Acquiescence, control and the statutory pledge

In February 2024, I wrote an article for the Solicitors Journal on the Moveable Transactions (Scotland) Act 2023 (‘the 2023 Act’) and the transformative effect this legislation will have on taking security over moveable property (or personal property in English legal parlance) in Scotland when it comes into effect. In this article, I take a closer look at the statutory pledge, which is a new form of non-possessory fixed security interest introduced into the law of Scotland under the 2023 Act (‘the Statutory Pledge’).

In my February 2024 piece, I made the point that the Statutory Pledge will be good news for secured creditors in Scotland, since it will mean that the ‘delivery’ of a pledged asset to a secured creditor pursuant to the ancient common law of pledge will no longer be the only means by which a fixed security can be created over corporeal moveable property (i.e. chattels) in Scotland. Equally, if as is expected, the Statutory Pledge is extended to other asset classes such as shares, financial instruments and bank accounts, then a number of highly unhelpful impediments and complexities inherent in taking fixed security over such asset classes will be ameliorated. This will be through the introduction of a new statutory register to be called the Register of Statutory Pledges (RSP), in which it will be competent for a secured creditor to register a Statutory Pledge, with such registration creating a fixed security over the pledged asset in question.

Equally, the following uncertainties in the law are clarified and addressed by the 2023 Act:

• any uncertainty in the law as to whether an ‘after-acquired’ or future asset can be subjected to a present fixed security. Such assets may be expressly pledged by way of a Statutory Pledge under the 2023 Act; and
• any uncertainty in the law as to the degree of specificity with which an asset must be described in order for a fixed security to be constituted. The 2023 Act clarifies that an asset may be adequately described for the purposes of a Statutory Pledge by way of general language describing the asset as comprising an identifiable asset class, and also by reference to descriptions given in extraneous documentation.

So, on the whole, the 2023 Act is the harbinger of glad tidings as regards the law of credit and security in Scotland. However, it is not all plain sailing for secured creditors and there are some difficulties to be aware of, the most acute of which is the ‘torpedo risk’ applicable to a Statutory Pledge under Section 52 of the 2023 Act. The purpose of this article is to take a closer look at Section 52 and some of the problems it will cause for secured creditors.

Section 52: the problem (and an explanation)

Section 52 takes effect so that, if a secured creditor under a Statutory Pledge acquiesces ‘expressly or impliedly’ in any transfer of all or any part of the encumbered property under the Statutory Pledge, other than in accordance with Section 51(2) of the 2023 Act, then the Statutory Pledge is extinguished in full over all encumbered property. So, if a secured creditor held a Statutory Pledge over a fleet of vehicles, for example, and if the secured creditor expressly or impliedly acquiesced in the transfer of one of those vehicles to a third party other than in accordance with Section 51(2) of the 2023 Act, then the Statutory Pledge would be extinguished over all of the vehicles expressed to be subject to the Statutory Pledge. This extinguishment would also apply to the vehicle transferred by the pledgor such that the transferee would take title to the vehicle unencumbered by the Statutory Pledge.

Obviously, Section 51(2) is of crucial importance here since, if the secured creditor’s acquiescence to a disposal is provided in accordance with that section then the Statutory Pledge will not be extinguished in respect of the balance of the pledged assets under Section 52 (and the purchaser will also take title to the transferred asset unencumbered by the Statutory Pledge).

Acquiescence will be provided in accordance with Section 51(2) where:

1. it is in the form of prior written consent of the secured creditor to:
   a. the particular transfer in question; and
   b. to the pledged asset being transferred unencumbered by the Statutory Pledge; and
2. such written consent is granted within a period of 14 days ending on the day of the particular transfer (or put another way, the written consent has not subsisted for more than 14 days prior to the date of transfer).

What this means in practice is that, where consent for an unencumbered transfer of a pledged asset is sought by a pledgor or an acquirer from the secured creditor, then the secured creditor will have to be extremely careful to ensure that its express consent, if indeed it is minded to consent to the transfer at all, is provided in strict accordance with Section 51(2) since, if it is not, then its Statutory Pledge will be ‘torpedoed’ over the balance of the ‘pledged assets’ under Section 52.

The effect of Section 52 may seem somewhat draconian, but there are compelling policy reasons behind the statutory provision. These policy considerations are in effect broadly the same as those which apply to the law of ‘recharacterisation’ in England under which a purported fixed charge may be recharacterised as a floating charge if insufficient control is exercised over the charged assets by the chargee. English law in this area is sometimes referred to as the ‘Spectrum Plus doctrine’ in reference to the leading House of Lords case on the matter, although in fact the line of cases here is lengthy and complex (including Houldsworth v Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284; Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142; Agnew v Commissioner of Inland Revenue [2001] UKPC 28; National Westminster Bank plc v Spectrum Plus Ltd [2001] UKHL 41; Re Avanti Communications Ltd [2024] 1 All ER (Comm) 391); and In The Matter of UKCloud Ltd (In Liquidation)[2024] EWHC 1259 (Ch).

