- The Moveable Transactions (Scotland) Bill (“the Bill”) was introduced to the Scottish Parliament in May. The title of the Bill may not make it immediately obvious what the Bill is actually about. The term “moveable property” at least suggests that the Bill concerns property you can physically move e.g. a table, machinery or whisky barrels. And that is so. But it is only half the story. “Moveable property” also includes stuff you cannot physically move from A to B. For example, “moveable property” also includes things like claims to a sum of money, copyrights and other intellectual property which is “incorporeal” and cannot be physically manhandled.
- The Bill concerns both types i.e. “corporeal” moveable property such as a vehicle and “incorporeal” moveable property such as the right to payment of a debt.
The main impetus for introducing the Bill
- The main impetus for the Bill is to make it easier for people – in particular for businesses – to use their moveable property to raise finance.
Some problems with the existing law
“Corporeal” moveable property
- Generally, the only way an unincorporated business might use its corporeal moveable assets to raise finance is by “pledging” them which, in a consumer context, is known as “pawn”.
- A “pledge” is a type of security (usually for a loan) which is taken over moveable property. This works in a similar way to a mortgage on a house. In that case someone grants a loan but the lender has a security over the house in case the loan is not repaid. With a pledge, someone grants a loan and the lender has a security over a piece of moveable property in case the loan is not repaid.
- But this requires delivery of the property that has been pledged to the person granting the loan. This is hardly commercially practical because, of course, businesses generally require possession of their assets to trade.
“Incorporeal” moveable property
- If a business wishes to transfer (“assign”) its unpaid invoices to e.g. a bank in order to raise finance, there has to be written notification (“intimation”) of the transfer to every invoiced customer. This is cumbersome, expensive and often impractical. In particular it cannot be done in respect of future claims, such as invoices due by future customers, where the debtor cannot yet be identified.
- And, in general, the only way to use “incorporeal” moveable property as security for a loan to help finance the business is to transfer the property into the name of the lender. For example, intellectual property must be transferred to the lender and complicated licence-back arrangements put in place so the business can continue to use the property.
- Similarly, shares in a company have to be transferred to the lender and the lender registered as shareholder. Again, contractual arrangements have to be used to deal with the consequences of transfer, such as entitlement to dividends and voting rights.
Some solutions contained in the Bill
The Bill aims to deal with the problems indicated above regarding:
(1) the transfer (assignation) of claims – most commonly the right to payment of a debt; and
(2) the law of pledges.
It does so primarily by the introduction of two new public Registers:
(1) the Register of Assignations which will be able to be used to grant assignations of claims as an alternative to having to intimate the assignation to the debtor liable to pay the claim; and
(2) The Register of Statutory Pledges so that it will be possible to grant a pledge without delivering or transferring the pledged property to the lender.
Some examples of how this may help
(1) Assignations
- Suppose a business does a lot of work in May that clients will pay for in June but the business needs money in May to pay its expenses. The changes introduced in the Bill would allow the business to get money in May by assigning its claim for the money its customers owe in June, for example, to a bank.
- If the business needs £1,000 to pay its expenses in May, a bank could lend the business that money in May. In return, the business would give the bank its right to be paid by its customers (who owe £1,000) in June. In June, the customers pay the bank instead of the business.
- This should help businesses with cash-flow problems in that they can get money when they need it on the strength of money owed to them.
(2) Pledges
- Suppose a business needs to borrow money and wants to grant a pledge over its machinery to secure that loan.
- Under the previous law, this could only be done by delivering that machinery to the person granting the loan. That does not work for many businesses who require the use of that machinery to keep operating.
- The Bill allows the pledge to be granted without delivering the machinery. Instead the pledge is recorded in the new Register of Statutory Pledges. This means the business could keep operating the machinery as it needs to, but the person granting the loan still has a security over the machinery in case the business does not repay the loan.
- The Register may also be used so as to create a security not only over physical/”corporeal” moveable property but also over certain types of “incorporeal” property.
Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Ross Leatham: email Ross@mitchells-roberton.co.uk