Smoothing cross-UK border deals: the Moveable Transactions Act advantage

The English law of Equity is in many ways a wonderful thing. It has given us the floating charge, trusts and equitable charges over various asset classes, as well as joint tenancies and tenancies in common as regards legal and beneficial ownership interests in real estate. However, I’m afraid to say that “Equity” is viewed with suspicion and, indeed, sometimes outright hostility north of Hadrian’s Wall.

That’s not to say that we don’t understand, and will have no truck with, the concept of “equity” in the Oxford English Dictionary sense of the word, or in the sense that the law should give rise to equitable outcomes. However, it is to say that a Scots lawyer would be entirely unfamiliar with the content of Snell’s Equity, or put another way, we would simply not recognise any general principle of law or equity that will presume that what ought to have been done in law has been done, if the intention of the parties to any transaction dictates that such a presumption should be made.

We have the “publicity principle” in Scotland, which is to say that we are intensely uncomfortable with the idea that there may be, as it were, silent interests in property. Thus, for heritable property, an interest must be registered in the Land Register of Scotland and, until registration, there is no real right in land at all whether legal or beneficial. This isn’t problematic from a comparative law perspective since most developed countries have land registration in their legal systems and so we are not too out of kilter with our brethren in other jurisdictions, namely England and Wales.

However, it does give rise to fundamental problems when it comes to moveable property in Scotland. And particularly when it comes to the creation of security over such moveable property.

Thus, for corporeal moveable property, the only form of fixed security currently available is the ancient common law pledge, which must be created through ‘delivery’ of the pledged asset by the pledgor to the pledgee. So, if a vehicle is subject to a fixed charge under English law, and that vehicle crosses the border into Scotland, then the fixed charge ‘flies off’ and is not enforceable as such in Scots law at all (i.e. because the vehicle has not been delivered to the chargee such that the chargee has actual or constructive possession).

As regards incorporeal movable property(which is to say, rights, claims or choses in action governed by Scots law), then the law for creation of fixed security differs depending on the asset class. For example (but without limitation):

• Contractual rights or book debts / receivables – there must be an assignation in security and formal intimation (which is to say, notice) to the underlying debtor. If no intimation is given then no right in security is created.

• Intellectual property – the IP must be transferred by assignation in security to the secured creditor, and then licensed back to the assignor so that it may continue to use the IP in the pursuit of its business.

• Shares – we have to create the equivalent of a legal mortgage over the shares and so the shares must be transferred into the name of the secured creditor or its nominee (which gives rise to various problems under the Companies Act 2006 (in respect of the “people with significant control” regime) and the National Security & Investment Act 2021 if the transaction is in an applicable sector).

• Bank accounts – there has to be an assignation in security with intimation to the account bank. And “charge-backs” remain subject to the Scottish equivalent of the “doctrine of conceptual impossibility” per Millet J in In re Charge Card Services Ltd. [1987] Ch. 150 as if BCCI No.8 [1997] 4 All ER 568 had never happened!

None of this is in the slightest bit helpful, which is something that Scots lawyers are only too acutely aware of. One might ask, well why not then simply adopt Snell’s Equity into Scots law and have done with it! Heaven forfend amidst much pearl clutching and inhalation of smelling salts, for that would be far too Anglocentric a solution for Scottish sensibilities. One only has to look towards the vexed case law in Scotland as regards the floating charge and what was to be done with a creditor seeking to enforce such a security over Scottish assets to get a flavour of this.

As Lord President Cooper said, in the case of in Carse v Coppen (1951) SC 233: “….. it is clear in principle and amply supported by authority that a floating charge is utterly repugnant to the principles of Scots law and is not recognised by us as creating a security at all. In Scotland, the term “equitable security” is meaningless.”

In the case of the floating charge, our revulsion at the very notion of “equitable security” was shoved back down our throats by Westminster when it forced the floating charge into our law through its enactment of the Companies (Floating Charges) (Scotland) Act 1961 and, thereafter, in the early 1970s, the Companies (Floating Charges and Receivers) (Scotland) Act 1972.

And so a Westminster solution was imposed upon a Scottish problem, and I suspect, dear reader, it won’t take too much of a mental leap to imagine the apoplexy induced in many a Scottish jurist at that!

