Moveable Transactions Reform in Scotland

• 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 is now the ability to take a new Statutory Pledge over high-value Scottish tangible moveable assets and intellectual property owned by a group obligor.
• Fixed security can be taken 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 are clarified, reducing uncertainty regarding fixed security over bank accounts.

Close

• The Statutory Pledge provides 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 is possible without storing it with a third party custodian.
• Fixed security over farmed fish and other livestock is a viable option.
• The Statutory Pledge provides 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 provides an alternative to reservation of title to stock.
• Title-based financing using previous reservation of title, leasing and hire purchase mechanisms will remain possible.
• Asset-based lending and other broader working capital financing solutions involving financing of receivables and bank account security 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).

Close

• 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 can 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 Financial Collateral Regulations otherwise apply.
• It is now 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 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.

Close

• 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 in security of 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.

Close

• Sellers can 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 is 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 is no requirement for back-up floating charges to be granted by sellers sitting behind Scottish trust arrangements.
• Electronic mechanisms are now facilitated by clarification of asset identification rules and electronic notice rules.
• Notification remains an alternative perfection option (for example, to stop a “good faith” discharge to an assignor) but notice rules are simplified and clarified.
• Asset-based lending and other broader working capital financing solutions involving the financing of raw materials, stock and bank account security work more smoothly with less formality being required.

Close

• There is now the ability to take a new Statutory Pledge over high-value Scottish tangible moveable assets and intellectual property.
• Fixed security can be taken over rights under Scottish material contracts without giving notice to counterparties by registration of an assignation in security in the new Register of Assignations.
• Rules on conditional assignation and control of rights assigned are clarified, reducing uncertainties relating to fixed security over operating and other executory contracts.
• Control rules are 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 avoids concerns a security holder may have previously had 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 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).

Close

• Existing assignation and notice mechanisms are 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 are clarified, reducing uncertainties relating to fixed security over operating and other executory contracts.
• Control rules are clarified, facilitating the use of Scottish bank accounts for projects by reducing uncertainty on fixed security.
• Statutory Pledge can now be taken 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 avoids concerns relating to decommissioning liabilities, the Persons with Significant Control regime and National Security & Investment Act regime.

Close

• 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 is 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 served on them.
• Control rules are clarified reducing uncertainty regarding fixed security over bank accounts used for rent collection and other receipts.
• A Statutory Pledge can be taken over higher-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 avoids concerns a security holder may have in relation to pension deficits, the Persons with Significant Control regime and National Security & Investment Act regime.

Close

• 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 ensures that insolvency practitioners have moveable assets available to them to facilitate ongoing trading required for business rescue.
• Effect of insolvency moratoria: A Statutory Pledge is 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, 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 is now 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 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.

Close

• 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 hard requirement 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.

Close

• The Statutory Pledge provides a genuine practical equivalent to the English equitable mortgage or fixed equitable charge over intellectual property in Scotland.
• This avoids 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.

Close

• 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:
  • if the provider is a sole trader and enforcement is against property used wholly or mainly for the purposes of the provider’s business;
  • if the provider is an individual, in respect of Scottish shares held by that provider; 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:

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

Close