‘It’s an area of Scots law desperately in need of reform’
The paper covers three main areas: acquiring title to “incorporeal moveable property” – debts, shares, life policies, intellectual property etc; acquiring security in that property; acquiring security in corporeal moveable property (“chattels” in English terminology) – things such as cars, machines, truck fleets. Ships and aircraft are excluded because they are dealt with differently in existing law.
Such assets are an important part of the true worth of a modern business. Moreover, with the increased focus, post-recession, on banks’ capital strength, the banks’ asset and invoice finance divisions are in pole position to help meet the Government’s lending targets, as they need less capital reserve allocation.
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Hide AdSo, what are the problems making reform necessary? With asset finance the main issue is that, other than by a floating charge, no security over a Scottish chattel is possible other than by the creditor taking possession. This works fine for pawnbrokers but is no use commercially where a company needs its chattels for its use.
Invoice finance has greater problems. If an invoice financier buys the right to a Scottish debt it will not own that debt until notice of the purchase is given to the account debtor. Giving notice to thousands of debtors is hard enough but there is some doubt about how that notice should be given. There is also an issue about the effectiveness of an agreement to buy future debts.
Over time, lawyers have found artificial ways round these difficulties. In particular, invoice financiers may ask their customers both to ensure that their contracts with their account debtors (and, hence, the debts the invoice financiers are buying) are governed by English law, even though all those debtors are in Scotland, and also demand that the invoice finance agreements with their customers, even if both are in Scotland, be governed by English law, since in English law it is easier to get title to debts without giving notice. Taking security over debts is even more difficult. In practice, a true security over Scottish debts on a bulk basis is impossible.
So, what are the Law Commission’s proposals? In effect, they solve these issues.
There should be a new register of moveable transactions, on-line and cheap to use. There could be registered there securities over chattels; debt purchases and securities over debts. Completing title to purchased debts or to a security over debts by registration would be optional; the existing route would remain available.
A good-faith buyer of a chattel would be protected without having to search the register. If you went into a showroom to buy a car, you wouldn’t have to check whether there was a security over the car.
The account debtor in a debt would be protected if he paid the wrong person without knowing he should have paid someone else. Registration could apply to the acquisition of or security over future debts and assets. Consumers should only be able to give security over assets they currently own.Any formalities about giving notice would be dispensed with; the debtor would simply have to know who he should pay.
It is a simple scheme. The commission hopes that by keeping its suggestions limited in scope, it may get legislation through at last. The paper contains an interesting argument as to the economic undesirability of extending the ability of businesses to borrow to fund their activities. Such arguments are unlikely to cut much ice with government demands that banks lend more money. Some things in the paper I don’t agree with – for example, how security over future assets should rank in relation to other creditors. But that is a quibble. The main thrust of the paper offers an overdue reform of the law.
l Bruce Wood leads Morton Fraser’s asset finance practice. He is ranked as one of the top asset and invoice finance specialists in the UK, and the best lawyer for asset finance in Scotland.