similar mechanisms will remain possible.
Asset-based lending and other broader working capital financing solutions also involving financing of receivables and bank account security will work more smoothly.

Title transfer financial collateral arrangements will continue to be possible in relation to Scottish financial instruments as at present, with security financial collateral arrangements by fixed security becoming possible using the new Statutory Pledge.
A new Statutory Pledge may be taken over Scottish shares and other Scottish financial instruments without registration of a security document in the new Register of Statutory Pledges provided the security holder has possession and control of the relevant financial instruments for the purposes of the Financial Collateral Arrangements (No.2) Regulations 2003, and the Regulations otherwise apply.
It will be possible for a new Statutory Pledge to take effect in relation to financial instruments acquired later and to cease to have effect in relation to financial instruments to be released from a financial collateral arrangement to which the Regulations apply when possession and control of the relevant financial instruments is acquired and lost by the security holder.
Fixed security arrangements arising in the course of market trading arrangements corresponding to English equitable charges arising should normally be capable of being constituted using Statutory Pledges.

Fixed security over limited partner interests will be possible using the new Statutory Pledge and it will not be necessary to take security over only part of a limited partner interest to avoid the security holder becoming a limited partner as assignee and requiring to publish this in the Gazette.
It will be possible to take fixed security over general partner interests without the security holder risking becoming liable for all partnership liabilities by becoming a general partner as assignee.
Scottish limited partnerships and their general partners and managers will be able to assign drawdown rights to funding commitments from limited partners by electronic registration in the new Register of Assignations without giving notice to limited partners.
An assignation of, or Statutory Pledge over, drawdown rights will be capable of extending to drawdown rights against future partners and relative to increased and transferred commitments without supplemental documentation, notice or registration.
Control rules will be clarified, simplifying processes relating to the exercise of drawdown rights and payment of commitments, and reducing uncertainty regarding fixed security over bank accounts.

Sellers will be able to grant a “Day 1” assignation of present and future Scottish receivables in favour of a funder by electronic registration in the new Register of Assignations.
There will be no need for Scottish declarations of trust granted by a seller in favour of a funder to be built into documentation and systems.
There will be no reason for floating charges to be granted by sellers to funders backing up Scottish trusts.
Electronic mechanisms will be facilitated by clarification of asset identification rules and of electronic notice rules.
Notice will remain possible to stop a “good faith” discharge to an assignor but notice rules will be eased and clarified.
Notice will remain an option to registration in the Register of Assignations to effect transfer.
There will be an option for a future requirement to use the Register of Assignations only to effect assignation, which would make online register searches more reliable for incoming funders.
Asset-based lending and other broader working capital financing solutions also involving the financing of raw materials, stock and bank account security will work more smoothly.

Where secured shares are issued by companies incorporated in Scotland, there will be an ability to take a new Statutory Pledge over those shares without the lender/security trustee or a nominee being registered in the company’s register of members. This will avoid existing concerns a security holder may have in relation to pension deficits, the Persons with Significant Control and National Security & Investment Act regimes, and otherwise from upfront registration
Fixed security can be taken using a new Statutory Pledge over Scottish shares acquired at a future date without supplemental transfers, registrations or notices being required on an ongoing basis.
Scottish shares may be dealt with readily when held direct by using a new Statutory Pledge, rather than requiring them to be held by custodians to facilitate dealings with custody rights against custodians instead of through registration of share transfers.
Scottish shares will not require to be book entry securities collateral held by an intermediary and subject to a financial collateral arrangement under the Financial Collateral Arrangements (No.2) Regulations 2003 for fixed security to be taken over them without registration of the security holder or its nominee in the registers of members of the relevant Scottish companies.
Existing arrangements for the outright transfer of Scottish shares for security purposes and registration of funders or their nominees in relevant registers of members and existing arrangements using custodians and/or book entry securities collateral held by intermediaries will continue to be possible.

There will be an ability to take a new Statutory Pledge over high-value Scottish tangible moveable assets and intellectual property.
There will be an ability to take fixed security over rights under Scottish material contracts without giving notice to counterparties by registration of assignation in the new Register of Assignations.
Rules on conditional assignation and control of rights assigned will be clarified, reducing uncertainties on fixed security over operating and other executory contracts.
Control rules will be clarified, reducing uncertainty regarding fixed security over bank accounts.
Where group companies are incorporated in Scotland, there will be an ability to take a new Statutory Pledge over the shares in them without the lender/security trustee or a nominee being registered in the company’s register of members. This will avoid existing concerns a security holder may have in relation to pension deficits, the Persons with Significant Control and National Security & Investment Act regimes, and otherwise from upfront registration
Asset-based lending and other broader working capital financing solutions involving financing backed by raw materials, stock, receivables and bank accounts will work more smoothly.
Categories of incorporeal property which may be subject to new Statutory Pledge may be expanded to include oil and gas licences, which can only currently be secured by floating charge in Scotland.

