Fri 20 Aug 2021

Key Differences between Scottish and English Security - Part 3

In our first and second summaries on the key differences in taking security between Scotland and England, I summarised the positions on the Scots law of assignation and share security respectively.  This is the third summary in that five part series and considers the position on floating charges in Scotland.

Unlike in England, floating charges were not recognised in Scotland until 1962 when the Companies (Floating Charges) (Scotland) Act 1961 was passed.  Scottish floating charges are now regulated by Part XVIII of the Companies Act 1985.  But that is not the only difference:

  1. no re-characterisation:  as we have said before, Scots law does not recognise the concept of equitable security interests and as a result Scots law does not re-characterise a fixed charge as a floating charge under any circumstances - if any fixed security is invalid or ineffective for any reason, there is no floating charge to fall back on, unless a separate Scots law floating charge was created in addition to that ineffective fixed security interest.
  2. crystallisation:  contractual "by notice" and automatic crystallisation provisions do not exist in Scotland.  Instead, a Scots law governed floating charge crystallises only on the occurrence of certain insolvency events.  As such, there is no means by which a creditor can accelerate crystallisation at least over Scottish assets - if a chargor has valuable assets which can be charged under English law, that is an option worth considering in order to take advantage of those benefits under English law.  "By notice" and automatic crystallisation provisions in English law floating charges will not work in relation to Scottish assets and the charge will continue to "float" until crystallised in accordance with Scottish rules.
  3. statutory priority:  whilst the general rule that fixed security interests take priority over floating security interests does apply in Scotland, Section 464(1A) of the Companies Act 1985 provides that if certain language is included in a Scottish floating charge, that language has the effect of conferring priority on that floating charge ahead of any subsequent fixed or floating charge.
  4. alteration: any alteration, including to the priority afforded to a floating charge granted by a Scottish company or LLP, must meet the requirements of the Companies Act 1985 and must be registered at Companies House against that floating charge within 21 days of the date of delivery or last date of signing of the relevant ranking or intercreditor agreement. The other alterations which trigger a registration requirement are those which prohibit or restrict the creation of any fixed security or any other floating charge having priority over, or ranking pari passu with, an existing floating charge, release property from an existing floating charge or increase the amount secured by a floating charge.  The registration requirement set out in Section 466 of the Companies Act 1985 and statutory timescale apply equally to those.
  5. all assets:  as Scots law is more limited than English law when it comes to taking fixed security over specific assets, Scottish floating charges are typically taken on an "all assets" basis, whereas English floating charges often charge only those assets which are not subject to an effective fixed charge or assignment created elsewhere in the same debenture (as an aside, where a floating charge is contained within an English debenture granted by a Scottish company or another chargor over Scottish assets, it is important that the floating charge is taken on an "all assets" (failing which, an "all Scottish assets") basis so ensure they are properly captured by that floating charge).  The Scottish floating charge is also a straightforward means through which to take a security interest over assets which are incapable of being secured by way of fixed charge in Scotland and those which can be problematic depending on the circumstances (such as book debts being financed on an undisclosed basis).
  6. enforcement:  LPA receivers do not have authority in respect of Scottish assets.  Scottish floating charges are enforced by way of administration (unless the floating charge is one granted prior to the Enterprise Act 2002 coming into force, in which case limited rights to initiate receivership still apply). 

Cross border deals: Scottish floating charge or English law debenture?

We are regularly asked on cross border financings whether a Scottish floating charge is required in addition to (or instead of) an English law governed debenture where a Scottish chargor is involved.  What matters is not that the chargor happens to be Scottish but the location of the asset(s) being secured.  Whilst it has been a matter of much legal debate amongst lawyers, Scottish firms appear to have reached a general consensus on that question:  if the chargor has assets in both Scotland and England, it is worth taking an English law debenture so that the creditor can get the benefit of English fixed charges (and the ability to accelerate crystallisation by way of contract and/or to appoint LPA receivers in respect of non Scottish assets) and to ensure that the floating charge provisions are amended so as to expressly include assets located in Scotland or otherwise subject to Scots law whether or not they are charged or purported to be charged or assigned by the fixed charges and/or assignments created by way of that debenture.  That said, there will be some circumstances in which a separate Scots law floating charge might be prudent - for example, where the chargor is not a Scottish or English entity but a foreign or offshore registered company and the creditor is concerned about the enforceability of the security being created.

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