Scottish security shakeup: new opportunities for lenders in Scotland

The Scottish Government is taking huge leaps towards reform of secured lending, with plans to introduce a new form of fixed security and to modernise the antiquated system of assignations.

These changes will be of particular interest to lenders and asset financers who cannot currently take fixed security over moveable property in Scotland.  Although no date has yet been confirmed, it is anticipated that the final form of the Moveable Transactions (Scotland) Bill will be agreed and come into effect during the course of 2023.

This insight sets out the headline changes lenders should be aware of, and suggests some steps that you can take now to begin to prepare.

What is moveable property?

In Scots law, property is divided into heritable property (land, buildings and rights over land) and moveable property (everything else).

Moveable property can be corporeal or incorporeal.  Corporeal property is in essence tangible and includes things like plant and machinery and work in progress.  Incorporeal property is intangible and includes things like intellectual property, debts and receivables. 

Why is reform needed?

At present, if a lender wishes to take fixed security over moveable property in Scotland, they have two options:

1. The borrower can grant a pledge of corporeal moveable property by physically delivering the charged property to the lender; or

2. The borrower can enter into an assignation of incorporeal moveable property, under which ownership of the asset is transferred to the lender and written notification (known as intimation) is sent to all contractual counterparties.

These options are cumbersome and in many cases commercially unviable.  There are also significant legal complexities.  While a lender may also (and often does) accept floating security over moveable assets, this comes with its own shortcomings. 

What changes are proposed?

The Bill, as presently drafted, proposes two key reforms.

Firstly, it introduces a new form of fixed security over both types of moveable property (although for incorporeal property, this is presently restricted to intellectual property) which will not require transfer of ownership or delivery of assets to the lender.  This will be known as the statutory pledge. This will be in addition to the existing possessory pledge mentioned above.

Secondly, it proposes certain steps to modernise the operation of assignations including: allowing assignation of future claims; allowing electronic intimation of assignations and enabling registration in a new Register of Assignations (the ROA) as an alternative to intimation.

What are the key features of the proposed statutory pledge?

The Bill envisages that the statutory pledge:

• May be granted by both corporates and individuals over all types of moveable property (subject to certain restrictions);

• May also charge future assets, (subject to certain restrictions for individuals);

• Will take effect on registration in a new register of statutory pledges;

• Will rank in priority according to the date of registration, unless agreed otherwise between chargeholders pursuant to a written ranking agreement (which would not itself be registerable);

• Will rank ahead of floating charges in an insolvency but behind securities arising as an operation of law (such as a landlord’s hypothec).

What are the key features of the proposed modernisation of assignations?

The process for intimation for all assignations of current property will be modernised so that electronic intimation will be available for the first time.

Registration as an alternative to intimation will only be available for assignations of claims, and not for assignations of non-monetary rights relating to land and negotiable instruments. 

If there are any concerns around confidentiality, it may mean that intimation, rather than registration, is a more attractive option.  This would enable the lender to perfect their right without any details of the arrangement being made publicly available (beyond the parties being intimated on). 

Next steps

These proposals present a huge opportunity for lenders to take additional fixed security over assets of corporate borrowers and to begin taking security over moveable assets owned by individuals, where a floating charge is not a possibility.

We do not yet know when the Bill will become law, and there is no guarantee that further changes will not be made before it does.  Secured lenders may wish to begin:

• Considering whether existing security might usefully be supplemented or extended by a statutory pledge or assignation of claims once these options are available;

• Putting in place processes to ensure that the new registers (of statutory pledges and assignations) are searched and any results considered at the time of customer take on and when making further decisions about lending;

• Agreeing internal guidance on the issues to take into account when deciding whether to complete an assignation by registration or intimation.

The current consultation on the Bill closes on 6 September 2022, and can be found here: Moveable Transactions Bill - Consultation - Scottish Parliament - Citizen Space.  We will provide further updates if any significant amendments are made to the proposals following this consultation. 

If you would like further information or advice about the issues discussed in this insight please contact a member of TLT’s Restructuring & Insolvency team.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.