On 13 June 2023 the Moveable Transactions (Scotland) Act 2023 (the “Act”) received Royal Assent. The Act sets out long awaited reforms in relation to assignation and security over moveable property (e.g. property other than land and buildings). This article will focus on the introduction of a new form of security available to lenders, namely the statutory pledge.
Prior to the Act, only fixed security over moveable property that existed in Scotland was the common pledge. For a pledge to become legally effective over an asset, the owner of the asset must deliver it to the person who the pledge is to be granted in favour of. This has the obvious disadvantage of preventing the owner from making use of the asset whilst the security is in effect – rendering pledges fundamentally unworkable in the context of asset finance deals.
With a view to addressing this inadequacy, the Act introduces a new form of fixed security over moveable property called the ‘statutory pledge’. It is intended that the statutory pledge can be used to collateralise assets such as motor vehicles, livestock, plant and machinery, whisky and intellectual property. The statutory pledge will not apply to aircraft or ships which already have separate security regimes.
The Act provides for the creation of a new statutory pledge register, which is to be maintained by Registers of Scotland. Registration will be required in order to render a statutory pledge effective. Lenders should also note that for Companies and LLPs, the requirement to register charges in Companies House within 21 days of their creation will apply to statutory pledge. It will also be possible for the pledge to be granted over future property, that is to say assets that the granter has not yet acquired but is in the process of doing so. In that instance the security can be registered but does not encumber the asset until it is owned by the granter.
So, will the Act open up new opportunities for both Borrower and Lenders seeking to finance moveable assets in Scotland? Whilst a statutory pledge may appear to be a more workable option than a common pledge, the Act presents a number of risk areas that lenders may struggle to get comfortable with. For example, there are specific instances where the statutory pledge will be extinguished if the owner sells the asset to a good faith buyer. A failure by a buyer to check the register to see whether the asset is unencumbered will not, in and of itself, determine that buyer to be in bad faith. Therefore, the statutory pledge doesn’t provide the same certainty of continuity as a standard security, and lenders should keep this in mind when considering their security options.
It should be noted that the statutory pledge can only be granted by corporate bodies, individuals acting in the course of their business, individuals acting as trustees of a charity or individuals acting for an unincorporated association. For individuals the asset must also be worth at least £3,000. The operative provisions of the Act are not yet in force and are not likely to be so for some time yet as regulations and processes are introduced for the new register.
Overall, these proposals are significant and positive reforms for the banking and finance sector in Scotland. Whether they will translate into greater borrowing options for businesses and open up new opportunities for lenders will remain to be seen.
