In Blog 2 of this series, we looked at the main types of security that a lender shall consider when lending to a business. In this Blog, will highlight the introduction of the new Statutory Pledge (SP) held within The Moveable Transactions (Scotland) Bill which was passed by MSPs on the 4th of May 2023. The Moveable Transactions legislation 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.
What is then a statutory pledge? Simply put, an SP, will be a means for a borrower to provide security for a loan without giving up physical possession of the asset. The statutory pledge is a fixed security whereby possession by the pledgee is not required, but which is created on the presentation of an executed document which identifies the property charged and the secured obligation. An SP will be required to be registered in the new Register of Statutory Pledges. SPs will be placed on a publicly accessible register meaning physical deliverance is not required.
One of the main issues with a regular pledge is that it is a possessory security – the borrower needs to give up or demonstrate possession/custody has been given to the pledgee. Commercially, businesses would typically be reluctant to give up business assets for the reason that they serve a purpose and generate revenue. The newly created statutory pledge will enable the business to keep hold of the pledged assets and still raise the finance they need.
But can’t this already be done by a floating charge? In a word, no. The floating charge is only available to companies and LLPs. A number of businesses aren’t incorporated companies or partnerships. Thus, excluding them from a type of non-possessory security which could be used to provide vital finance to help them grow. The statutory pledge trumps the floating charge when it comes to sequestration/insolvency as it is a fixed security. At present, floating charges rank behind fixed securities, preferred creditors (such as HMRC), and the prescribed part of proceeds set aside for unsecured creditors. The floating charge is not a fixed charge until it crystallises and enforcement in Scotland means it only attaches to specific assets upon the appointment of a receiver or administrator, or upon the commencement of winding up proceedings. The statutory pledge immediately attaches to specific assets making recover faster and more likely as it is ranked higher up the ladder in ranking order of debtors.
What about future assets? At present it is difficult to create an effective fixed charge over future and circulating assets, as the chargee must have both possession and control of the assets charged. As the concept of equity does not exist in Scottish law, no security interest is created unless further steps are taken to perfect the security once the relevant assets come into being. However, floating charges over future or circulating assets can be created but they still rank below fixed securities in the priority of debtors.
The new statutory pledge will allow future assets produced or acquired by the pledgor to be included in the security – the current law does not facilitate this, with further common law pledges required for future assets. (Ordinary Pledges require specificity of asset being pledged) A statutory pledge can be drafted to include identifiable future property and can be registered even though the grantor does not own the property at that point in time. The registered statutory pledge over future assets becomes effective once the pledgor owns the assets. Where assets are not included in an original statutory pledge, for example because they are not at that point identifiable, they can be added to the registered statutory pledge by amendment to the registered security. This gives flexibility and may allow for streamlining of finance products which would otherwise require separate agreements for securitisation.
Will Companies need to register SPs at Companies house?
For entities subject to the Companies Act 2006 charges regime (Companies and LLPs), a statutory pledge over assets will need to be registered at Companies House as well as in the Register of Pledges. The 21-day time limit for registration at Companies House will remain but no time limits apply to registrations in the Register of Pledges at the Registers of Scotland.
What are the benefits to lenders? Cheaper costs of financing debt as they don’t need to store pledged assets, or pay third parties to store them, or insure those in their possession.
It is fixed security not a floating one. Fixed charges rank higher on insolvency/sequestration.
One of the major benefits of the new SP regime is that lender will not have to take ownership of the asset. Typically with patents and share pledges, to be perfected they need to be transferred and registered in the name of the Pledgee, which is cumbersome for lenders. SPs allow lenders to obtain a valuable fixed security without the need to have the assets transferred to them legally. The rigmarole of Companies House red tape, and costs of patent registration in the name of the lender is thus avoided.