Tue 05 Oct 2021

Invoice Finance in Scotland

Any funder offering invoice finance facilities in the UK whose borrowers have (or may in the future have) debtors with a Scottish connection should be aware of the different rules applicable to invoice finance in Scotland. 

 Scots law is less user-friendly to invoice financiers than English law, and the following is a brief, high level guide to some of the key issues to consider in invoice finance transactions which involve Scottish debts or debtors.

When is Scots law relevant?

The issue is not whether the seller of the debts (the "Customer") is Scottish or English, but whether (i) the debts are governed by Scots law, or (because of a stray case in the Court of Session ("Ticketus")) (ii) the debtor is in Scotland. Scots law is undoubtedly less user-friendly to invoice financiers than English law.

How do I assign Scottish Debts?

In English law, if there is an agreement to buy and sell a debt and the buyer pays the purchase price then equity will provide that the purchaser has an equitable assignment of the debt. However, there is no equity in Scots law, so in Scotland there must be an actual assignment (which we call assignation, but there is nothing in the difference). 

What about debts that are not yet in existence?

It is not settled in Scots law whether an assignment of a debt which does not exist yet is competent and so because of the risk, steps have to be taken to back up any initial assignment of debts, present and future, with an assignment of future debts once they have come into existence.

Do you need to give notice to the debtor? How?

The Publicity Principle: this is the principle that two parties should not be able to effect secret transfers of property which affected third parties don't know about.  In contrast, equity can allow this in English law.  So, the Publicity Principle tells us that the buyer has no title to the debt in a challenge by third parties (which include the administrator or liquidator of the client) until notice is given to the debtor of the assignment (referred to in Scotland as "intimation".)

It is probably the case that notice cannot be validly given before the debt exists.  So, letters in advance to a debtor with whom the Customer has a continuing relationship do not do much good.  A notice is needed each time, though a sticker on the invoice stating that the debt has been assigned to the invoice financier is regarded as sufficient. 

What if I can't give notice?

Often, notice is not an option from a commercial perspective, particularly in confidential arrangements. Normally, in such circumstances, a Customer in England declares in the invoice finance agreement that debts which have not vested in the invoice financier are held in trust for the buyer by the Customer as trustee of the trust. The same approach can be taken under Scots law in relation to Scottish debts, but Scots law likes a bit more formality in creating this trust, so it is important that the invoice finance agreement contains the required Scottish provisions.

Taking Security

It is common for invoice financiers to take security from the Customer to bolster their position and render pointless any challenge to the trust mechanics.

As it is not practicable to take a fixed charge on debts in Scotland, the floating charge is usually the only form of security which is viable.  This is unless the invoice financier wants to take a security over the client's land and buildings or the client has assets in England which lend themselves to being charged by way of fixed charge.

There is hope on the horizon as the Moveable Transactions (Scotland) Bill was included in the legislative programme for 2021/22 announced by the Scottish Government and, if approved, it will fundamentally reform the law in Scotland in this area. For a more detailed review of what is proposed please click here.

For more information, please contact Beverley Wood (Beverley.Wood@morton-fraser.com) or Laura Purves  

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