Lending and borrowing: changes to moveable property assignation and security in Scotland in force from April

Historically, this area of law has been unduly restrictive and cumbersome, regarded as being ill-suited to the needs of modern Scottish commerce. The MTSA takes steps to reform the law in Scotland in relation to taking security over ‘moveable’ property – property which can be physically moved as well as intellectual property – and to codify and reform the law in Scotland in relation to assignations, both ‘absolute’ and ‘in security’.

Changes that will take place on and from 1 April

Introduction of statutory registers

The MTSA (77 pages/2.25 KB) introduces two new publicly searchable statutory registers that will be maintained by the keeper of the Registers of Scotland – the Register of Assignations and the Register of Statutory Pledges.

Registration of an assignation in the Register of Assignations will be an alternative to intimation, meaning an assignation (either absolute or in security) will be able to be “created” by registration rather than by intimation.

The MTSA also creates a new form of security known as the “statutory pledge” which can secure ‘corporeal’ moveables - for example, plant and machinery - and certain ‘incorporeal’ moveables, such as intellectual property rights. Registration of the statutory pledge will negate the requirement to transfer possession of the pledged asset to the creditor, which will therefore referred to as a non-possessory pledge.

Section 47(3) of the MTSA enables the Scottish ministers, by passing regulations, to specify further kinds of incorporeal property over which it is competent to create a statutory pledge. It is envisaged that the categories of incorporeal property over which a statutory pledge can be created will be extended to include shares in Scottish companies. The Scottish government took the view in the MTSA consultations that the introduction of the statutory pledge in the context of shares is a reserved matter for the UK government as it relates to financial services and financial markets.

Discussions are ongoing with the UK government to include shares within the purview of the statutory pledge, and it is anticipated by the Scottish government that the regime will be able to be extended to include shares in Scottish companies prior to the registers going live on 1 April. However, the legislative order required to give effect to this change is still awaited.

The inclusion of shares within the framework of the MTSA will be welcomed by businesses and creditors alike, given that it will remove the need to transfer title to the shares – and the associated issues which can currently arise under the National Security and Investment Act 2021 and people with significant control regime in relation to any such transfer.

These options to be introduced by the MTSA are an alternative to, and not a replacement of, the existing common law regime. Lenders and borrowers can still choose to use a traditional assignation in security, which is only effective following intimation to the debtor, and possessory pledges, only effective by the delivery of the pledged asset, where it is still considered appropriate to do so. However, lenders, and in particular anyone involved in deal structuring, on both originations and refinancings, should be aware of the broader range of assets, including future assets, over which it will now be possible to obtain fixed security, and consider what security package would be best suited to their transactions going forward once the MTSA comes into force.

We anticipate that (i) statutory pledges, (ii) assignations (which are to be perfected by way of registration) and (iii) security interest agreements (encompassing a Scots law floating charge, any statutory pledges and any assignations within the one security document) will soon be in circulation on any deals with could benefit from the new security options and which are due to complete on or after 1 April.

Securing future claims and future property

1. The MTSA allows for the assignation of future incorporeal moveables, which will automatically be assigned when they come into existence. This, in particular, will transform invoice finance and securitisation transactions, as it will allow for any future invoices with a Scottish customer to be assigned in advance without the need for any further steps or intimations.
2. Section 45(4) of the MTSA also states that, with respect to a statutory pledge, the property identified – whether separately or as a class – as the property which is to be the encumbered property may be either property of, or property to be acquired by, the provider. The MTSA therefore envisages that future assets will be able to be pledged by way of a statutory pledge prior to such assets being acquired and that no further steps will have to be taken when those assets become part of the provider's property to make them subject to the statutory pledge.

Methods of intimation

The MTSA also clarifies the methods of service that can be used by the assignor or assignee for the purposes of the intimation of an assignation. It states that this can be done by post or by transmitting the notice to an address for electronic communication, such as email. It is also permissible for any notice sent by electronic communication to simply contain a link to a website or portal where further details about the identity of the assignor and assignee and the claims assigned can be provided. The ability to validly intimate using email, where an email address has been provided in the underlying assigned contract, will be a very welcome change.

