The Stage 1 Report of the Delegated Powers and Law Reform Committee (Report), the lead committee tasked with examining the Moveable Transactions (Scotland) Bill, records the almost universal stakeholder support for the reforms in the Bill for business borrowers in all sectors and confirms that these are likely to have a beneficial impact on access to credit and finance for Scottish businesses.
Concerns raised in relation to consumers have been taken on board in the Report's recommendations, which task the Scottish Government with further consideration of some of the reforms insofar as they affect individuals acting outside the business context.
Five key issues for further consideration highlighted in the Report are:
1. Financial instruments (including shares in companies) and financial collateral: as we discussed here a major change from the Scottish Law Commission's draft Bill was that the Bill as introduced to Parliament did not allow:
(i) a statutory pledge to be created over shares in a Scottish company (or over any other form of financial instrument under the Financial Collateral Arrangements (No.2) Regulations (FCARs)); or
(ii) the assignation (transfer) of claims which are financial collateral arrangements under the FCARs.
The Scottish Law Commission (SLC) had taken the view that neither the law of assignation nor the law of rights in security is reserved to the UK Parliament as they are both part of the law of property, part of Scottish private law and within the competence of the Scottish Parliament.
The Scottish Government took the view that it does not have the legislative competence to legislate on the issue and has asked the UK Government to grant an order under the Scotland Act 1998.
The Report urges resolution of this matter as a priority and requests that the Scottish Government set out in further detail in its response to the Report why it has concluded that provisions about assignations of claims which are financial collateral arrangements are, and the making provision for financial instruments would be, outwith the competence of the Scottish Parliament.
2. The new registers: where the borrower is a corporate subject to the charges regime in the Companies Act 2006 statutory pledges and assignations in security will require to be registered both in the appropriate new register and also at Companies House. In order to streamline this process and avoid unnecessary duplication the Report tasks the Scottish Government with addressing the alignment of the new registers with information held at Companies House as a priority.
Consideration of concerns around register access, privacy protections and accuracy of the data base in the long term will be assessed once the draft regulations about the operation of the new registers are available.
3. Time limit for registration of statutory pledges: as we noted here the Bill contains no time limits for registration of a statutory pledge (although the 21 day limit for registration at Companies House will apply). The Report recommends further consideration be given to setting a time limit for registration.
4. Changes to registered statutory pledges: as the Bill places no obligation on secured creditors to update the Register of Pledges when changes are made to a statutory pledge, or when a statutory pledge is assigned (transferred), restricted or discharged, the Committee has recommended that the Bill is amended to require such changes.
5. Individuals: the Report contains a number of recommendations in relation to individuals, including:
(i) assignation of debts owed by consumers: further consideration of the removal of the need to intimate assignations on debtors who are individuals and further consultation on the likely use of the Register of Assignations for the assignation of consumer credit debts and its impact on consumers; and
(ii) statutory pledge: the exclusion of individuals not acting in a business context from the Bill's provisions on statutory pledges, failing which that additional protections are put in place – for example that the minimum value of an asset that can be the subject of a statutory pledge be increased to no less than £3,000 (from £1,000 currently in the Bill) and the exclusion of essential household goods from the assets which can be secured in this way. Protections for sole traders are also recommended.
Next steps
The matters identified above and other issues raised in the Report are to be considered before the Bill progresses to Stage 2 (when amendments are made to the Bill).
The SLC's proposals for the statutory pledge of financial instruments and assignation of financial collateral arrangements are a missing key piece in the Bill's reform package.
From a business perspective the ability to take a statutory pledge over shares in a Scottish company without having to register the fixed security taker in the company's register of members as is currently required under Scots law, will be hugely beneficial in widening access to secured credit for Scottish companies. It will remove current implications and risks for the security taker under the PSC and National Security and Investments Act 2021 regimes and around pension scheme liabilities.
It is hoped that the legislative competence issues around share security can be resolved as a priority so that the reforms can be introduced when the Bill becomes law.
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