The securitisation market in the UK is arguably the most active in Europe. AFME reports that of the 269.4bn of issuances across Europe in 2018, 58.7bn was issued in relation to UK originated collateral. A significant proportion of that collateral has its origins in Scotland. During 2018, UK based securitisations of all classes of collateral, but in particular RMBS and ABS, incorporating Scottish loans (or other contractual obligations) continued to be attractive to originators, issuers, arrangers and funders due, in part, to a large degree of regulatory and legal alignment between England & Wales and Scotland. However, there are a number of distinctive elements of Scots law that can unseat those who have not fully adapted transaction documentation purporting to securitise Scottish receivables to take account of those differences. The right kind of commercially focussed and specialist expertise can make all the difference. Our banking and finance practice, incorporating our dedicated securitisation team, is recognised as being first in class by the independent legal directories Chambers & Partners and the Legal 500. This is your brief reference guide to securitisation from a Scottish perspective. It will be particularly relevant to the key securitisation parties (including originators, sponsors, arrangers and funders) as well as legal advisers requiring specialist Scots law advice.
To keep this guide as reader friendly as possible, where we refer to the 'SPV', we are also referring to the purchaser or issuer, and where we refer to the 'originator' we are also referring to the seller, in each case as the context requires. Also, while we refer solely to securitisation, it is useful to know that the concepts contained in this guide will also apply equally to warehouse financing transactions.
Chambers UK Banking & Finance (Scotland)
Dickson Minto WS
Shepherd & Wedderburn
Addleshaw Goddard LLP
Dentons Harper MacLeod LLP
What law should govern the transaction documents?
It is customary for the sale agreement on a securitisation transaction involving the sale of both Scots law and English law governed receivables to be governed by English law. Subject to the usual list of restricted exceptions (such as public policy considerations and other limited exceptions contained in the Rome I Regulation on the law applicable to contractual obligations), the Scottish courts will recognise and give effect to the choice of English law as the governing law of the sale contract.
Where the transaction relates to the sale of receivables and collateral relating to real estate assets located in Scotland, we would recommend that certain of the transaction documents, although expressed to be governed by English law, are signed in accordance with Scots law.
There are a number of important elements to get right when documents are signed in accordance with Scots law and we can provide relevant transactional guidance on this point where required.
Any operational documents that give effect to the creation of a trust interest over Scottish receivables, the transfer of Scottish receivables or the creation of a fixed security interest over Scottish assets, should also be governed by Scots law and comply with Scots law signing formalities. The introduction of counterpart execution in Scotland in 2015 was a welcome reform to the law of execution in Scotland.
It has thankfully simplified the process of arranging for the execution of Scots law governed documents where there are multiple counterparties. However, there are distinct differences between the laws of counterpart execution in Scotland and counterpart execution in England, particularly around the methods of delivery of the counterparts. Scots law advice should be obtained to ensure that the Scots law counterpart legislation is complied with.
How is the transfer of receivables effected?
The transfer of receivables from the originator to the SPV under English law is, in our experience, most often set up as an equitable assignment. An important, if not the most important, distinction between English and Scots law in this context is that it is not possible to transfer receivables that are subject to Scots law under an equitable assignment.
To adapt the transaction to include Scottish receivables, so that it reflects as closely as possible an equitable assignment under English law, an effective alternative is for the originator to grant a separate Scottish trust in favour of the SPV over any receivables subject to Scots law.
The trust should be supported with express contractual obligations within the transaction documents to grant perfected legal transfers of the trust assets on the occurrence of certain events, such as the insolvency of the originator. It is also prudent to ensure that any enforcement powers of attorney expressly extend applicable powers to enable the attorney to effect legal transfers of the trust assets if it becomes necessary.
If properly constituted, the three key benefits of the Scottish trust are that:
(i) the originator divests itself (in its capacity as originator) of the trust assets and so removes those assets from its balance sheet,
(ii) the trust should survive the insolvency of the originator and keep trust assets out of the hands of administrators, and
(iii) the trust can be created without involvement of the individual underlying borrowers.
Alternatives to the Scottish trust structure include perfected assignment (in Scotland, an assignation) or novation of any receivables subject to Scots law, each of which would require notification to be given to the relevant counterparties.
Contractual restrictions on transfer in relation to the underlying contracts
The default position under Scots law is that, where a contract is silent as to assignability, the parties to that contract can freely assign their rights thereunder. This is subject to the overarching Scots law principle of delectus personae (literally, `choice of person'), which is the situation where a person has chosen the counterparty to a contract for special or peculiar personal qualities that cannot be found elsewhere. Where this concept applies, rights under that contract are not assignable without counterparty consent.
Alternatively, parties can make specific provision within a contract to allow assignation of rights under that contract which overrides the restriction that arises by operation of law.
Under English law, The Business Contract Terms (Assignment of Receivables) Regulations 2018 (the `Regulations') provide that, subject to some exceptions, a term in a business contract will have no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties. As at the date of this guide, no equivalent legislation has been enacted in Scotland.
However, the regulations explicitly state that where it appears to a court or other arbiter that the choice of Scots law has been made for the purpose of avoiding the operation of the Regulations, the Regulations will apply.
In other words, counterparties cannot choose Scots law for the purpose of sidestepping the prohibition on contractual restrictions on transfer under English law.
