Moveable Transactions: Five things Insolvency Practitioners need to know about the Moveable Transactions (Scotland) Bill

The Moveable Transactions (Scotland) Bill introduces a raft of fundamental changes designed to modernise and improve the law of Scotland in relation to transactions concerning moveable property. The changes will make it easier for businesses and, subject to certain protections, individuals to exploit their assets to raise finance by reforming both the law relating to assignation of claims (including assignations in security) and the law relating to granting fixed charge security over corporeal moveable property and intellectual property (the only kind of incorporeal moveable property to which the Bill currently extends).

In previous blogs, we have highlighted five things you need to know about the new rules on assignations and the new statutory pledge.

Whilst it is anticipated that the reforms will improve cash flow and access to finance, as well as reducing borrowing costs, they will not prevent business failure and insolvencies. In this blog we highlight five things Insolvency Practitioners will need to know when dealing with insolvencies after the Bill becomes law.

1. Creditor landscape

The enactment of the Bill will inevitably lead to a change in the creditor landscape, namely, the number and identity of those providing finance to businesses and individuals in Scotland, the number of creditors holding security and the type of security held.

Amongst other things, the changes being brought in by the Bill will allow claims, including future claims, to be assigned without the need to give written intimation to every debtor (by providing for registration in a new Register of Assignations as an alternative) and enable fixed charge security to be granted over moveable assets without the need to transfer ownership or possession (by creating the new statutory pledge which will require to be registered in the new Register of Statutory Pledges). All of this will make lending in Scotland more appealing and open up the market to finance providers with lending models which Scots law, as it currently stands, cannot readily accommodate without complicated and/or expensive workarounds.

As a result, Insolvency Practitioners are likely to be dealing with more, and a wider range of, finance creditors and more creditors holding fixed charge security.

2. The debtor's assets

Following their appointment an Insolvency Practitioner will take steps to confirm the extent of, ingather and safeguard the debtor's assets.

In addition to speaking with the debtor or its officers and employees and reviewing the debtor's own records, Insolvency Practitioners will check public records to identify assets owned by the debtor. The new Register of Assignations and Register of Statutory Pledges will become additional sources of information for Insolvency Practitioners.

However, the Bill augments, rather than replaces, the existing law. It will still be possible to assign claims, either outright or in security, by intimation and to grant a traditional possessory pledge, neither of which will require registration in the new Registers. The new Registers will therefore not necessarily provide a complete record of transactions concerning moveable property for any particular debtor.

As the Bill provides for the assignation of future claims and for the granting of statutory pledges over property to be acquired by the grantor, questions may arise as to whether claims arising and/or property acquired after the commencement of an insolvency process form(s) part of, or an unencumbered part of, the debtor's estate.

In the case of statutory pledges the Bill is quite clear – the statutory pledge is not created over any property which is acquired by the grantor after becoming insolvent, notwithstanding the fact that such property is identified in the pledge document as property to be encumbered.

The Bill contains a similar statement in relation to claims of which the assignor becomes the holder after becoming insolvent – the assignation is ineffective in relation to any such claim. However, the Bill provides an exception to that rule in relation to a claim in respect of income from property in so far as that claim (1) is not attributable to anything agreed to by, or done by, the assignor after the assignor became insolvent, and (2) relates to the use of property in existence at the time the assignor became insolvent. Whilst it is clear from the explanatory notes to the Bill that an assignation of royalties and an assignation of rents remain effective on the insolvency of the grantor, the interpretation of "income from property" will be key in determining the effectiveness of assignations of other types of claims (for example, loan repayments under loans assigned pre-insolvency) on the insolvency of the grantor and the extent to which those claims form part of the debtor's estate in the event of their insolvency.

3. Realisation of assets

Currently, secured creditors in a typical Scottish insolvency consist of standard security holders (where the debtor has heritable property and/or a registered lease) and, where the debtor is a corporate entity, floating charge holders (whose security will typically extend to all assets of the debtor).

Whilst an Insolvency Practitioner will usually seek the consent of all secured creditors to any proposed sale, and the discharge of any standard security over heritable or leasehold property forming part of the sale will always be required, in administration an administrator has the ability to dispose of property which is subject to a floating charge as if it were not subject to the charge. It is therefore not necessary to obtain or exhibit any form of consent from, or release by, the floating charge holder when selling floating charge assets in the course of an administration, allowing sales of assets to be completed quickly and efficiently.

In the event of more assets being subject to fixed charge security post enactment of the Bill, Insolvency Practitioners may have to liaise with a larger number of individuals and organisations, obtain their consent and co-operation in relation to any proposed transaction and co-ordinate the execution and delivery of any required security releases.

4. Distribution of realisations

More assets being subject to fixed charge security will also impact the flow of funds down the insolvency waterfall.

Insolvency Practitioners distribute asset realisations from an insolvency process in satisfaction of debts and liabilities in the following order of priority:

i. Debts secured by fixed charge security

ii. Expenses of the insolvency process

iii. Preferential debts

iv. The prescribed part for unsecured creditors

v. Debts secured by floating charge security

vi. Unsecured debts

As debtors will be able to grant fixed charge security over more of their assets, a larger proportion of realisations will flow out of the waterfall at the first level. Before accepting an appointment, Insolvency Practitioners will want to ensure that sufficient funds will be available to meet the expenses of the insolvency process (including their remuneration).

With less money flowing down the waterfall, Insolvency Practitioners may also find themselves making more applications to court to disapply the prescribed part on the ground that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits.

5. Confirmation of validity and ranking

The distribution of realisations will, of course, remain subject to the Insolvency Practitioner being satisfied with the validity of claims and any related security, and any relevant ranking arrangements in place.

The Bill sets out requirements for (i) the transfer of claims; (ii) the creation of a pledge; and, where the assignation or pledge is being registered in one of the new Registers, (iii) effective registration. Where the debtor is a corporate entity, an assignation in security (whether intimated or registered in the new Register of Assignations) will require to be registered at Companies House. A pledge is not included in the types of charges which can be registered at Companies House (although practice is to register Scots law 'share pledges' which contain an assignation in security of the rights of the pledgor). Insolvency Practitioners will need to satisfy themselves that all relevant requirements have been met and any pledge or assignation granted by the debtor is valid.

A claim can only effectively be assigned to one person at a time. Although the holder may purport to grant more than one assignation in respect of the same claim, the claim will transfer to the person whose assignation is first to be intimated or registered in accordance with the Bill. However, it is possible for two pledges or a pledge and another security right to be granted over the same moveable property. In that case, priority of ranking is determined according to the time/date of creation (the earlier created having priority over the later) or as set out in a written agreement between the relevant creditors. Insolvency Practitioners should note that any such agreement has effect only as between the parties to it and their successors and is not registerable in the new Register of Pledges. Consequently, in the absence of registration, an Insolvency Practitioner may not be aware that any such agreement exists and, even if they are, if the debtor is not a party to it, there would appear to be no basis for the Insolvency Practitioner to regard themselves as bound by its terms.

Insolvency Practitioners should take appropriate legal advice in order to confirm the validity of security and the ranking thereof prior to making any distribution.

Whilst the Bill remains subject to amendment as it makes its way through the legislative process, Insolvency Practitioners should be aware of the proposed changes and consider the extent to which they may require to adjust their practices when the Bill comes into force.