The Moveable Transactions (Scotland) Act 2023 – Considerations for Insolvency Practitioners
Introduction
The Moveable Transactions (Scotland) Bill (‘Bill’) was passed by the Scottish Parliament on 4 May 2023 and received Royal Assent on 13 June 2023. The Moveable Transactions (Scotland) Act 2023 (‘Act’) is expected to come into force next year.
The Act will modernise the law of Scotland in relation to moveable transactions, in implementation of the Scottish Law Commission Report on Moveable Transactions published in December 2017. The Act deals with the law relating to:
(1) The assignation of a claim from one person to another (typically the right to payment of a debt).
(2) The introduction of a statutory pledge which will be able to be granted over corporeal moveable property (such as vehicles, equipment including plant and machinery, whisky or livestock) and certain kinds of incorporeal moveable property (specifically, intellectual property – which includes copyright, trademarks, design rights and patents).
Currently, there are two options for a lender to obtain fixed security over moveable property in Scotland, which are as follows:
(1) The borrower can grant a possessory pledge by physically, symbolically or constructively delivering the pledged property to the lender; or
(2) The borrower can enter into an assignation in security, under which the claim is transferred to the lender. The assignation can only be completed by letting the debtor in the claim know about the assignation (known as intimation).
Assignation of claims
The Act aims to modernise assignations by introducing a register (as an alternative to intimation) which can be used to record assignations of claims. It is hoped that this will help businesses raise finance by selling claims that have a right to payment in the future, relating to work in progress.
Upon registration of the assignation, it will become effective without the need to intimate it to any counterparty, for example an assignation of book debts will be able to be registered without the need to give notice to customers. If, however, those customers are to be required to make their debt payments directly to the lender so that the lender applies the payment against the outstanding debt, it will still be necessary to intimate to those parties so that they know this is what is required of them.
The statutory pledge
This element of the Act introduces a new form of fixed security known as the statutory pledge over moveable property (corporeal and incorporeal). This will remove the requirement to transfer ownership or delivery of assets to the lender. Instead, the registers can be used to create statutory pledges over moveable property, where they will be registered.
Furthermore, the Act allows statutory pledges to be granted over non-physical assets, which cannot be delivered e.g. intellectual property.
However, the Act does not currently allow for the creation of a new fixed charge over shares. Security over shares in a Scottish company will continue to only be possible either as part of the assets secured by a floating charge, or by a Scots law “shares pledge”, which requires actual transfer of the shares into the name of the security holder. This is because the question of security over shares is a reserved matter necessitating consent from Westminster before enactment. It may be that this consent is provided in time for shares to be included when the Act comes into force, but as matters currently stand shares are not included.
Furthermore, the Act does not allow the creation of a statutory pledge by an individual except in certain limited circumstances (broadly, where the individual is acting in the course of a business or in certain other capacities and the secured assets are of a restricted class).
Assignations and statutory pledges on insolvency
The Act contains specific provisions relating to both assignations and the creation of statutory pledges in the context of insolvency. During the passage of the Bill, there was some debate about the types of insolvency proceedings to which these provisions should relate, with amendments being made to the provisions as introduced but subsequently reversed. The Scottish Government has committed to consulting on the proper scope of these provisions with a view to their possible amendment before the Act is brought into force.
Considerations for Insolvency Practitioners (‘IPs’)
As mentioned above, the Act aims to simplify the process for taking fixed security over moveable assets in Scotland, which is likely to lead to IPs seeing changes in certain aspects of the management of formal insolvency processes in Scotland. Although the Act has received Royal Assent, there are matters that require further attention before the provisions of the Act will come into force including:
- As mentioned, a consultation on which types of insolvency proceedings should be included in the provisions relating to insolvency mentioned above.
- Establishment of the registers and the making of regulations about the rules, forms and fees for the operation of the registers.
- A possible section 104 Order under the Scotland Act 1998, to apply the provisions in the Bill to financial collateral and financial instruments.
Due Diligence
With the introduction of new Registers of Statutory Pledges and Assignations, IPs will need to ensure searches are undertaken of these prior to distributions to creditors to satisfy themselves as to the existence and validity of any pledges or assignations. It is important to note that these searches are to be added to any steps already undertaken by IPs as neither register is definitive.
Returns to creditors
If a company or competent individual has granted a statutory pledge, IPs need to be mindful that any asset realisations in respect of those pledged assets will need to be set aside for the creditor holding the benefit of the pledge. Unless there is a surplus in the realisations, no funds realised will be available to floating charge holders or unsecured creditors.
Remuneration and expenses
IPs will need to be mindful of the effect assets subject to a statutory pledge will have on the ability to recover costs of the insolvency process, including remuneration. Fixed charge security ranks at the top of the distribution waterfall and takes priority to an IP’s remuneration, disbursements and expenses.
Implementation
Whilst the Act has received Royal Assent, the Act will not be effective until the new proposed registers are ready to come into operation, and that is not expected to be until the summer of 2024.
Helpful links
The Act (Link)
ICAS (Link)