Reform Update – Floating Charges
Introduction
Insolvency Practitioners should be aware of the proposed reforms in the Bankruptcy & Diligence etc. (Scotland) Bill to the law regarding creation and ranking of floating charges. These have a potentially significant impact on how floating charges will rank with each other and with other fixed securities.
New Register of Floating Charges
The Bill provides for a new Register to be created to be known as the "Register of Floating Charges". This Register will be established and maintained by the Keeper of the Registers of Scotland rather than by the Registrar of Companies.
It is core to the proposed reforms that a floating charge will only be created once it is registered in that Register (rather than being created when it is executed as is the case presently).
However, it will be possible for a proposed floating charge creditor and debtor company to jointly lodge an "advance notice" of a proposed charge. Provided the charge is registered within 21 days of the advance notice being registered, the date of creation of the floating charge will be backdated to the date of the registration of the advance notice.
Ranking
Reform of the law on ranking of charges and fixed securities is also proposed. Presently, floating charges rank (1) with other floating charges in accordance with the time of their registration and (2) behind fixed securities in which the real right has been constituted prior to crystallisation of the charge.
The Bill proposes that floating charges will rank both with other charges and with fixed securities in accordance with date of creation. The date of creation of a fixed security will be "when the real right was constituted". For example, in relation to a heritable security this will be the date of registration in the property registers.
To take a practical example, under the present law if a floating charge is granted one year before a heritable security but the heritable security is registered in the property registers prior to the floating charge crystallising, the heritable security will have priority over the floating charge. Under the new proposals, if the floating charge is registered immediately (i.e. in the example, around one year before the heritable security) the floating charge will have priority over the fixed security.
There are further provisions governing how floating charges and fixed securities created before and after the Bill comes into force are to rank with each other. Where there are pre-existing charges and securities, these will continue to rank in accordance with the law as it stands now, as set out in section 464 of the Companies Act 1985. However, where there is a floating charge created after the Bill comes into force, that charge is to rank with any pre-existing charges and fixed securities in accordance with the new ranking provisions.
It will remain possible for parties to contract out of the statutory ranking provisions and enter into their own ranking agreements.
Comment
In deciding how floating charges and fixed securities are to rank in future, as well as carefully considering the terms of the charges, securities and any ranking agreements, insolvency practitioners will have to have regard to two sets of legislative provisions.