Using moveable assets as collateral to raise finances

Modern day businesses can have various significant moveable assets that they would like to utilise for the purpose of raising Bank finance.

For example, many technology businesses are rich in Intellectual Property and would like to use those assets as collateral. Likewise, an engineering business may wish to raise finance by using its large scale machinery as collateral. The law in Scotland does not make this easy and it generally encourages Banks to seek security that relates to heritable property. English law is much more advanced than Scottish law in this regard. However, the aim of the Moveable Transactions (Scotland) Act 2023 (MTA) is to make lending in relation to moveable property easier via the introduction of the Statutory Pledge.

Current problem

Currently under Scots law, there is no fixed security available over moveable property and the only existing forms of security over moveables are the possessory pledge or floating charge. This contrasts the position in English law, which has the ‘chattel mortgage’ or fixed equitable charge.

The Scottish possessory pledge is seen as antiquated as it requires physical delivery by the borrower of the pledged asset. The security holder will take – and retain – control over the property for the duration of the security. This form of security is commercially impractical as it restricts a business from being able to use the pledged assets in its day-to-day business operations. Imagine physically transferring a bottling machine to a Bank and not being able to use it for the duration of the loan – this should illustrate how antiquated and cumbersome the current position is.

In addition, the transferring or granting of a Scottish possessory pledge requires giving notice to the parties (called intimation) if there are changes to the pledged assets – say if an asset is sold. If intimation had to be provided after selling or buying an item of stock, this would be incredibly labour intensive and simply not practical.

The Moveable Transactions (Scotland) Act 2023 (MTA)

The MTA is to come into force by the end of 2024 and aims to expand the abilities of Scottish companies to acquire financing from a lender by allowing companies to grant security over their moveable assets through a Statutory Pledge. It is thought that doing this will offer businesses cheaper channels for finance, as lenders are able to take a security package over moveable assets. It also will provide businesses with more options when it comes to raising finance, as they will be able to consider moveable assets in addition to heritable property.

A Statutory Pledge can be created in relation to physical property or intellectual property. Importantly, the subject of this sort of pledge will not require assets to be physically transferred to the secured party.

The MTA allows for assets to be charged by a fixed charge which would outrank a floating charge on insolvency.

The MTA also creates two new registers to be set up by the Registers of Scotland – the Register of Assignations and the Register of Statutory Pledge. The creation of these registers shall lessen the requirements of intimation, as the MTA will allow that to be done electronically.

Conclusion

Ultimately, the introduction of the MTA should dramatically bolster the abilities of businesses to raise finance with the addition of the new Statutory Pledge providing a modern and flexible security, with no requirement to physically transfer the property.

Floating charges are currently used to secure Scottish moveable assets in many situations and will remain available along with the new Statutory Pledge. However, as sole traders and partnerships cannot grant floating charges, the new systems will make secured credit more readily available to those types of smaller businesses. It will also provide all businesses with additional options.

Overall, the position will be more aligned with England which will have a particular benefit to UK wide business but will simply make financing easier in Scotland.