Costs

The actual fee for completing a registration in either of the new registers is yet to be finalised by Registers of Scotland but, as currently proposed:

• it will cost £30 to register an assignation document, unless there are different claims being assigned to different assignees within one assignation document, in which case the fee is £30 for each claim for which registration is applied);
• it will cost £30 to register a statutory pledge, unless the constitutive document creates more than one statutory pledge, in which case there is a fee of £5 per additional statutory pledge for which registration is applied; and
• where an application is made for registration of an amendment document relating to a statutory pledge, the fee is £30 for each statutory pledge record entry amended.

No information on the registers will be freely available. It is currently proposed by Registers of Scotland that there will be a £3 plus VAT search fee to search the application record by company number, business name, individual's name and/or date of birth or by registration number. The £3 fee paid for the search will allow you to access one security record and download an extract of the registered document.

Each statutory pledge and registered assignation will also still require to be registered at Companies House and be subject to the usual fees of at least £15.

Risk of statutory pledge ‘torpedo’

With regards the new statutory pledge, there are ongoing discussions regarding what constitutes the "pledge" for the purposes of registration on the Register of Statutory Pledges. This is due to uncertainties which have arisen as a consequence of section 52 of the MTSA which states: "If a secured creditor acquiesces, expressly or impliedly, in a provider's transfer of encumbered property (or any part of it) to a third party, other than by means of granting the consent mentioned in section 51(2), the statutory pledge under which the property (or part) was encumbered is extinguished."

This provision is being referred to in the market as the risk of a ‘torpedo’ of the pledge. Consent under section 51 must be the secured creditor’s prior written consent to the particular transfer and to the property in question being transferred unencumbered by the pledge, and does not include consent granted more than 14 days before the day of the particular transfer.

It is not uncommon for there to be pre-ordained consent granted within a suite of finance documents – for example, the consent you might see documented in a loan agreement with a "Permitted Disposals" regime. In order to avoid any possible risks of a torpedo where a deal involves Scottish assets to be secured by a statutory pledge, the current working assumption is that each asset of value which is to be pledged will need to be subject to an individual and distinct pledge within the same security document. For instance, if the shares in five subsidiaries are to be pledged within a statutory pledge document this would give rise to five separate registration fees, rather than being viewed as a single pledge over a class of assets, and therefore a total fee of £50 would be incurred under the proposals above: £30 for the first pledge and £5 each for the four other pledges.

This is considered necessary to reduce the risk of section 52 operating to extinguish the entirety of a statutory pledge over a particular class of assets when a single asset is disposed of. The Register of Statutory Pledges, which Pinsent Masons, alongside a number of other firms, tested in December has been set up with the functionality to allow for one security document to be uploaded but for multiple pledges to be registered in respect of the one document.

Lenders consider putting in place processes for managing consent requests after the MTSA comes into force to ensure any consent complies with Section 51 of the MTSA where assets are secured on a transaction by way of statutory pledge, and avoids the application of the ‘torpedo’.

Requests for information

The MTSA introduces an obligation on lenders and security agents to respond within 21 days of receipt to requests for information from any "entitled person". These requests can include whether, for example, a specific claim is assigned in the assignation document in favour of the assignee; whether specific assets are part of the encumbered property in the statutory pledge in favour of the secured creditor; or whether the registered creditor is still the secured creditor or if the claim has been assigned to someone else.

An entitled person includes a person, in the case of an assignation, who, depending on who holds the claim, may have a right to execute diligence against the claim. In the case of a statutory pledge, an entitled person is someone who has a right to execute diligence against the specified property or who is authorised to execute a charge for payment and will have the right to execute diligence against that property if and when the requisite number of days of charge expire without payment, or a person who has a right in the specified property.

The obligation to respond to a request is subject to certain caveats such as if it is manifest from the assignation or statutory pledge document that the claim or asset specified is not assigned or pledged. This also applies if, within the period of three months ending with the date of receipt of the request, a response was already issued to the same person in relation to the same claim or property.

Lenders will therefore need to consider the practical implications of the use of the new registers, and be set up to respond to any queries on and from 1 April once the registers are live and searchable.