Secondary legislation enabling parties to grant a new and more convenient form of security over shares in Scottish companies has been laid before the UK Parliament. From commencement on 1 April 2025, this reform will offer significant opportunity for businesses and financial institutions operating in Scotland.
The Reform
The Moveable Transactions (Scotland) Act 2023 (the 'MTA') introduced a new form of security over moveable property in Scotland, the statutory pledge. Whereas currently Scots law requires a transfer of possession and/or other control to create security over moveables, the new type of security can be perfected by registration in a digital register.
This reform will significantly enhance the practicality of granting security over moveable property in Scotland by allowing the borrower to retain possession or control of the secured asset. With a view to avoiding overstepping the limits of devolved competence, however, the MTA did not extend this new type of security to financial instruments.
The Moveable Transactions (Scotland) Act 2023 (Financial Collateral Arrangements and Financial Instruments) (Consequential Provisions and Modifications) Order 2025 (the 'Order') removes this restriction. Made and laid before the UK Parliament under powers contained within section 104 of the Scotland Act 1998, the Order expands the type of assets which can be subject to a statutory pledge to include financial instruments, including shares in Scottish companies and interests in Scottish partnerships.
The Impact
By requiring shares to be transferred to the secured lender, current Scots law on share security has several drawbacks. The secured lender does not generally have an interest in becoming a shareholder of the company and will have to enter arrangements concerning the associated voting and dividend rights. Where the share transaction falls within the scope of the National Security and Investment Act 2021, UK Government approval may be required before the security can be granted and again before it can be released. There is also a risk that the lender will have to consolidate the shares within its own accounts, and it could even be found liable to make up any shortfall in the company's pension scheme liabilities.
Extending the new statutory pledge to cover security over shares in Scottish companies removes these risks and will make taking share security more attractive. Scottish companies will be able to grant security and access financing more readily, and those lending to Scottish companies or companies with Scottish subsidiaries will be able to secure their debt more conveniently.
Beyond security over shares, the Order includes further reforms to the grant of security over financial instruments. Generally, it will not be competent for an individual to provide a statutory pledge unless they are acting in the course of their business to grant a pledge over business assets worth over £3000. Under the Order, however, individuals will be able to provide a statutory pledge over financial instruments including shares without this restriction.
The Order also extends the MTA's provisions on assignations to security over bank accounts. This will allow for assignations of future bank accounts and identifiable classes of bank accounts, as well as allowing the assignations to be completed by streamlined electronic intimation and/or registration.
Preparing for Commencement
With the Order now laid before Parliament, parties can begin preparing to take advantage of its terms from 1 April.
If you would like to discuss anything raised in this blog in more detail, including how you can prepare for commencement, please contact a member of the Banking, Finance, and Restructuring team or your usual Brodies contact.
