A lender looking to provide finance to a borrower will always want to ensure that it has an adequate security package to allow them (in the event that things take a turn for the worse) to be able to recover at least some, if not all, of the outstanding indebtedness of the borrower. Lenders who operate across a number of jurisdictions, even within the UK, should be aware that, north of the border, things aren't quite the same when it comes to the types of security available. Lenders will require to take a slightly different approach when it comes to ensuring that they are adequately secured in respect of Scottish borrowers, or borrowers with assets situated in Scotland.
This note provides a brief overview of the key differences between security packages commonly taken in England/Wales and Scotland.
All Assets debentures (England) v Asset specific security (Scotland)
In England, lenders have the ability to take an all-assets debenture. An English-law governed debenture can create fixed charges over all of the chargor's assets, including assets such as plant and machinery, shares, bank accounts and insurance policies, with a floating charge to capture any assets that have not been caught by the fixed charges. Due to the floating charge contained within a debenture, this can only be granted by certain entities, most notably companies and LLPs.
In Scotland, the traditional concept of an "all-assets" debenture does not exist. Fixed charges can only currently be taken over certain types of assets. It is therefore common for a lender to secure a chargor's assets by way of an all assets floating charge (provided the chargor is able to grant a floating charge), often supplemented by asset-specific fixed security, such as a standard security over real estate (see further below).
Where a lender intends to take security from a chargor over assets situated in both Scotland and England, they should be aware that the terms of an English-law governed debenture may not secure the chargor's assets to the extent that they are situated in, or subject to the laws of, Scotland. For example, the English fixed charges will not catch any of the assets of that chargor that are considered Scottish. This would include any shares in Scottish companies or equipment or property located in Scotland. Rather, the English debenture will only be able to catch Scottish assets by its floating charge (and even then, only when the floating charge is clearly worded to achieve this).
Assignments (England) v Assignations (Scotland)
The differences in assigning assets in England and Scotland are not just limited to the slight difference in terminology. In England, there are two main types of assignments used in financing transactions- legal and equitable assignments.
One of the main advantages of a legal assignment is that the assignee (the lender) has the right to enforce the assigned rights in its own name. However, in order to create a legal assignment, certain requirements must be met, including giving notice to the other parties to the contract under which the assigned rights arise. With an equitable assignment, no other party to that contract requires to be notified. This can be beneficial in a financing scenario where a chargor may not want to disclose its funding arrangements – for example, if a book debt is subject to an equitable assignment, the debtor would not need to be informed that their debt has been assigned and could continue to deal with the chargor. In Scotland, it is not possible to have an "equitable assignation", and any assignation under Scots law is therefore more akin to that of an English legal assignment.
In Scotland, an assignation must be outright, transferring the ownership of the right to the lender for the duration of the assignation. That assignation must also be notified to the other parties to the relevant contract, something that the chargor may be reluctant to do.
In practice, assignations in security are seen most often when it comes to rental income, insurance policies and certain contracts (such as building/construction contracts or supply contracts).
Security over Real Estate and Rental Income
Security created over property in England and Scotland is very similar, though does have certain key differences.
In England, fixed security over a property will commonly be taken by way of a legal mortgage (commonly referred to as a legal charge). This will create fixed security over that property, but will also usually be accompanied by an assignment of insurance policies relating to the property and rental income. A legal mortgage will require to be registered at HM Land Registry. It must also be registered at Companies House (if required to be so registered) before it is registered at HM Land Registry. Legal mortgages cannot be registered at HM Land Registry without the consent of an existing charge holder who has the benefit of a restriction on the title to the relevant property prohibiting any other legal mortgages over that property.
In Scotland, fixed security over property is created by way of a standard security. Registration requirements are broadly similar, with a standard security requiring to be registered in the Land Register of Scotland and, if granted by a company or LLP, at Companies House.
A standard security is not created or perfected until it is registered in the Land Register of Scotland, and so the order of registration is reversed (as against England) with the standard security first being registered in the Land Register of Scotland and then at Companies House. Whilst there is no express requirement for consent to a standard security in favour of an existing charge holder to be provided for registration at the Land Register of Scotland, a lender should be aware that they will rank behind that existing charge holder unless a ranking agreement is entered into, and, similarly, subsequent security interests may be created on the title (albeit these will likely be subject to negative pledge provisions in bank facility documents). Where the property is leasehold, fixed security can only be granted where the lease is also registered in the Land Register of Scotland A standard security will normally be accompanied by a standalone assignation of rental income where security is also to be taken in respect of rental income from a charged property subject to a lease. The assignation of rental income must be intimated to each tenant whose rent payments are to be secured. In addition, it is worth noting that, should a new lease be entered into after an assignation of rental income is granted, a new (or supplemental) assignation of rental income should be granted in respect of the payments due under that new lease.
Security over other common assets
One consideration a lender will have is whether to take security over a bank account. In England, this is normally achieved by way of a fixed charge, usually contained in the all-assets debenture. In Scotland, fixed security can only be created over a bank account by way of an assignation in security of the rights in respect of the bank account. For such an assignation in security to be effective, the lender would need to have control over any withdrawals from the account. This is unlikely to be practical where the chargor needs to make regular withdrawals from the account. Floating charges are therefore commonly taken over Scottish bank accounts. Lenders may also consider quasi-security arrangements such as set-off or netting agreements where they are the account bank.
Security over shares continues to be a contentious topic in Scotland. Whilst in England shares can be subject to a fixed charge created by an all-assets debenture, Scottish shares cannot be charged in the same way. Rather, they require to be transferred to the lender (or its nominee) in order for the security to be perfected. This can cause the lender certain concerns, especially in terms of the application of the persons with significant control (PSC) regime or potential liabilities of the lender as holder of the shares. For more information on share security and its risks, please see our detailed note here. In addition to this, lenders taking security over shares in a Scottish company need to bear in mind the National Security and Investments Act 2021 which, due to the way in which it is drafted, means that shares pledges in Scotland will in principle trigger the notification requirements under that Act in certain circumstances.
As with other categories of assets, whilst a fixed charge can be created under English law in respect of intellectual property, this option is not currently available under Scots law. As a moveable asset, intellectual property owned by a Scottish entity is generally considered to be subject to the laws of Scotland, even if that intellectual property is registered at the UK Intellectual Property Office. A lender looking to take fixed security over Scottish intellectual property can insist upon an assignation in security of that intellectual property. However, given that this requires an outright assignation perfected by notice, it raises issues as regards ongoing use of the intellectual property by the chargor (who would require a licence back from the lender to continue to use that intellectual property). Given these issues, it is more common for a lender to rely on a floating charge by the chargor to capture Scottish intellectual property.
There are a number of similarities between England and Scotland when it comes to taking security. However, there are also a number of significant differences, and with those differences come associated risks and considerations. It is worth noting that, at the time of writing, a review of the ability to create fixed charges over moveable property in Scotland (including shares and intellectual property) is ongoing, with the Moveable Transactions (Scotland) Bill having been introduced to the Scottish Parliament. If the proposed reforms are implemented, a lender's ability to take a security package more similar to that taken in England will likely be the outcome.