Fund Financing
Fund financing: What you need to know about the Moveable Transactions Act
The Moveable Transaction Act (the “Act”) was passed by the Scottish Parliament in May 2023 and will make fundamental, and very positive, changes to fund finance transactions involving Scottish limited partnerships. We expect that the Act will come into force in Summer 2024, although no date has been confirmed yet.
The Act modernises the law as it relates to the transfer of, and the creation of security over, contractual rights. In fund finance situations, security is typically taken over: (i) the rights to call for and receive commitments from investors; or (ii) the rights of partners to receive distributions; or (iii) assets of the partnership. When in force, the Act will make it much easier to create security over those rights and assets and bring processes more in line with other jurisdictions.
What is changing?
Registration vs intimation
Under the current Scots law, notice of an assignation in security over rights (including rights to call for and received commitments) must be given to the relevant counterparty for security to be created. In fund finance situations where security is being taken over the rights to call for/receive commitments, that means intimation notices must be sent to all limited partners. The process of sending intimations is outdated and can be inefficient in terms of time and costs. The modernisation of the law pursuant to the Act offers streamlined options:
- the Act will create a new online public Register of Assignations in which an assignation in security over rights can be registered. The new Register of Assignations will allow lenders to bypass the notice (or “intimation”) process, and the assignation in security will create valid security over the assigned rights upon registration; and/or
- where traditional intimation is preferred over registration, the Act provides that notices can be deemed effective when served by email or by an electronic link to a website or portal. These new provisions modernise and going forward will facilitate the notice process for fund finance clients.
Control
Under the current Scots law, an assignation in security over rights requires a transfer of those rights to be effective. Currently, security documents often include mechanics giving lenders an element of control over assigned rights prior to enforcement so they can be confident a transfer has taken place and valid security created.
The new Act makes clear that rights will transfer upon either intimation or registration of the assignation in security, and going forward no transfer of control over rights being assigned will be required. Any changes to the day-to-day management or control of rights being assigned will not need to change.
Future rights
The current law is not clear on the ability to assign (by way of security or otherwise) future rights (including rights created at subsequent closings/transfer of partner interests throughout the life of a facility). However, the new Act expressly permits the assignation of future rights. Lenders will have increased comfort that assigned rights will cover the commitments of all limited partners admitted during the term of a loan, preventing the need for supplemental assignations to be taken when new limited partners are admitted.
How will this impact on fund financing?
As a result of these changes, assigning rights in fund finance situations under Scots law will be streamlined and modernised to make use of online filing and electronic notices. Clients should expect a more efficient, international-friendly process of granting security over rights related to Scottish limited partnerships.
