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 received Royal Assent 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. It comes into force on 1 April 2025.

Background

The Act modernises Scots law relating to the 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 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 a high level of formality, from giving notices to third parties to taking possession of specific assets.

The current rules can therefore 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 custodian) or to transfer them for financing purposes (for example by invoice discounting).

As these types of assets often change rapidly as part of the working capital cycle of a business, the requirement to repeatedly give notice to numerous third parties, or to enter into ongoing supplemental transfers or security documents in relation to future assets, raises significant practical problems.

What key changes does the Act make?

The Act makes three primary changes to Scots law:

It modernises the law relating to assignation (or assignment) of rights.
It introduces a new form of security that can be granted over Scottish moveable property, known as the “Statutory Pledge”.
It creates two new registers to be operated by Registers of Scotland – the Register of Assignations and the Register of Statutory Pledges.

Once the Act comes into effect, it will be possible to take fixed security over tangible, moveable property by way of Statutory Pledge (perfected by registration in the new Register of Statutory Pledges) rather than requiring possession to be transferred to the creditor. Similarly, it will be possible to perfect an assignation of rights by registration in the new Register of Assignations rather than notification to counterparties being required.

Modernisation of the existing law means that it will also be possible to take a “Day 1” assignation of present and future rights and perfect this by electronic notification to the relevant counterparties.

By way of example:

Registration up front in the Register of Assignations of a transfer of 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 and without the requirement for ongoing supplemental assignations to capture new rights.
Registration up front in the Register of Statutory Pledges of a Statutory Pledge over equipment, intellectual property or shares will 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.
Short-form electronic notification to relevant counterparties will be sufficient to perfect an assignation of rights, without the need for paper notification accompanied by certified copy deeds.

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.

In some cases – particularly asset and invoice finance – this could lead to more funding opportunities being available for a wider class of business.

In other cases – for example, acquisition finance, real estate/development finance or supply chain finance – the reforms could lead to increased efficiency by facilitating more fully automated online financing systems. Greater uniformity of operations in Scotland, England and other jurisdictions may also 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. This will allow lenders to engage greater credit analysis for businesses operating in this market.

Separately, 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 and the ability to perfect assignations of rights without notice carries some risk, and the Act contains some protections and limitations in these areas.

Individuals will not be able to grant the new Statutory Pledge security unless they are acting in the course of business and the assets are wholly or mainly used for the individual’s business. This protects consumers while ensuring that sole traders and small businesses can benefit from the new rules.

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

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 in certain insolvency and turnaround scenarios.

Finally, parties who wish to continue transacting using the existing law – for example, by perfecting an assignation of rights by notice or by pledging corporeal moveable property and delivery possession – can continue to do so with the existing rules retained.

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.

Below, we have outlined some practical examples of the changes and how they might impact specific businesses, sectors and transactions:

Where the company structure includes a target or group company incorporated in Scotland, fixed security can be taken by way of Statutory Pledge over the shares in the Scottish company without the shares having to be transferred into the name of the lender/security trustee. This will avoid existing concerns relating to pension deficits, decommissioning liabilities, the Persons with Significant Control regime and the National Security & Investment Act regimes.
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 material Scottish contracts (for example acquisition agreements) without giving notice to counterparties by registration of the assignation in the 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 the need for notice, back-up 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 over specified high-value moveable property.
Fixed security over whisky or gin stock will be possible without storing it with a third party custodian.
Fixed security over farmed fish and other livestock will be a viable 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 involving financing of receivables and bank account security will work more smoothly with less formalities being required (where notification is to be given) or perfection by registration being possible (where it is not practically possible to give notification).

