Scots Law has always had problems in providing creditors with fixed security (i.e. a security ranking prior to all other claims) over assets other than land. Examples include:

• Security over physical assets such as vehicles, plant machinery and stock (corporeal movables).
• Security over intangible assets such as intellectual property rights and shares (incorporeal movables).
• Security over obligations by third parties to the borrower - primarily, through trade credit (claims).

That is because:

a) Physical assets can only be secured if they are in the creditor’s possession which is impractical if the debtor requires to use them as an essential part of their business.

b) Intellectual property can only be secured through transfer and licence back which can be costly and may not even be effective.

c) Third party claims can only be secured by assigning them to the creditor, then notifying that assignation to each third party which often creates major administrative burdens, and excludes future debts causing significant problems for debt factoring/invoice discounting.

As a result, creditors have often either limited the amount / type of business they transact in Scotland and/or insist that, where possible, the contract be made subject to English law where such security is permitted.

The Moveable Transactions (Scotland) Bill seeks to correct this by the introduction of:

a) A Register of Assignations where registering assignations of trade receivables and other income streams will create an effective security for both present and future debts including lease rentals, royalties and both present and future invoices.

b) A Register of Statutory Pledges where registration of plant and machinery, vehicles, stock IP rights etc, to the extent they can be specifically identified will again create effective security.

At present, security over shares is excluded from the Bill due to concerns over devolved competence but it is proposed that this is to be resolved through an Order by UK Government under Section 104 of the Scotland Act.

Stage 1 of the Bill contained a provision for individuals to grant fixed security over personal assets subject to certain protections. Due to concerns raised primarily by consumer groups, amendments were introduced in Stage 2 limiting this to:

a) Assets used mainly for the purpose of an individual’s business.

b) Assets belong to charities or other unincorporated associations granted by the individual in their capacity as trustee member.

Subject to a minimum threshold (currently £3,000 index linked). This may require to be further amended following the extension of security over share capital where ultimate owners tend to be individuals.

One matter that may give rise to issues, is that third parties acting in good faith are generally not expected to check the Register before either paying invoices or acquiring moveable property, so creditors will often still wish to publicise the existence of their security but will have greater flexibility in doing so.

Stage 3 of the Bill was passed unanimously on 4th May and when it comes into force, it should provide a welcome and long overdue improvement in the ability of Scottish businesses to raise capital.