Back to the border
SOURCE: SCOTTISH BANKER, AUGUST / SEPTEMBER 2008
As we have seen, a cross border security package usually provides that a borrower will grant an English law debenture creating a floating charge and also a fixed charge over English assets including land, book debts, plant and equipment and investments. In Scotland, the floating element will create effective security (so long as specifically applied to Scottish assets), but the fixed charge will not be enforceable in respect of the same assets and so lenders need to look elsewhere to obtain effective security. This is increasingly relevant as plant and book debts for example are substantial assets of many companies and, with diminishing property values and trends toward asset-based lending, banks are looking to secure those assets.
The only way to obtain valid fixed security over plant and equipment or investments in Scotland is by pledge, but to be valid and create a real right in security the bank has to take actual delivery or ownership of the assets. This might be ok in certain cases but can create problems where a borrower needs to use machinery or sell stock in the ordinary course of business, and for this reason often the only additional assets over which a bank will look to obtain fixed security are stocks and shares.
It’s here that we see the relative flexibility in English security law which we don’t have in Scotland. For example, a legal charge over shares in an English company can be completed by transferring them to the bank, but it’s also possible to take an equitable charge so that the bank’s interest is not registered, but reliance is placed on possession of a signed charge enabling the bank to register on borrower default. This flexibility does not extend to Scotland where, to create valid security in the case of a share pledge, it is necessary for the bank or its nominee to be registered as proprietor of the shares. Otherwise, the bank will not have an enforceable security.
A fixed charge can also be granted over certain other assets in Scotland such as bank accounts, book debts or rights under contract, by creating an assignation in security. This transfers rights in the asset to the bank, for example the right to receive rents under occupational leases, pending repayment of the debt. The crucial point is that to create effective security (and not just a contractual right) an assignation in security, whatever the subject, must be intimated to the common debtor.
So, to take effective fixed security over Scottish book debts, a lender must take an assignation of each debt and perfect this by intimation to each debtor. Of course, if a borrower does not want its debtors to know that it has had to give security over debts it may resist giving this form of security and there are also difficulties in creating a fixed security over future debts which means it is often impracticable to take a fixed security over a large fluctuating portfolio of receivables.
Again, creating effective security rights is of course central to managing risk and so, while there are similarities on either side of the border, there are also fundamental differences which banks need to consider when evaluating cross-border proposals and your advisors need to be familiar with the impact of all relevant laws.
author: alex innes