Existing assignation and notice mechanisms will be preserved, allowing continuance of existing working mechanisms for relevant project contracts and the use of the new Register of Assignations where it is more straightforward to do so.
Rules on conditional assignation and control of rights assigned will be clarified, reducing uncertainties on fixed security over operating and other executory contracts.
Control rules will be clarified, facilitating the use of Scottish bank accounts for projects by reducing uncertainty on fixed security.
There will be an ability to take a new Statutory Pledge over high-value moveable project assets.
Where a project company is incorporated in Scotland, there will be an ability to take a new Statutory Pledge over its shares without the lender/security trustee or a nominee being registered in the company’s register of members. This will avoid existing concerns a security holder may have in relation to the Persons with Significant Control and National Security & Investment Act regimes, and otherwise from upfront registration.

By registration of assignation in the new Register of Assignations, there will be an ability to take fixed security over rental income streams and rights under development documents without giving notice to underlying tenants or counterparties to development documents.
Fixed security can be taken over future rental income streams without supplemental assignations or notice being required on an ongoing basis. This will be particularly beneficial for assets such as shopping centres, industrial estates, multi-tenanted offices, buy-to-let portfolios or student accommodation.
Tenants or development parties who continue, in good faith, to pay rental income or perform under the development documents will be protected, although simplified electronic notice can be used to prevent this.
The existing option of assigning or transferring the benefit of the rental income or development documents in security with notice instead of by registration in new register will remain available.
Control rules will be clarified – reducing uncertainty regarding fixed security over bank accounts used for rent collection and other receipts.
There will be an ability to take a new Statutory Pledge over high-value moveable assets related to property or its development.
Where the financing structure includes a company incorporated in Scotland, there will be an ability to take a new Statutory Pledge over the shares in the Scottish company without the lender/security trustee or a nominee being registered in the company’s register of members. This will avoid existing concerns a security holder may have in relation to pension deficits, the Persons with Significant Control and National Security & Investment Act regimes, and otherwise from upfront registration

Originators/sellers will be able to grant a “Day 1” assignation of Scottish receivables in favour of an issuer perfected by electronic registration in the new Register of Assignations.
There will be no need for periodic Scottish declarations of trust granted by a seller/originator in favour of an issuer.
Electronic mechanisms will be facilitated by clarification of asset identification rules.
Issuers will be able to grant ”Day 1” fixed security over their current and future rights to receivables in favour of securitisation Security Agents.
There will be no need for supplemental Scottish assignations in security.
In relation to auto-loan securitisations, there will be no need for Scottish vehicle declarations of trust or Scottish vehicle floating charges to catch residual value disposal proceeds.
The new reforms will unfortunately not be available for use on RMBS transactions or other securitisation transactions involving mortgages or other land interests except rents.

The Statutory Pledge provides a genuine practical equivalent to the English equitable mortgage or fixed equitable charge over intellectual property with no need for registration in IP registers or notice to be provided to counterparties to create Scottish fixed security.
Where it is not clear if intellectual property is “Scottish”, it may be possible to register an appropriate non-Scottish security document electronically in the Register of Statutory Pledges to ensure a Scots law-compliant fixed security has been created.
There will be no need for intellectual property transferred for security purposes to be licensed back to the transferor and no need to deal with related sub-licensing restrictions when relevant IP is itself a license.

Our Moveable Transactions Team

The Shepherd and Wedderburn Moveable Transactions Team has been heavily involved in the development of these reforms for many years, with Dr Hamish Patrick and Andrew Kinnes being leading members of the Scottish Law Commission’s Advisory Group throughout the process. Hamish was asked to give evidence to the Scottish Parliament’s Economy etc. Committee on the proposed reforms in 2019 and Neil Campbell was a member of the Scottish Law Commission’s staff working on the reforms in their earlier stages.

Given our practical experience advising on the specialist fields mentioned above, and the broader relevant expertise we have at clients’ disposal throughout the firm, our team is well placed to advise on the implications of these reforms. If you have questions as to how the reforms under the Act will affect your business or sector, please get in touch with a member of our team.