New ways to take security in Scottish fund finance transactions

When the new Moveable Transactions (Scotland) Act 2023 (MTA) comes into force – expected in the second half of next year – the way in which lenders can take security over Scottish limited partnership (SLP) rights will be simplified. The reforms will modernise and streamline fund finance transactions where tax transparent SLPs with separate legal personality feature in the fund structure, as they commonly do. SLPs can feature either as a primary fund vehicle or as a carried interest or feeder fund, or as general or limited partner in other limited partnerships within the fund structure.

When facilities are advanced to a fund (in subscription line and net asset value financings) or to a general partner/co-investment vehicle (in co-invest facilities) lenders take security over various SLP rights (as those are set out in the SLP agreement).

Generally, security takes the form of an assignation (assignment) in security granted over:

• the uncalled capital commitments of the limited partners, by the general partner (or manager) of the SLP assigning their rights to issue drawdown notices and make capital calls.
• the partners' rights to distributions from the SLP, by the partners assigning their interests to these receivables.
• the general and/or limited partners' partnership interests in the SLP.
• (where the general partner is a Scottish LLP) the LLP's members' partnership interests under the LLP agreement in respect of the general partner.

Modernisation of assignations in security

The MTA will remove current challenges around taking security over commitment rights, distributions rights and other related SLP rights. The MTA modernises the way in which lenders can take an assignation of these rights in three significant aspects:

• Online registration of assignations (dispensing with the requirement to give notice): lenders can reduce the administrative burden of complying with current legal requirements for notice ('intimation') to be given to relevant counterparties by, instead, registering the assignation document online in the new Register of Assignations operated by the Registers of Scotland. Intimation will remain a competent method of effecting an assignation in security.
• Assignations of future rights: lenders can avoid the need for supplemental assignations to cover increases or changes in commitments from existing limited partners and new commitments from incoming limited partners, as the MTA specifically permits the assignations of rights not in existence at the time of assignation. The assignation document will need to be appropriately drafted to cover such future rights as they come into existence.
• Modernised notice mechanisms: where a lender opts to intimate the assignation, for example to give payment instructions to the relevant counterparties, this can be done electronically, removing the administrative burden of giving postal notice, which is common current practice.

A new security mechanism: the statutory pledge

The MTA provides for a new statutory pledge which is created by registration (without the need for delivery) in the new Register of Pledges, also maintained by the Registers of Scotland. Currently the only incorporeal (intangible) property over which a statutory pledge can be created is intellectual property, but the regime is expected to be extended to shares in companies and other financial instruments.

To the extent that interests in Scottish limited partnerships are 'equivalent to shares in companies' (and therefore fall within the definition of financial instrument under the Financial Collateral Arrangements (No. 2) Regulations 2003) they may be brought within the remit of the new statutory pledge when the regime is extended.

Currently lenders generally only take an assignation in security of receivables due to the general partner or limited partner (or members of the LLP, where the general partner is an LLP) to avoid the risk of the lender taking on the role of general partner or limited partner, and thereby assuming substantial additional liabilities. An extension of the statutory pledge regime to cover financial instruments could allow fuller partnership interests to be secured by fixed security.

Comment

We have a strong track record of advising in fund finance deals with a Scottish dimension. The modernising changes being brought in by the MTA are strongly welcomed in the fund finance space. Once the MTA is in force fund finance transactions will become more straight forward and lenders will have greater certainty around their security package. A statutory pledge regime extended to cover partnership interests will also remove some of the current restrictions and risks relating to security over those interests.