In the Scottish energy finance space the extension of the new statutory pledge created under the Moveable Transactions (Scotland) Bill ("the Bill") to shares in Scottish companies will benefit energy businesses and lenders to the sector alike by removing the potential risks and complications currently involved for lenders taking security over shares in Scottish companies.
In energy finance deals lenders commonly seek a security package including one or more of a bond and floating charge over the borrower's Scottish assets, security over the borrower's heritable property, security over the shares in the Scottish companies involved, and a transfer in security of rights under contracts such as power purchase agreements (a form of long term renewable energy offtake contract between an energy generator (i.e. the borrower) and a customer (i.e. an energy supplier)).
The heritable property aside, each of these assets is moveable property, and each is capable of being collateralised in order to obtain secured finance, but the constraints of the current law in Scotland make the process for taking fixed security over these moveable assets cumbersome and at times legally uncertain.
Furthermore, Scots law requirements for creating share security, requiring title to be transferred to the security holder, give rise to further potential risks for the security holder. These potential risks include exposure to pension liabilities of the borrower or members of the borrower group, becoming a person with significant control under the PSC regime and having to seek prior government approval under the National Security and Investment Act 2021 ("the NSIA") to the transfer of the shares which are the subject of the share security. Energy finance transactions are particularly exposed to the last of these risks as energy is one of the 17 named sectors under the NSIA.
As a consequence, sometimes lenders or security holders in energy finance transactions do not perfect (complete) their fixed share security and rely primarily on their bond and floating charge. But in an insolvency scenario the fixed security is king; the holder of fixed security receives a payout before the administration costs and the preferred creditors (such as HMRC), and, unlike the floating charge, is unaffected by the prescribed part. Because of this, finance where fixed security is taken can be cheaper and more readily available than lending secured only by a floating charge. So the ability to grant share security without giving rise to any of the potential risks for the security taker mentioned above makes investment in the energy sector more attractive for all parties.
However, the Bill alone will not address this practical obstacle for energy finance deals. For reasons of legislative competence, the provisions which extended the new statutory pledge (which allows security to be created by registration, with no requirement for delivery or control being passed to the security holder) were stripped from the Bill before it was introduced to the Scottish Parliament. Instead of being dealt with within the Bill, Scottish share security is to be dealt with separately by the UK Parliament, by an order under section 104 of the Scotland Act 1998.
Until this matter is specifically addressed in legislation the potential risks for lenders to the Scottish energy sector remain. In England fixed security can be taken by lenders without title to the shares having to be transferred. The new statutory pledge, once extended to cover shares in Scottish companies, will remediate that commercial imbalance.
In the interests of those active in the energy finance sector (as well as other finance sectors) it is hoped that the necessary legislation will be put in place to ensure that the gap between the passing of the Bill and the enactment of the necessary legislation to extend the new statutory pledge to shares in Scottish companies is kept to an absolute minimum and the playing field for Scottish energy companies can be levelled with that of their English counterparts.
