The movable Transactions (Scotland) Bill makes a number of important changes to update and strengthen Scottish legislation governing transactions involving movable property. By changing both the legislation relating to assignation of claims (including assignations in security) and the legislation related to granting fixed charge security over corporeal moveable property and intellectual property (the only type of incorporeal moveable property to which the Bill currently extends), the changes will make it easier for businesses and, subject to certain safeguards, individuals to use their assets to raise capital.
1. Moveable Transactions and Changes for Creditors
The Bill’s implementation will surely result in changes for creditors, namely the number and identity of people providing finance to firms and individuals in Scotland, as well as the quantity and kind of security held.
Among other things, the changes introduced by the proposed legislation will permit claims, including subsequent claims, to be assigned without the need for written notice to given to all debtors (by providing an alternative route for registration in a new Register of Assignations) and enable fixed charge security to be provided over moveable assets without the need to transfer ownership or possession (by creating the new statutory pledge, which will require registration in the new Reg All of these will make lending in Scotland more enticing, opening up the market to financial providers with lending structures that Scots law cannot now support without complex and/or expensive workarounds.
2. Debtor’s assets in Scotland
Following their appointment, an Insolvency Practitioner will make efforts to confirm, collect, and secure the debtor’s assets. Insolvency practitioners need to know the importance of prioritising assets under fixed security.
In addition to interacting with the debtor or its officials and workers, and evaluating the debtor’s own documents, Insolvency Practitioners will search public records for assets owned by the debtor. The new Register of Assignations and Register of Statutory Pledges will provide extra information for insolvency practitioners, which they need to know about.
However, the Bill supplements, rather than changes, the current legislation. It will still be able to assign claims, either outright or in security, by intimation, as well as give a traditional possessory promise, both of which do not require registration in the new Registers. As a result, the new Registers may not offer a comprehensive record of transactions involving transportable property for any one debtor.
Because the Bill allows for the assignment of future claims and the granting of statutory pledges over property to be acquired by the grantor, concerns may arise as to whether claims arising and/or property acquired after the start of an insolvency process form(s) part of, or an unencumbered part of, the debtor’s estate.
In the case of statutory pledges, the Bill is quite clear: the statutory pledge is not issued over any property acquired by the grantor after becoming bankrupt, even if such property is listed in the pledge instrument as property to be encumbered.
The Bill includes a similar declaration about claims for which the assignor becomes the holder after becoming insolvent: the assignation is invalid with regards to any such claim. However, the Bill makes an exception to that rule in the case of a claim for income from property if the claim (1) is not attributable to anything agreed to or done by the assignor after the assignor became insolvent, and (2) is based on the use of property that existed at the time the assignor became insolvent.
3. Realisation of assets
Currently, secured creditors in a typical Scottish insolvency include standard security holders (where the debtor has heritable property and/or a registered lease) and floating charge holders (where the debtor is a corporate entity), whose security typically extends to all assets of the debtor.
While an Insolvency Practitioner will usually seek the consent of all secured creditors before proceeding with any suggested sale, and the release of any standard security over heritable or leasehold property forming part of the sale is always required, in administration, an administrator has the authority to dispose of property subject to a floating charge as if it were not subject to the charge. When selling floating charge assets during an administration, no approval or release from the floating charge holder is required, allowing transactions to be conducted promptly and effectively.
If more assets become subject to fixed charge security after the Bill is passed, Insolvency Practitioners may be required to communicate with a wider range of people and organisations, obtain their consent and cooperation in relation to any proposed transaction, and coordinate the execution and delivery of any required security releases.
4. Distribution of proceeds received from the realisation of assets
The more assets there are that are subject to fixed charge security, the more this will affect the flow of cash through the insolvency process. Prior to insolvency, it’s crucial to identify these assets.
Insolvency Practitioners prioritise the distribution of asset realisations from an insolvency procedure to satisfy debts and liabilities:
- Debts secured with fixed charge security that insolvency practitioners need to know about
- Costs of the insolvency process
- Preferential debt under the current insolvency law
- The specified section for unsecured creditor, which insolvency practitioners need to know about
- Debts secured with floating charge security prior to insolvency
- Unsecured Debts in personal insolvency
As debtors are able to offer fixed charge security over more of their assets, a greater share of realisations will exit the cascade at the first level. Before accepting an appointment, bankruptcy Practitioners should confirm that adequate funds are available to cover the costs of the bankruptcy procedure (including their fee).
With less money pouring down the waterfall, Insolvency Practitioners may find themselves filing more court motions to disapply the prescribed share on the grounds that the expense of distributing to unsecured creditors is disproportionate to the benefits.
5. Confirmation of ranking order and validity
The distribution of the proceeds realised from assets will obviously be subject to the Insolvency Practitioner’s satisfaction with the validity of claims and any accompanying security, as well as any applicable ranking arrangements.
The Bill specifies the conditions for (i) transferring claims, (ii) creating a pledge, and (iii) successful registration of the assignation or pledge in one of the new Registers. Where the debtor is a corporate body, an assignment in security (whether intimated or recorded in the new Register of Assignations) must be registered with Companies House in accordance with insolvency law. A pledge is not one of the sorts of charges that may be filed at Companies House (although it is common practice to register Scots law’share pledges’ that include an assignment in security of the pledgor’s rights). Insolvency Practitioners must ensure that all necessary standards are completed and that any pledge or assignation provided by the debtor is lawful under insolvency law.
A claim may only be successfully allocated to one individual at a time. Insolvency practitioners need to know this for efficient management. Although the holder may appear to give several assignations for the same claim, the claim shall be transferred to the person whose assignation is the first to be informed or recorded in conformity with the Bill. However, two promises or a pledge plus another security interest might be given over the same transportable item. In that instance, the priority of ranking is established by the time/date of formation (the earlier created has priority over the latter) or as specified in a written agreement between the applicable creditors. Insolvency Practitioners should be aware that any such arrangement is solely binding on the parties and their successors and cannot be registered in the new Register of Pledges. As a result, in the lack of registration, an Insolvency Practitioner may be unaware that such an arrangement exists, and even if they are, if the debtor is not a party to it, there appears to be no reason for the Insolvency Practitioner to consider themselves obligated by its provisions.
Before making any distribution, insolvency practitioners should get adequate legal counsel to validate the legality of the security and its rating.
