Scots law has not traditionally been recognised for its dynamic or innovative nature, but newly-passed legislation to reform the law of moveable transactions could help to change this.

At present, Scottish law on borrowing against ‘moveable’ property — property which can be physically moved, as well as intellectual property and shares in Scottish companies — is widely considered to be unduly restrictive and ill-suited to the needs of modern Scottish commerce. A new Bill sets out to modernise and simplify the law, offering businesses more flexibility to raise finance in Scotland.

The Moveable Transactions (Scotland) Bill, which was passed by MSPs yesterday and is likely to come into force before the end of the year, will represent a fundamental change in how security is taken over certain assets in Scotland. One of the biggest changes in Scots banking law in decades, the Bill’s reforms will be a big step forward in structuring finance transactions and will impact both lenders and borrowers.

Cash flow is crucial to small and medium-sized enterprises, and it has become commonplace in Scotland to put in place workarounds to exploit the value of assets and replicate the position in England — for example, using leaseback, trust or licensing arrangements. But such arrangements are inevitably more complicated and expensive for everyone involved and come with potential unintended consequences.

The Bill will reform the law by creating two new registers: the Register of Assignations and the Register of Statutory Pledges — giving businesses greater access to finance, and allowing them to sell debts and secure assets that previously would have been very difficult to achieve in Scotland.

Register of Assignations

In law, an ‘assignation’ is the transfer of a right or claim from one party to another. A claim is most commonly the right to payment of a debt. For example, if someone has a right to be paid for goods or services, they can transfer that right to payment to another person.

Under the current law in Scotland, an assignation of a claim is only effective if the debtor is notified — a process known as ‘intimation’. But the new Register of Assignations can instead be used to grant assignations of claims as an alternative to intimating the assignation to the debtor.

According to the existing law, future claims cannot be assigned due to the impossibility of ‘intimating’ to a debtor that does not yet exist. The Bill will allow future claims to be assigned, so that businesses can sell claims that they will have a right to in future business dealings. This will let them raise finance faster and more efficiently — transforming dealings in the finance sectors of invoice finance and securitisation.

Register of Statutory Pledges

A ‘pledge’ is a type of security that is taken over moveable property — usually to secure a loan, giving the lender the right to that piece of moveable property if the loan is not repaid. Under the current law in Scotland, a pledge can only be granted by delivering the piece of moveable property that has been pledged, or transferring title to it, to the person granting the loan or credit.

The Bill will allow pledges to be granted without the requirement for delivery of the moveable property, as long as the pledge is recorded in the new Register of Statutory Pledges. The reform will apply to ‘corporeal’ moveable property, such as vehicles, equipment including plant and machinery, whisky or livestock, as well as certain types of ‘incorporeal’ moveable property, like intellectual property and, eventually, shares in Scottish companies.

The change will offer more flexibility to businesses trying to raise finance in Scotland. For example, if a company currently wants to pledge a piece of expensive machinery as security for a loan, this has to be physically delivered to the lender Without the requirement to hand over the machinery to the lender, the company could secure such an asset and continue to use it day to day. It will also still be possible to grant a pledge by delivery of the moveable property, instead of through registration, in the traditional way.

In time, companies will be able to pledge shares as security for a loan under this new regime, helping to overcome the administrative difficulties and other unintended legal consequences associated with the common law pledge over shares that currently exist.

Pamela Gilmour and Shonagh Brown are legal directors at law firm Pinsent Masons