Restructuring and Insolvency

Restructuring and insolvency: What you need to know about the Moveable Transactions Act

The Moveable Transactions Act (the “Act”) was passed by the Scottish Parliament in May 2023. When it comes into force, the Act will make fundamental, far reaching, changes to the commercial landscape in Scotland which will have a particular impact on lenders, borrowers, and insolvency practitioners.

We expect that the Act will come into force in Summer 2024, although no date has been confirmed yet. The Act modernises the law relating to the creation of security over contractual rights and creates a new security right (the statutory pledge) that can be used to secure moveable assets.

What is changing?

When the Act comes into force, it will change how companies create security over their Scottish assets. It will be easier to use valuable contractual rights, such as the right to receive rental income, as security for borrowings. It will also be possible for companies to create a new type of security called a statutory pledge over their moveable assets in Scotland, such as plant and machinery, vehicles, stock in trade, and intellectual property. Currently the only way to create security over these types of assets is to transfer possession of them to a lender or grant a floating charge.

The Act (as currently drafted) does not allow a statutory pledge to be granted over shares in Scottish companies but it is hoped that the Act will be amended to permit this. If a statutory pledge could be granted, it would no longer be necessary to transfer title to the shares to a lender to create fixed security. This would be a welcome development as the requirement to take title to the shares makes security over shares in Scottish companies unattractive to some lenders.

The Act also introduces a new Register of Assignations. Assigned claims may either be intimated or, alternatively, registered at the Register of Assignations. The introduction of a register makes it possible for an assignation in respect of a future claim – this was previously impossible given that a future claim could not be appropriately intimated.

The ability to assign future rights and the introduction of a statutory pledge are both more attractive prospects for lenders and should, in turn, improve the borrower’s ability to raise additional funds in a restructuring process.

How will this impact on insolvency?

Corporate lenders now have an alternative avenue to pursue and reclaim borrowed funds in an insolvency event if they have a registered statutory pledge over moveable assets of the insolvent company. Registered statutory pledges will constitute fixed security, ranking ahead of floating charges and will therefore be prioritised in distribution in an insolvency event. As a result, returns to floating charge and unsecured creditors are likely to be reduced.

For insolvency practitioners, consideration needs to be given to priority of payments on insolvency – as noted above, a statutory pledge will constitute a fixed security with relevant priority on insolvency, including priority over insolvency practitioners’ remuneration.

With the introduction of new Registers of Statutory Pledges and Assignations, insolvency practitioners will need to ensure additional searches of these registers are carried out before distributions to creditors to satisfy themselves as to the existence and validity (or not) of any pledges or assignations.

The Act contains specific provisions relating to both assignations and the creation of statutory pledges in the context of insolvency, and it’s worth noting that there continues to be some debate about how insolvency is defined in the Act. The Scottish Government is consulting further on the proper scope of these provisions with further amendments likely before the Act is brought into force.