Both lenders and borrowers, familiar with the position in England and Wales, often find the legal position on security over assets in Scotland confusing. One of the most striking differences is that there is no concept of equity in Scotland and there is no identifiable equivalent to equitable security under Scots law as the concept applies in England & Wales. While this is the most significant difference, there are others.
In England and Wales, it is commonplace for a company to grant a debenture in security for its liabilities to a lender. A debenture can conveniently create security over all of the assets and undertaking of a chargor, using a mix of fixed and floating charges. The notions of a charge being ‘fixed’ or ‘floating’ apply equally in both jurisdictions). To the surprise of those more familiar with operating in England and Wales, a debenture is not competent under Scots law to the extent that it purports to create fixed security over Scottish assets (though these can be captured by the floating charge). The more common forms of security, therefore, to be taken in a finance transaction involving Scottish assets and/or a Scottish chargor company, are a standalone floating charge, standard security and (more rarely due to the practical and technical issues raised below) a share pledge.
In Scotland, floating charges have a statutory basis and are created as standalone security agreements. The general concept of a floating charge remains broadly the same in both jurisdictions. However key differences relate to enforcement, with the Scots floating charge only attaching to specific assets upon the appointment of a receiver or administrator, or upon the commencement of winding-up proceedings. This differs from the position in England and Wales in which the floating charge can crystallise much earlier. In Scotland there is no ability for a floating charge over Scottish assets to convert into a fixed charge automatically, or by ‘notice’, unlike in England. In Scotland, the document will frequently be referred to as a ‘bond and floating charge’. The ‘bond’ refers simply to the chargor’s undertaking to pay the underlying debt.
Legal charge / Standard security
With a statutory basis, the Scottish standard security is the method for creating fixed security over “heritable” (real) property (including long leasehold) in Scotland. This differs significantly from the position in England and Wales where a lender has the option of securing property under a debenture, legal mortgage or legal charge, creating legal or equitable security over the property in question. The standard security is comparable to, but not the same as, a legal mortgage (the most secure and comprehensive security interest over land in England and Wales). As the Law of Property Act 1925 does not extend to Scotland, LPA receivers are also unique to England and Wales, and there is no equivalent in Scotland. In 2018, the Scottish Law Commission commenced a review of heritable security in Scotland and the findings of the Commission should inform a report and draft bill in due course.
It is quite common in corporate lending transactions in England and Wales for a Lender to take security from the shareholder/parent over the shares in the borrowing entity and, relying on the law of equity, it is standard practice for the lender simply to hold the share certificates alongside signed but undated stock transfer forms to be completed only in the event of enforcement action being taken. Recalling that it is not possible to create equitable security under Scots law, to take effective security in Scotland over moveable property (such as shares) it is more likely that a pledge will be granted. A pledge in Scotland requires the property in question (be it shares or other moveable property/chattels) to be delivered or transferred to the pledgee. Physical property needs to be delivered to the pledgee (or its nominee/trustee/warehouse). In the case of shares, an unperfected Scottish share pledge (where there is no transfer registered to the pledgee/ its nominee) provides no actual security to the lender and has the status of a contract to transfer the shares. That contract would be vulnerable like any other on insolvency.
The Department for Business, Energy & Industrial Strategy has also confirmed its view that a lender taking security over shares in a Scottish company would be required to be listed on the company’s People with significant control (PSC) register. This, as well as the requirement for the pledgee (or its nominee/security trustee) to be registered as the holder of the shares for any security right to exist at all, is often the cause of concerns all round. As a result, some lenders in Scotland are taking a more cautious approach when requesting a share pledge in their security pack and seek alternative forms of security.
This article has provided only a brief introduction to some of the common differences between security law in Scotland and England and Wales and the security options available to a lender in a corporate finance transaction. It should be noted that there are appreciable differences between the jurisdictions when it comes to giving or taking security Similarly, this article has not covered the execution requirements, perfection and security enforcement options which also differ between the respective jurisdictions. Expert legal advice should be sought from the outset when contemplating cross-jurisdiction security.