The issues

The arrangements for registration of charges created in Scotland by companies have long been regarded by practitioners as unsatisfactory. Particulars of both fixed and floating charges created by companies have to be registered with the appropriate Registrar of Companies, within 21 days of the date of creation of the charge, which in the case of floating charges is the date of execution, whereas for fixed charges (standard securities over land and buildings) it is the date of registration in the relevant Property Register that applies.  For such fixed charges, this in effect means a duplication of registration, and the requirement that the company has up to 21 days from the date of creation of the charge within which to register it, means that there is a 3-week period during which the company's charges register may be inaccurate for a significant period after a charge has been created.

Both the Scottish Law Commission and the Law Commission for England and Wales were asked by the Department of Trade and Industry to review the law on registration of securities, both north and south of the border.  In the case of Scotland this resulted in a Report from the Scottish Law Commission, published in September 2004, in which they recommended reform, and included draft legislation which the Executive has used as a basis for the provisions relating to registration and creation of floating charges contained in the recently introduced Bankruptcy and Diligence etc (Scotland) Bill.

The Bill addresses the procedures relating to floating charges in Scotland.  The principle of a floating charge is that the assets of the company are not "attached" by the charge until such time as the company goes into liquidation or a receiver is appointed in terms of the charge.  Thus the charge "floats" over the company's property and only crystallises in the event of liquidation or the appointment of a receiver, attaching at that stage to whatever is comprised in the property and undertaking of the company, covered by the charge.

Notice of the existence of such a charge needs to be available so that other potential creditors are aware of the prior claim to the assets of the company. When heritable property changes hands, the purchaser from a company needs to be sure that there are no claims by creditors. Fixed charges in the form of standard securities have to be registered in the relevant Property Register to be validly created, and their existence is therefore already evident from those public registers. Practitioners have devised conveyancing procedures that attempt to address these issues.

It is intended that the matter of duplication of registration of fixed charges will also be addressed and this will be done by the UK Parliament through the medium of the Company Law Reform Bill and in regulations.

The proposed new regime for floating charges

Part 2 of the Bankruptcy and Diligence etc (Scotland) Bill provides for a new regime for the creation, registration, alteration and ranking of floating charges to be set up, replacing the current provisions contained in Part XVIII of the Companies Act 1985.  The proposals include:

  • A new Register of Floating Charges will be established and maintained by the Keeper of the Registers of Scotland
  • There will be an option to register an advance notice of a floating charge in the Register
  • Registration will create the charge, not execution
  • Floating charges will rank according to date of registration
  • Any variation, assignation or discharge of a floating charge must be registered before it can affect any third party interest.

Register of Floating Charges

A new register – the Register of Floating Charges - will be set up, so that these charges will no longer be registered with the Registrar of Companies. The new register will be maintained by the Keeper of the Registers of Scotland, who currently administers both Property Registers - the Register of Sasines and the Land Register of Scotland - as well as a number of other public registers in Scotland. There will be detailed regulations in due course dealing with the form and structure of the new Register.

Creation of floating charges

Companies will continue to be able to grant floating charges, and the date of registration in the Register of Floating Charges will be the date of creation of the charge, not the date of execution of the charge as at present. The full text of the charge, rather than just short particulars, will be recorded in the Register.

Advance notice

A new concept which effectively creates a "priority period" is proposed, whereby an advance notice of a floating charge can be registered in the Register of Floating Charges, effective up to 21 days in advance of creation of the charge itself.  The creditor in the charge will have priority ranking from the date of the advance notice, provided that the floating charge itself is completed and registered within 21 days. Both parties to the charge will have to submit the notice.

Ranking arrangements

Companies may grant several fixed and floating charges at the same time, and when that happens, arrangements usually have to be considered for how each charge is to "rank" in relation to the others. The primary principle is that ranking will be based on the date of creation. In the case of fixed securities this is the date on which the security was constituted as a real right (i.e. for standard securities - the date of recording or registration in the relevant Property Register). Where the floating charge is created on the same day as another floating charge or a fixed security, the respective securities will rank equally.

Where a fixed security arises by operation of law, for example a landlord's hypothec, the existing rule that such fixed securities have priority over any floating charge will continue.

Existing arrangements regarding protection of the value of subsequent floating charges will continue, allowing the subsequent charge holder (of either a floating or a fixed charge) to give notice to the prior floating charge holder, which will have the effect of restricting the priority of ranking of the prior floating charge holder to the present outstanding debt plus any future debt which the charge holder is contractually bound to make (plus interest and expenses).

It will continue to be open to the parties to agree the order of ranking and to set out the detail in a ranking agreement.  Such agreements should be registered in the Register of Floating Charges.

Assignation, alteration and discharge

Floating charges can be assigned by the holder and the right of the assignee will arise on registration of the assignation in the Register of Floating Charges, although any other rule of law by which a floating charge may be assigned will not be prejudiced.

Any alterations to the floating charge or its ranking must be registered in the Register of Floating Charges for third parties to be affected by the changes.  The company itself need not necessarily sign a ranking agreement that alters ranking of its creditors, provided the alteration does not adversely affect the interest of the company.

Although it will not be mandatory to register the discharge or extinction of a floating charge in the Register of Floating Charges, when, for example, the debt secured by the charge is repaid, the Bill contains provision allowing a discharge to be registered, and this will obviously have the advantage of making the position clear from the Register.

Other granters of floating charges

The Bill provides that the new regime will also apply to Scottish floating charges granted by Industrial and Provident Societies registered in Great Britain. It is also intended that the new regime should apply to floating charges granted by Limited Liability Partnerships and European Economic Interest Groupings, but it is expected that the application of the new regime to those entities will be done by way of statutory instruments.

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