After all, as P.G. Wodehouse rather drolly reminded us, “[i]t is never difficult to distinguish between a Scotsman with a grievance and a ray of sunshine”!

All change: the new Act

And it is at this point in proceedings that we turn to consider the Moveable Transactions (Scotland) Act 2023 (the “2023 Act”), an enactment which received Royal Assent on 13 June 2023 and is expected to come into force in the second half of 2024.It is by no means hyperbolic to say that its effect will be transformative as regards the law of moveable property in Scotland. At a stroke, we will move from having perhaps the most rigid and least user-friendly law of personal property in the world to having a system which will lay claim to being “best in class”.

The 2023 Act follows almost two decades of work by the Scottish Law Commission, which undertook an enormous review of the existing Scots law in this area and a comparative analysis of personal property regimes in several international jurisdictions, including the law of personal property in England and Wales, the Uniform Commercial Code in the United States and the Personal Property Security Act legislation in Canada, Australia and New Zealand. The result is a comprehensive and codified legal framework which provides clarity and ease of use to this area of the law in Scotland.

The key changes implemented by the 2023 Act will be as follows:

1. The law as it pertains to “assignations” (which is to say, the Scottish equivalent of assignments) is codified, clarified and simplified. Henceforth, an assignation in Scotland will be known as an “assignation of claim”.

2. An entirely new form of non-possessory fixed security interest in respect of moveable property is introduced – the “statutory pledge”.

3. Two new registers are brought into existence through which we will be able to create real rights in moveable transaction through registration therein:

a. the Register of Assignations; and

b. the Register of Statutory Pledges.

The Assignation of Claims

For assignations, intimation is now optional since registration of the assignation document in the Register of Assignations will transfer the assigned claim or right to the assignee. Assignations in Scots law can be outright by way of transfer or by way of security under which the assignor retains the Scottish equivalent of the “equity of redemption” in the assigned rights (through a right of re-assignation on redemption of the secured obligation). If by way of security then the assignation takes effect as a fixed security.

There are reasons why an assignee may wish to intimate in addition to registration in any event, one of which is the fact that a good faith debtor who pays the assignor without knowledge of the assignation is discharged and has a good defence.

Crucially, registration of the assignation in the Register of Assignations will not fix the debtor with constructive knowledge and so there is no requirement to search the Register of Assignations before making payment. However, if intimation is served on the debtor then the debtor cannot claim to be in good faith if it pays to the assignor (since it has knowledge of the assignation) and so it will not be discharged.

In this sense, a registered assignation which is not intimated can be regarded as broadly equivalent to an English equitable assignment. And upon intimation, the assignation will become the equivalent of an English legal assignment.

The Statutory Pledge

This new form of non-possessory fixed security will be constituted as a real right by registration of the pledge document in the Register of Statutory Pledges. The following categories of moveable property either are currently under the terms of the 2023 Act, or will be through implementing statutory instruments, capable of being subjected to a statutory pledge:

What does this mean in practice?

The main practical effect of this legislation and long needed reform will be that it will be far easier than it ever has been in Scotland to take fixed security over moveable property. Whereas to date we typically advise clients that a fixed security package in Scotland would comprise in the main heritable property (real estate) with most other assets being subject to a floating charge only (due to the impracticability involved in taking fixed security), we will now be able to assist our clients in taking fixed security over a far broader range of assets.

In this sense, the legal system in Scotland will be brought into broad alignment with the legal system in England & Wales through which secured creditors can take fixed security over a far broader range of assets than is possible (from a practicable perspective) in Scotland through the availability of equitable security rights in England & Wales.

Of course, this will come into sharp focus in the context of insolvencies where the distinction between fixed and floating security becomes acutely important. Going forward from the 2023 Act coming into force, the pool of fixed charge assets in a Scottish insolvency will be far greater than it has been in the past.

While this will maximise recoveries for secured creditors, it will mean smaller insolvency dividends for unsecured creditors. Insolvency practitioners will also have to do greater diligence into the likely pool of floating charge assets before taking an appointment in order to be satisfied that the expenses of the administration or the liquidation can be paid.

Ross Caldwell is a partner at Morton Fraser MacRoberts.

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