Over the Border
SOURCE: SCOTTISH BANKER, JUNE / JULY 2008
Scottish banks are increasingly being asked to lend to English borrowers and/or take security over English assets; sometimes in combination with Scottish borrowers and assets. Therefore, banks need to be aware of some of the problems that may exist in taking security over certain assets in cross border situations.
The first topic that we shall consider is which law should be chosen?
If both the borrower and the assets to be secured are located in the same country, then the law of that country would be the obvious choice; otherwise, you would typically select the law where the asset is located.
However, it should be noted that a Scottish borrower can grant a security governed by English law and an English borrower can grant a security governed by Scottish law; but problems may arise due to the conflict between the different laws, and you may need to specifically amend the securities to cater for this.
When you obtain security from a borrower, the preference is to obtain fixed charges where possible as these will usually rank ahead of floating charges. A cross border security package often provides that the borrower will grant a Debenture governed by English law, as it creates both fixed and floating charges. However, whilst a floating charge is recognised as an effective security under Scottish law, specific forms of security are required to create fixed charges over Scottish assets (e.g. a fixed charge over land must be a Standard Security). Therefore, if you are to obtain a fixed charge over any Scottish assets, separate Scottish fixed charges will be required, in addition to any Debenture or floating charge.
So, armed with your English law Debenture, and your separate Scottish fixed charges, you should have a good security package. However, you need to check the wording of the floating charge in the Debenture as often this creates a floating charge over all assets that are not effectively covered by the fixed charges, and this can create a major problem for the security holder.
The English courts would recognise the fixed charge in the Debenture as creating a security over the Scottish assets. However, in order to enforce the charge, you would need to apply to the Scottish courts, and they will not recognise any security over Scottish assets that does not comply with Scottish law. The provisions of the Debenture are unlikely to comply with the strict Scottish security procedures, and so the fixed charge elements of the Debenture over the Scottish assets would not be enforceable.
With no fixed charge, you would expect to rely on the floating charge in the Debenture; but the fixed charges are effective under English law (albeit not enforceable under Scots law), and as the floating charge is only over the assets that are not covered by the fixed charges, no effective floating charge would be created over any of the Scottish assets, and you would only be able to rely on the security over the English assets, and any separate Scottish fixed charges that you obtained.
Therefore, the Debenture should be altered to specifically provide for Scottish assets in order to create an effective Scottish floating charge; and you ought to separately create fixed charges over specific Scottish assets.
Creating effective security rights is an essential part of managing risk and so, whilst there are similarities on either side of the border, there are also fundamental differences that banks need to consider when evaluating cross-border proposals and your advisors need to be familiar with the impact of all the laws that could apply. We shall consider the different types of security that can be used in cross border transactions in future articles.
author: alex innes