Getting it right over reform of moveables

The Moveable Transactions (Scotland) Bill was introduced to the Scottish Parliament on 25 May. The Scottish Government has thereby taken forward the recommendations made by the Scottish Law Commission in its three-volume Report on Moveable Transactions (Scot Law Com no 249, 2017). On that report see “Asset Finance: Time for Reform”, Journal, January 2018, 22.

As the name suggests, the legislation deals with transactions involving moveable property. The bill is arguably the most significant reform to Scottish law here since the Sale of Goods Act 1893 – the successor Sale of Goods Act 1979 falls outwith scope because of its UK-wide application.

The ability of businesses to use assets to raise finance is hugely important in practice. Secured loans will generally offer cheaper interest rates than unsecured loans because of the reduced risk to the lender. Historically, finance was often raised against land. Nowadays, many businesses do not own premises over which they can grant a standard security. 

For startup small and medium size enterprises in the technology sector their intellectual property rights may be their principal assets. In other types of business, ownership may be held of vehicles and equipment. Whisky stored by a distiller in its own warehouses will typically be of huge value. In addition to secured loans, a business may wish to sell its invoices and raise immediate cash that way. The current law in this area, frustratingly, impedes such transactions. Internationally, not least compared with English law, we have fallen away behind. The Scottish Parliament, having passed much important legislation in relation to land, is now rightly turning to overdue reform of the law of moveable property.

Three major inadequacies

There are three headline issues which the bill will address. First, an assignation of a claim (a right to demand the performance of an obligation, typically to pay money) by the creditor to an assignee requires intimation to the debtor. This area is partly governed by the Transmission of Moveable Property (Scotland) Act 1862, which unsurprisingly does not meet modern needs. The rest of assignation law has little changed since the time of Stair. The requirement to intimate is cumbersome and expensive, particularly where a single assignation deals with multiple claims. Moreover, where an intimation is made by post under the 1862 Act there is a requirement to send a copy of the assignation to the debtor. 

These rules create a barrier to invoice discounting transactions whereby businesses sell their invoices to a financial institution. The requirement of intimation also prevents the assignation of future claims, for example invoices yet to be issued, because the customer identity is not yet known. Complicated workarounds such as trusts and contracting under English law have to be used.

Secondly, the only universally available security over corporeal moveable property (such as equipment, livestock, vehicles and whisky) is pledge. It requires delivery to the creditor. According to Hamilton v Western Bank (1856) 19 D 152 such delivery must be actual, and constructive delivery (such as by intimation to a third party warehouse holding the property) is impermissible. A business can hardly operate if its bank has its vehicles. Moreover, banks do not want to store such assets. 

Floating charges are available to companies and certain other corporations, but not to sole traders and partnerships. But in any event, floating charges have a lower ranking than other security rights such as pledges, or standard securities over land, which in terms of corporate insolvency law are fixed securities. Moreover, they rank below certain tax claims, following the reintroduction in 2020 of the statutory preference for these.

Thirdly, the floating charge aside, security over incorporeal property requires transfer into the name of the creditor. Rather like delivery in pledge, this gives the creditor too much. With intellectual property, license-back arrangements are needed. For shares in a company, contractual arrangements are required in respect of dividends and voting rights. The fact that the shares are in the creditor’s name causes awkward issues in relation to the Persons with Significant Control legislation (Companies Act 2006, Part 21A and Sched 1A) and the National Security and Investment Act 2021. These problems do not arise under English law where an equitable fixed charge can be used instead.

What will the bill do?

The inadequacies in the current law are addressed by the setting up of two new registers to be run by the Keeper of the Registers of Scotland. First, there is to be a Register of Assignations. Registration there will be an alternative to intimation to the debtor in order to effect the transfer of a claim. For these purposes a claim will include rental payments under a lease even although these relate to land. Businesses will have a choice as to how to proceed. 

The 1862 Act will be replaced with modern rules on intimation. In particular, electronic intimation will be facilitated. Where intimation is made there will be no requirement to send a copy of the assignation but the debtor will have certain rights to information. The Register of Assignations itself will operate electronically. A debtor who does not know, as will often be the case, that an assignation has been granted and registered will be protected under good faith provisions which will discharge the debtor if payment is made to the assignor.

Secondly, there is to be a Register of Statutory Pledges. Here a brand new type of security over moveable property will be registered. The statutory pledge will be able to be granted by any person, not just by companies, although there will be specific consumer protection provisions. 

In property law terms, the statutory pledge will be a subordinate real right. The debtor will retain ownership of the asset. In corporate insolvency law terms, the statutory pledge will be a fixed security. It will be available generally over corporeal moveable assets, apart from aircraft and ships where there are existing specialist regimes. A simple electronic registration in the Register of Statutory Pledges will replace the need to deliver the asset. For incorporeal moveable property, the position will be more limited, as discussed further below, but the fundamental reform will be that using a statutory pledge will remove the need to transfer the asset into the creditor’s name. 

Good faith acquirers of assets encumbered by a statutory pledge will be protected in some circumstances. The enforcement rules for possessory pledge (except for pawn, where the Consumer Credit Act 1974 regulates the matter) and statutory pledge will be broadly the same, with sale being the usual remedy.

Has the bill changed?

Four and a half years have passed since the Scottish Law Commission published its report together with a draft Moveable Transactions (Scotland) Bill. But for the pandemic, implementation would have been quicker. The Commission’s draft bill ran to 124 sections. The bill which has been introduced is 118 sections. With one exception, the changes are generally cosmetic. The draft bill was produced in-house by parliamentary counsel based at the Commission. It has now been refined by the Parliamentary Counsel Office to meet up-to-date drafting practice.

The exception, which is the main substantive change, is the deletion of the provisions on financial collateral and on statutory pledges over financial instruments. The Commission had recommended that the statutory pledge initially should be limited in respect of incorporeal property to (a) financial instruments such as shares in a company, and (b) intellectual property. This was partly because these are the assets as regards which there is most demand for reform, and partly for technical reasons. The draft bill also had provisions to ensure it complied with the complex Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226), which implement an EU directive. 

The Scottish Government, in contrast to the Commission, has concluded that both the financial instrument and financial collateral provisions deal with issues reserved to the UK Parliament. Nevertheless, it accepts the importance of reform and intends to seek an order by the UK Government under s 104 of the Scotland Act 1998 to take reform forward.

Timetable

In accordance with the usual Scottish Parliament procedures, the bill has been allocated to a lead committee, in this case the Delegated Powers & Law Reform Committee. It will call for written evidence on the bill’s contents. Members of the profession are strongly encouraged to contribute. The committee will subsequently take oral evidence before issuing its stage 1 report. It may be expected that this will happen in the autumn. The documents submitted by the Scottish Government to the Scottish Parliament indicate that the bill is expected to complete the subsequent stages of its consideration in early 2023. 

Assuming that the bill is passed, the plan is for the new registers to be commenced by summer 2024. As well as the necessary IT work by Registers of Scotland, there will require to be a number of statutory instruments issued, including register rules, as for the Land Register. This timetable is quite ambitious, although the registers are not technically complex when compared with the Land Register and its mapping aspect. As with other registers, the expectation is that the running and maintenance costs will be funded by registration and search fees. These too will be fixed by statutory instrument. On the new registers becoming operational, Scotland will finally join the modern era in terms of its moveable transactions law.