The Moveable Transactions (Scotland) Act 2023 (the “MTSA”) comes into force on 1 April 2025 and changes how security is taken over moveable assets in Scotland – bringing new opportunities for lenders and borrowers alike.

The focus of this insight is on the reforms introduced by the MTSA relating to the new form of security right known as the statutory pledge. We will explore the issues with the current law in Scotland relating to security over moveable property and discuss how the MTSA introduces some very welcome changes to the financing options open to borrowers and lenders in Scotland.

Have a look at our other insights for information on how the MTSA changes the law relating to assignations in Scotland for both funds and financing transactions.

Background – and some definitions

First, a couple of helpful definitions to guide you through this blog:

Corporeal moveable property: any physical or tangible thing that is movable or not fixed to land or real property, such as a car, office equipment or plant and machinery.

Incorporeal moveable property: intangible, or non-physical, assets such as shares in a company, contractual rights or rights to receive money in the future.

Financial collateral: cash, financial instruments (which may also include shares) or monetary claims of certain types (but NOT rights in relation to bank accounts (which can be assigned, but not pledged, including under the new assignation provisions in the MTSA)).

Difficulties with the existing law, and the need for reform

The problem of possession

Pre-MTSA, with very limited exceptions, the only way to take fixed security over corporeal moveable property in Scotland was by way of a possessory pledge, based on principles of Roman law, which requires physical delivery of the secured asset to the security holder. (The MTSA does not cover, or alter the existing law in relation to, fixed security over ships and aircraft, which are governed by a separate, UK-wide regime.)

To take an example: delivery of a fleet of vehicles to a lender is impractical at best, and in most cases impossible. The current pledge regime is therefore less than useful for businesses and lenders alike…

In relation to incorporeal assets, similar difficulties arise – in particular, caused by the requirement to constructively transfer possession of the relevant asset, requiring title and control to be held by the security holder. Taking shares as an example, the only way to effectively take security over shares in Scotland prior to the MTSA coming into force is by way of a pledge that requires full transfer of title to the shares, and the relevant register of members to be written-up with the security holder registered as a shareholder. This is clearly an unsatisfactory position for both lender and borrower. The practical effect is that, without careful drafting, a company whose shares are pledged can inadvertently become a subsidiary of the security holder for various statutory purposes. Other legislation such as the Persons with Significant Control regime, and the more recent National Security and Investments Act 2021, have caused additional difficulties, all arising from the requirement to transfer legal title.

No security over “future” assets

Given moveable assets must be physically or constructively transferred on day one, security cannot be granted over assets acquired by the security provider in the future, and a lender must rely on further assurance provisions in finance documents requiring a borrower or guarantor to enter into additional security. This is different from the position in England, where it is possible to rely on existing security to capture certain future assets.

No supplemental security or security for subordinated lenders?

The requirement for the transfer of assets on day one means that when supplemental security is required due to, for example, an uplift in the loan, it is sometimes not possible for lenders to take supplemental security (and subordinated lenders often cannot obtain any fixed security at all).

The only available options for lenders requiring supplemental security are:

• to release and retake security. This is a less-than-ideal position for various reasons, not least that it can make the new security more liable to challenge under insolvency law; or
• to rely on the existing security. This may be a concern for lenders as it means that the security may not extend to the increased sum borrowed, or it may be extinguished altogether (under the so-called purview doctrine).

For all of the reasons set out above, at present, secured lenders will often only practically be able to take a floating charge over corporeal moveable property and incorporeal moveable property such as shares. A floating charge is of course useful, but it does have certain limitations. Any fixed security over the same assets will have priority on insolvency, and the proceeds of that fixed security will not be subject to statutory deductions applicable to floating charge realisations.  

The welcome MTSA reform

The MTSA completely overhauls how fixed security over moveable property, including financial collateral, is taken under Scots law. 

The statutory pledge is a non-possessory security right that can be granted by a wide range of legal persons including companies, LLPs, unincorporated entities and individuals. It can be taken over most corporeal moveable property as well as a more limited group of incorporeal assets, including intellectual property and financial collateral (including shares). The non-possessory nature of statutory pledges means it is now possible to take security without the practical limitations of the existing regime set out above.

So why is the MTSA such a welcome addition to the Scottish financing sector?

• Statutory pledges are non-possessory

Delivery of the asset is no longer required. Fixed security can now be created over these assets by registering the statutory pledge in the new public Register of Statutory Pledges. The ability to create a pledge by transfer of an asset will remain, but the MTSA provides for a more practical alternative.

• Security is available over future assets

It is now possible to grant security over assets acquired by the chargor after the date of the pledge document. The MTSA provides that a pledge is created over such future assets with effect from the property becoming an asset of the security provider, as long as that property is identifiable. This avoids the need to negotiate and grant new security documents each time new assets are acquired.

It is easier to provide supplemental security and security for subordinated lenders

The MTSA removes the difficulties with granting supplemental security over already-transferred assets and provides the opportunity for mezzanine or other subordinated lenders to get second ranking, fixed security. This is a much more desirable position. Multiple statutory pledges can be granted over the same assets and registered at the Register of Statutory Pledges. It is worth also mentioning that supplemental security over newly acquired assets may be required less during the life of a statutory pledge, since pledges can be granted over future assets.

• Fixed security over financial collateral

Fixed security can now be granted over financial collateral without many of the concerns for lenders and borrowers noted in the first section of this blog. Individuals can also grant this type of fixed security albeit with certain limitations and protections, referred to briefly below.

Some additional features of the new legislation

Pledges from individuals

There are a number of provisions in the MTSA which create protections in relation to individuals granting pledges. This was a hotly debated topic when the legislation was being considered, and these provisions need careful consideration when taking a new statutory pledge from individuals. In general, only certain types of asset can be pledged by an individual.  So, for example (and while there are other exceptions relating to trustees of charities and members of unincorporated associations), the individual must be acting in the course of his or her business and the pledged asset must be used, or to be used, wholly or mainly for the purposes of their business.  If the asset is a corporeal moveable, it must have a monetary value exceeding £3,000.

“Torpedo” risk

While the statutory pledge is non-possessory, and while the legislation makes it clear that transfer of control is not required, the requirement for some element of control of the secured asset remains. Where a security holder acquiesces expressly or impliedly to the transfer of pledged property to a third party, other than by means of a specific and prescribed form of written advance consent, the statutory pledge is extinguished. This apples to all of the property pledged, including the property that remains owned by the chargor after the relevant assets have been transferred. Practice is already evolving to protect lenders from the effect of what is being termed “torpedoing” under the MTSA, which will involve taking a number of separate statutory pledges, rather than one covering a large pool of assets.

Conclusion

As a result of the MTSA, taking security in Scotland will become much more closely aligned with the position in England, which should create a more streamlined and satisfactory position for businesses and funders in Scotland. This should especially be the case for companies with a cross-UK presence. It removes many of the practical difficulties with fixed security over moveable assets and should make Scotland a more borrower and lender-friendly place to do business.  

We look forward to working with our clients in the coming weeks and months, helping them to implement these very welcome changes.

For more information, please see our resource hub or reach out to us to discuss.

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