The Scottish Law Commission has completed its consultation on the modernisation of the Scottish laws applicable to asset backed financing. On 19 December 2017, it published its three-part Report on 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 and warehouse financing transactions are structured wherever Scottish receivables are involved and will be particularly relevant for cross-border transactions with a Scottish element.
The Bill sets out a thorough modernisation of the law and there will be benefits for originators, issuers, arrangers and funders under the new legislation.
Brodies LLP has been very actively involved in the consultation process. Bruce Stephen and Chris Dun were members of the Scottish Law Commission's Advisory Group in connection with the Report and are working closely with the Scottish Government's policy makers in relation to the Bill.
Where there is an equitable sale of receivables under English law, it has been market practice in Scotland to grant in favour of the purchaser a separate Scots law trust over any Scottish receivables included in the sale. An equitable sale is not recognised in Scotland and the grant of the trust ensures that the sale of any Scottish receivables in the portfolio conforms as closely as possible with the English arrangements. The beneficiary's (usually, the issuer's) rights in that trust are then assigned in security as part of a wider security package. Under current law, the Scottish trusts and assignations in security are typically only granted in respect of underlying contracts that have already been entered into. The accepted market view is that they cannot capture receivables arising under contracts that are not yet in existence. This means that the Scottish trusts and assignations in security must be granted on a periodic basis a costly, time consuming and administratively burdensome exercise.
From a securitisation and warehouse financing perspective, two key benefits of the proposed reforms under the Bill are that:
(i) it will become competent to grant assignations (i.e. legal transfers) and assignations in security in respect of future assets, and
(ii) it will be possible to perfect the assignation or assignation in security by registration rather than delivery of a notice (i.e. intimation to the individual debtor). These reforms create an opportunity for delivering greater efficiency and flexibility and, properly utilised, will reduce running costs of the transaction. In addition, a new form of statutory pledge is proposed under the Bill, which, in some circumstances, would enable funders to take an enhanced security package over Scottish assets.
- Securitisation or warehouse financing by full legal transfer of Scottish receivables will be simplified, although Scottish trusts (initial and supplemental, where portfolio originations are ongoing) are still likely to be required under equitable sale arrangements, the latter being the far more common UK wide structure.
- Assignation of future claims will be facilitated, which may remove the requirement for periodic security to be granted on an ongoing basis (thereby saving on time and registration fees).
- Registration of the assignation in a new register will be a new means of giving effect to the transfer, but would be subject to certain debtor protections. The ability to register an assignation as a means of perfection provides welcome flexibility, but it may still be desirable to intimate the assignation to the relevant debtors in certain circumstances.
- It will be confirmed that, assuming the relevant parties agree, intimation is effective if sent electronically, simplifying perfection requirements following completion.
- It will be confirmed that the intimation itself does not require to append a copy of the assignation, one of the current statutory based forms of intimation under Scots law. This would avoid disclosing full portfolio information where undesirable.
- It will be confirmed that legal transfer under a Scots law assignation can be subject to a suspensive condition, such as an event of default under the funding documents. This will clarify an uncertain area under current Scots law.
- The reforms are applicable equally to outright assignations (i.e. legal transfers) and to assignations in security.
- A new non-possessory security will be created that can be taken over certain classes of property, including: shares, intellectual property, and certain equipment (for example, consumer goods). In some circumstances this may enable funders to take an enhanced security package over Scottish assets.
The Bill is the result of huge investment by the Scottish Law Commission and industry participants over the last five years. The Bill, if accepted for parliamentary consideration, will be subject to policy review, impact assessment and then wider parliamentary consideration over the coming years.
The Scottish Government issued their initial response to the Bill on 4 February 2019. They state that they understand the business sector is very keen to move forward with the Bill and highlight the need to consult on the proposed reforms, particularly as the creation of the new registers would incur expenditure. Although we understand the Scottish Government is considering how best to take forward the Scottish Law Commission's recommendations, the Bill has been proposed amid the backdrop of Brexit, which may create an unwelcome delay in the implementation of the reforms.