There has been a great deal of interest generated by the Bankruptcy and Diligence etc (Scotland) Bill on its passage through the Scottish Parliament. Much of the focus has been on the reforms to sequestration and diligence, for example:
- automatic discharge of the debtor after only one year
- introduction of bankruptcy restriction orders and undertakings
- the new diligence of land attachment
However, less well know are the changes proposed to the law regulating floating charges and in particular the creation and ranking of those charges. In addition to understanding how the new system will work, practitioners will also have to come to grips with the transitional provisions for dealing with pre-existing charges and securities.
Register for Floating Charges (ROFC)
The Bill provides for a new Register to be created to be known as the Register of Floating Charges ("ROFC"). The ROFC 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.
It would appear that the floating charge itself will be registered and provision is also made for any assignation or alternation to the floating charge to be registered in the ROFC.
Reform of the law on ranking of charges and fixed securities is also proposed. Currently, 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" i.e. 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.
If you think that you have grasped all that, here come the transitional provisions!
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.
Therefore 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, practitioners will have to have regard to two sets of legislative provisions.
Andrew Scott is a solicitor specialising in Insolvency with law firm Shepherd and Wedderburn.