Tue 15 Jun 2021

Key Differences between Scottish and English Security - part one

Introduction and Summary of Key Points Part #1 of 5 Our banking and finance practice undertakes a lot of work on a referral basis and is regularly involved in providing specialist Scottish advice on English and international transactions.  Over the last year we have seen work from as far afield as Singapore and Canada and we have been instructed on large volumes of work from the English market.  From these transactions, where we are advising on the Scottish aspects, we have seen certain common themes emerging so we have put together a few short pieces looking at some of these issues. 

In England, it is common and quite straightforward for companies and LLPs to grant all assets security by way of a debenture which includes a series of fixed charges over specified assets, an assignment of material leases, insurances and other contracts and a floating charge over assets which are not expressly subject to those fixed charges. That same approach does not work in Scotland, at least not without some adaptation. 

In Scotland, there is no direct equivalent to English law's fixed security interest over moveable assets.  The only fixed security interests generally recognised by Scots law are: standard security which is taken over land or heritable property (real estate) in Scotland, a pledge of shares which has been properly created by transfer of the pledged shares to the pledgee, a pledge of assets which involves the transfer of possession to the security holder (but is clearly impracticable if those assets are required for the generation of income) and an assignation which has been intimated (notice has been given) to all relevant third parties.  So when it comes to taking security in Scotland we generally take fixed security interests over specific assets (most commonly heritable property but sometimes over contractual rights) and support that limited fixed security with an all assets floating charge.

Where Scotland does recognise a direct or close equivalent type of security to England and Wales, our rules and requirements (and therefore the steps required to be taken in order to properly create a security interest) are often still very different.

It is against that background that we have put together this series of five short summaries of the key differences between Scotland and England and the steps that require to be taken in Scotland when specific types of security are being taken.  This is the first in that series and considers the Scottish requirements of assignation.

Summary #1 of 5:  Assignation

Assignation is the Scottish equivalent of the English law assignment.  The Scottish rules on assignation differ to the English assignment as follows:

1. Notice:  unlike an English assignment which may be an equitable or a legal assignment, a Scottish assignation must be intimated to each relevant third party, most commonly a tenant or a debtor in the case of assignations of rent or contractual rights, in order to create a security interest.

2. No equity:  we do not recognise equitable security interests:  unlike south of the border, it is not possible to create any form of security interest by way of an assignation which has not been intimated on all relevant third parties.  Until that step has been taken there is no protection in equity and no floating security "safety net" to rely on - there is simply no security interest whatsoever.

3. Assigned rights must be properly described: Unlike in England, it is not possible to assign uncertain future rights under Scots law.  Scots law requires that any rights being assigned are properly identified at the point of assignation so it is not possible in Scotland to simply assign "all payments due to Company ABC by all of its customers now and in the future" because the uncertainty as to those payments means they cannot be properly described and any such assignation could not be properly intimated.  That said, it is possible to assign future rights which arise under an existing contract such as a lease or staged payment agreement but any changes to the debtor (such as a tenant, for example) would require a new assignation of the receivables under that contract and a new notice being issued to that new debtor.  That can pose a significant administrative burden on creditors and borrowers and often results in lenders not taking security in the rental income receivable by their borrowers under residential leases by way of assignation.

4. Relevance of debtor's address:  thanks to the decision in the Ticketus case which involved the sale of future season ticket income by Rangers Football Club prior to its administration in 2012, Scots law considers as "Scottish" any contractual right or claim which is owed by a debtor located or resident in Scotland even if the underlying right or claim arises under a contract which is expressly governed by English (or another) law. Whilst any such right could be competently assigned under English law, notice of that assignment must be given to the Scottish debtor to properly constitute a security interest in that right if that security interest is to be recognised as valid and enforceable in Scotland.

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