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 existing concerns around the security holder becoming a limited partner).
It will be possible to take fixed security over general partner interests without the current risk of the security holder 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 and perfect this assignation by electronic registration in the new Register of Assignations without the need to give notice to multiple 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, notices or registrations being required.
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 paper documentation and systems.
There will be no requirement for back-up floating charges to be granted by sellers backing up Scottish trust arrangements.
Electronic mechanisms will be facilitated by clarification of asset identification rules and electronic notice rules.
Notice will remain an alternative perfection option (for example, to stop a “good faith” discharge to an assignor) but notice rules will be simplified and clarified.
Asset-based lending and other broader working capital financing solutions involving the financing of raw materials, stock and bank account security will work more smoothly with less formalities being required.

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 relating to 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, fixed security can be taken by way of Statutory Pledge over the shares in the Scottish companies without the shares having to be transferred into the name of the lender/security trustee. This will avoid existing concerns a security holder may have in relation to decommissioning liabilities, pension deficits, the Persons with Significant Control regime and National Security & Investment Act regime.
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 with fewer formalities being required (where notification is to be given) or perfection by registration being possible (where it is not practically possible to give notification).

Existing assignation and notice mechanisms will be preserved, allowing continuation of existing working mechanisms for relevant project contracts and financing arrangements 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 relating to 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 Co is incorporated in Scotland, fixed security can be taken by way of Statutory Pledge over its shares without the shares having to be transferred into the name of the lender/security trustee. This will avoid existing concerns relating to decommissioning liabilities, the Persons with Significant Control regime and National Security & Investment Act regime.

Fixed security can be taken on Day 1 over present and future rental income streams or development documents without supplemental assignations or notice being required on an ongoing basis. This will be particularly beneficial for assets with a high turnover of tenants such as shopping centres, industrial estates, buy-to-let portfolios or student accommodation.
Assignations of rental income or development documents can be perfected by registration in the new Register of Assignations, avoiding the need for the cost and administration associated with serving multiple notices upon tenants or construction counterparties.
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.
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 located at a property or development.
Where the financing structure includes a company incorporated in Scotland, fixed security can be taken by way of Statutory Pledge over the shares in the Scottish company without the shares having to be transferred into the name of the lender/security trustee. This will avoid existing concerns a security holder may have in relation to pension deficits, the Persons with Significant Control regime and National Security & Investment Act regime.

Effect of insolvency on assignations and statutory pledges: A Statutory Pledge can be validly granted over present and future property pledged, and an assignation granted in relation to present and future claims identified. However, any assets that come into existence after the date of insolvency will not be caught by the security or assignation. This is to ensure that insolvency practitioners have moveable assets available to them to facilitate ongoing trading required for business rescue. The definition of “insolvency” is currently widely drafted under the Act but may be amended prior to the legislation coming into effect.
Effect of insolvency moratoria: A Statutory Pledge will be enforceable in accordance with the terms of the document itself or where there has been a failure to perform the underlying secured obligation. However, if a Statutory Pledge chargor is subject to administration, the creditor’s enforcement options will be restricted as a result of the administration moratorium which protects the chargor from such action. A moratorium entered into under Part A1 of the Insolvency Act will also restrict enforcement. The moratorium which forms part of the Bankruptcy process will, however, not restrict security enforcement (where the chargor is an individual or a partnership) in the same way.
Insolvency related investigations / due diligence: Insolvency practitioners will want to incorporate searches of the new electronic Register of Statutory Pledges and Register of Assignations into their pre-existing investigations and due diligence processes to confirm the existence and validity of any Statutory Pledges or assignations. The information contained in the Registers is not, however, definitive as parties can (for example) enter into separate ranking agreements which will not be registered.
Asset sales: Insolvency legislation provides that an insolvency practitioner cannot dispose of an asset subject to a fixed charge security without the consent of either the relevant secured creditor or the permission of the court. As a result of the Act, it insolvency practitioners may need to liaise and co-operate with a larger number of secured creditors prior to selling any assets subject to Statutory Pledges. This should be factored into any restructuring transaction planning.
Realisations: Insolvency practitioners distribute funds according to the statutory insolvency waterfall. Fixed security holders rank first in respect of the proceeds of realisation (after deduction of the costs of realising the relevant asset). As it will be possible to grant fixed security over a greater number of assets under the Act, it is reasonable to expect that there may be less funds available to flow down through the insolvency waterfall to other classes of creditors (e.g. preferential creditors, floating charge creditors and unsecured creditors) with a greater proportion of realisations will be paid out to the holders of fixed charges.
Remuneration and expenses: The remuneration and expenses of the insolvency process (including insolvency practitioners’ remuneration and disbursements) are paid after the claims of fixed security holders under the insolvency waterfall. An increase in secured claims, as a consequence of the Statutory Pledge being available for wider classes of assets, will impact the funds available to meet the costs and expenses of an insolvency process. This should be taken into account in an insolvency practitioner’s pre-appointment assessment of whether a company’s asset position is capable of funding an insolvency process.