What Scots law security can be taken pre and post transfer of legal title?
Where Scottish trusts are used in a securitisation, the relevant Scots law security can be separated into two groups:
(i) security granted prior to legal transfer of the trust assets to the SPV, and
(ii) security granted post legal transfer of the trust assets to the SPV. This is driven by the nature of the interest held at the given stage.
The key Scots law pre-transfer security, to be granted by the SPV, is an assignation in security of its interests under the trust granted in its favour by the originator (see `How is the transfer of receivables effected?' on page 2). An assignation in security is the broad equivalent to a perfected fixed charge under English law.
The assignation in security must be intimated to the originator as trustee under the Scottish trust. Where the pool of receivables is not fixed, supplemental assignations in security must be granted in respect of each supplemental Scottish trust granted in connection with future receivables (see `Are future receivables captured?' right).
Floating security is also usually taken over the Scottish receivables by extending the English law floating charge granted by the SPV. If drafted correctly, that floating charge will extend to Scottish assets.
In the event that the SPV acquires legal title to the Scottish receivables, the SPV should grant fresh security over the Scottish assets that have been transferred to it. We would recommend that express contractual obligations are set out in the transaction documents to cover the grant of new Scottish security.
The form of security to be granted will vary depending on the underlying assets and advice should be obtained for each transaction as to the most appropriate forms of post transfer of legal title security.
However, in our experience, common examples include a standard security over standard securities, where the underlying receivables relate to heritable (the equivalent of freehold) property, or an assignation in security in respect of the SPV's interest under the receivables contracts to which it holds legal title following legal transfer.
Are future receivables captured?
There is doubt under current Scots law that a transfer of, or grant of a trust over, any asset which is not in existence at the time of the transfer or grant of trust is effective.
Therefore, unless the transaction documents include express mechanics to deal with receivables subject to Scots law arising under contracts entered into after the securitisation is entered into, those receivables will not automatically be brought into the securitisation.
To ensure that any future receivables subject to Scots law are effectively brought into the securitisation, express obligations on the relevant parties to grant supplemental Scots law trust or transfer documents on an ongoing basis should be included within the transaction documents (together with the agreed forms of such Scots law supplemental trust/transfer documents and related Scots law supplemental security). The frequency and trigger for granting supplemental Scots law transfers or trusts and related supplemental security should be raised between the parties as early as possible in the transaction negotiations. What is commercially sensible will very much depend on the context of the transaction in question and the value of Scottish assets involved.
True sale analysis and transaction legal opinions
The usual `true sale' considerations apply in relation to securitisation financing transactions involving Scottish receivables. It is possible that the Scottish courts could re-characterise a transaction expressed to be a sale as a secured financing and not as an absolute sale or transfer of ownership.
A true sale analysis is usually undertaken with relevant provisions being included in the transaction legal opinions.
A true sale analysis involves the assessment of the `ultimate right' in the receivables sold. No single factor will determine if the true sale test has been met. The existence of a true sale has a number of transaction implications including the off balance sheet treatment of the transaction, the avoidance of an unsecured creditor exposure to the originator and the rating and value of the bonds.
Unwinding a sale/transfer as a matter of Scots law
UK Insolvency legislation contains creditor protections giving rise to suspect periods during which a sale transaction may be unwound. In the Scottish context these creditor protections may be relevant where the originator becomes insolvent and adequate consideration was not received by the originator for the Scottish assets sold or the sale had the effect of preferring one creditor to the prejudice of the general body of creditors. Importantly, certain Scottish insolvency clawback provisions are distinct from the English provisions and different challenge periods and defences apply. Equivalent provisions also apply as a matter of Scots common law and so specific Scots law advice should be obtained.
The Scottish creditor protections will apply in relation to Scottish companies and certain overseas companies and it is good practice to ensure that the transaction solvency certificates are, where relevant, appropriately revised to specifically refer to the Scottish legislative and common law insolvency provisions. We can assist with making the necessary adaptions to transaction solvency certificates.
Which insolvency rules are applied will depend on whether the originator is a regulated entity such as a credit institution. The applicable rules are influenced by EU law and the position is subject to review in light of Brexit. Draft legislation is already prepared which assumes a no-deal form of Brexit. The Insolvency (Amendment) (EU Exit) Regulations 2019 has UK wide application (including some specific Scottish provisions). There are also The Insolvency (EU Exit) (Scotland) (Amendment) Regulations 2019 which are issued by the Scottish parliament and which will affect the position too.
Horizon scanning: other Scots law reform and impact on securitisation transactions
On 19 December 2017, the Scottish Law Commission published its three-part report on proposed law reform in the context of moveable transactions and submitted the Moveable Transactions (Scotland) Bill (the `Bill') to the Scottish Government.
When it becomes law, the Bill will have a significant impact on how securitisation transactions are structured in relation to receivables subject to Scots law.
If enacted in its current form, a key benefit of the proposed reforms under the Bill is that it will become competent to grant assignations (i.e. legal transfers) and assignations in security in respect of future assets, which would create an opportunity for delivering greater efficiency and flexibility on securitisation transactions.
The Scottish Government gave their initial response to the report on 4 February 2019.
To keep up to date
with proposed law reforms and their impact on securitisation transactions in Scotland take