Scottish security law reform

Why should I read this?

Significant changes to the law on taking security over assets such as contractual rights and intellectual property have been passed by the Scottish Parliament and are likely to come into force later this year or in early 2024. If you take or give security over “moveable” Scottish assets such as contractual claims or intellectual property then you may want to read more about this upcoming modernization of Scots security law.

The Moveable Transactions (Scotland) Bill

Scottish MPs voted to pass the Moveable Transactions (Scotland) Bill (the “Bill”) on 04 May 2023 The Bill:

• creates a new form of security called the statutory pledge; and
• establishes two new registers: (1) the Register of Assignations and (2) the Register of Statutory Pledges.

What’s changed?

The Bill will make it easier and more straightforward to take security over moveable assets in Scotland by:

• no longer requiring a creditor to take possession in order to have a valid security; and
• allowing future assets to be secured.

These changes will enable businesses to grant security without the need to transfer title to their assets and to grant supplemental security more easily. The new statutory pledge will create a form of security that is similar to equitable fixed security in England and Wales which will bring the two security systems closer.

What is the Register of Assignations?

The Bill brings a much needed update to the current law on assignation of claims (such as debt or rental income). An assignation is a transfer of that debt, rental income or other claim from the security provider to the secured party (similar to an English law assignment).

Existing Scots law requires intimation, the process of notifying the debtor/tenant/other counterparty, for the assignation of a claim to be effective. This can be a tricky negotiation point, take for example a commercial property with multiple leases – the tenants may change over time and there can be commercial sensitivity around serving notices on certain tenants. The Register of Assignations will remove the need for intimation. When the Bill is in force assignation of claims can be executed through the registration of the assignation document by the assignee. Intimation will still be an option, but the new process will be much simpler and particularly beneficial in situations such as security rental income from a property with multiple, fluctuating lettings. The new regime importantly enables not only current but future claims to be assigned. This gives businesses greater capacity to borrow and more ability to adapt. 

Additionally, good faith protection is built into the Bill for debtors. Where the debtor does not realise a claim has been assigned, they can be discharged from their obligation if they have performed their obligation to the last known debtor.

What is a statutory pledge?

The Bill introduces a new form of security called a statutory pledge. A pledge is a type of security over moveable property. In existing Scots law for a pledge to be created possession or transfer of title is needed.

The Bill allows for a statutory pledge to be given without the need for delivery of the moveable property or transfer of title. Statutory pledges will be created by registration in the Register of Statutory Pledges. Statutory pledges impact businesses by allowing them to continue to use property that is crucial for their business while still creating a pledge over it. Furthermore, pledges will be able to be created over moveable property such as intellectual property (and subject to anticipated further legislation, shares) without the need to transfer ownership rights over them (which has long been a sticking point on taking security over shares in Scottish companies).

As with assignations of claims, good faith provisions are included. A purchaser of corporeal property such as vehicles and machinery will acquire it unencumbered, even though the property is encumbered by a statutory pledge, if the purchase is in good faith and in the ordinary course of their business.

What else do I need to know?

The detailed procedural rules of the new registries (eg registration deadlines, fees, etc) are yet to be implemented but the Bill sets out that registration in the new registries will take place online and the registries will be searchable for the public online (for a fee).

It is worth noting that assignations of claims by way of intimation and pledges which are not created through registration will not appear on the respective registers. This limits third parties’ awareness of such assignations and pledges – the new registers are not a one-stop shop to find out whether there is security over an asset.

The Bill is awaiting Royal Assent and no date has been given as to when it will come into force. Scotland’s Public Finance Minister, Tom Arthur, has stated that the goal is to have both registers operating by summer of 2024. There is currently no clear timeline for the legislation required to extend the statutory pledge to shares in Scottish companies, this is being discussed between the Scottish Parliament and the UK Government as company law is not a devolved power.

Finally, the law relating to taking security over real estate in Scotland is not changing as part of these reforms.

Further reading

For further information please see the Moveable Transactions (Scotland) Bill.