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 land.

The Statutory Pledge provides a genuine practical equivalent to the English equitable mortgage or fixed equitable charge over intellectual property in Scotland.
This will avoid the need for intellectual property to be assigned in security to a lender/security trustee, with no need for registration in IP registers, notice to be provided to counterparties to create Scottish fixed security or intellectual property to be licensed back to the chargor by the lender/security trustee (with the associated sub-licensing issues this can create under the existing law).
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.

Enforcement means that the secured creditor has the right to sell the property subject to a statutory pledge. In order to enforce a statutory pledge, the secured creditor must serve a notice on various relevant parties.
Upon enforcement, the secured creditor may purchase the secured property if it is sold by public auction and they purchase it for a price close to market value.
The secured creditor is also entitled to let the property or grant a licence of any secured intellectual property.
The secured creditor can, in specific circumstances and subject to certain conditions, appropriate and become owner of the property. A further notice must be served on various parties unless the provider and the secured creditor have agreed that the secured creditor is entitled to appropriate the asset. This agreement can be provided before the pledge becomes enforceable and we expect that this is likely to be something that will be set out in any agreement between the secured creditor and the provider at the outset.
In certain circumstances, a court order will be required before a secured creditor can enforce against the pledged goods. A court order is required for enforcing a pledge only:
- if the provider is a sole trader and enforcement is against property used wholly or mainly for the purposes of the provider’s business; or
- if the statutory pledge is in respect of property that is the sole or main residence of an individual (unless after the pledge enforcement notice has been served), and the provider and the individual whose sole or main residence is the property in question (if a person other than the provider) consent.
The court is not to grant an order unless satisfied that enforcement is reasonable having had regard to all of the circumstances of the case.
If the provider of a statutory pledge transfers the encumbered property (or any part of it) to a third party, the transferred property remains encumbered by the pledge. This is subject to four important exceptions:

Acquiescence by the secured creditor.
Good faith purchase from someone acting in the ordinary course of their business.
Good faith and for-value purchase of an asset that is wholly or mainly acquired for personal, domestic, or household purposes.
Good faith purchase of a motor vehicle that is not from someone in the trade of selling or financing vehicles.

What next?

Registers of Scotland are currently in the process of building and testing the two new Registers. At the same time, a number of consultations are ongoing in relation to ancillary aspects of the Act (such as registration costs and fees, enforcement protocols and insolvency triggers) which are expected to conclude in the early part of 2025. The Act itself will go live on 1 April 2025.

Businesses and lenders should now be thinking about what changes they might have to make ahead of commencement on 1 April 2025. This includes ensuring that credit and risk teams are sufficiently upskilled on the Act; future-proofing transaction documents being entered into now; preparing pro-forma security documents and ensuring that systems will be ready for implementation.

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. We have already provided bespoke training sessions for a number of clients and contacts across a breadth of sectors on the Act and its impact.

If you have questions as to how the reforms under the Act will affect your business or sector, or you would like training on the Act, please get in touch with a member of our team.