But in essence, the policy consideration is the same and it is this: that it should not be possible for a secured creditor to elevate its claim above all other creditors’ claims simply by taking a security right described as being ‘fixed’ if in fact the nature of the security is ‘floating’ and ought therefore to rank behind the following claims in an insolvency of the chargor:

• the claims of the insolvency practitioner for its expenses, i.e. the liquidator or the administrator;
• the claims of preferential creditors (for example, HMRC in respect of PAYE and VAT collections; and employees for remuneration up to a capped amount); and
• the prescribed part for unsecured creditors (which is a percentage of floating charge realisations capped at £800,000).

Were it not for Section 52 in Scotland, then a secured creditor could purport to take a Statutory Pledge over all corporeal moveable property belonging to the pledgor from time to time and then operate that Statutory Pledge as if it were a floating charge in practice (in other words, by allowing assets to be transferred into and out of the ambit of the Statutory Pledge on a fluctuating basis in the ordinary course of trading of the pledgor) only to then, as it were, ‘pounce down’ on the pledged assets as a fixed charge-holder in the event of the insolvency or default of the pledgor.

But the key difference between English law and Scots law here is that there is no ‘recharacterisation’ in Scots law. If the Statutory Pledge is ‘torpedoed’ under Section 52, then it simply ceases to exist; it is extinguished; it is a deceased thing which has shuffled off its mortal coil! It does not transform itself into a floating charge; it simply ceases to be. Therefore, in a Scottish financing it will be crucial to ensure that, where the pledgor is a company or a limited liability partnership, it also gives a floating charge over all of its assets whether or not subject to any fixed security (such as a Statutory Pledge) in order that any assets that inadvertently fall out of a ‘torpedoed’ Statutory Pledge are then caught by the floating charge.

You say ‘control’, we say ‘acquiesce’

As mentioned above, under the Spectrum Plus doctrine, the key indicator of a fixed charge is control over the charged assets. Control essentially means restrictions on the chargor’s ability to deal with the charged assets without the consent of the chargee. A dealing might include a disposal of a charged asset, hiring the charged asset to a third party or the grant of further security over the charged asset. For asset classes such as book debts, control is also evidenced by limitations placed on the entitlement of the chargor to deal with the proceeds of the book debts upon realisation.

Whereas in Scotland, this notion of ‘control’ is not one that has to date had any specific meaning in the sense of being utilised to demarcate any distinction between a fixed security and a floating security. A floating charge is a statutory security which must be specifically granted and does not arise through operation of law or under ‘equity’ (which is not a legal concept that is applicable in Scotland). Fixed security over land is in the form of a standard security registered in the Land Register of Scotland, which means in effect that material dealings in the land so charged cannot proceed without the consent of the secured creditor. And most other forms of fixed security are possessory in nature - in other words, the asset is transferred into the possession and ownership of the secured creditor. Accordingly, control arises from the nature of the security itself, albeit that this inherent control will be supplemented through contractual control provided for in the underlying documentation.

However, with the advent of the Statutory Pledge constituted through registration in the RSP, we now have to contend with this concept of an express or implied acquiescence. Express acquiescence is reasonably clear and is dealt with above. The law will operate here so that, in order to preserve a Statutory Pledge over the balance of any pledged assets, the secured creditor must acquiesce expressly to a disposal solely in accordance with Section 51(2). Accordingly, if the secured creditor provides only verbal consent to a disposal, then the Statutory Pledge will be extinguished. If the secured creditor’s written consent is given on day X and then the pledged asset is disposed of on day X+15 business days (i.e. not on or before day X+14 business days), then the Statutory Pledge is extinguished.

But what is meant by an implied acquiescence? I think it must mean where the secured creditor has knowledge that pledged assets are being disposed of and takes no steps to prevent this from happening or to protect its fixed security under the Statutory Pledge. Proving that the secured creditor had such knowledge at the relevant time may transpire to be quite difficult in practice. In ordinary course, the secured creditor’s documentation will contain several restrictive covenants in respect of the pledged assets, including covenants not to dispose of any pledged asset, hire out a pledged asset or create security over a pledged asset. Any such contractual restrictions would, I suspect, be the starting point for any judicial analysis of the question and would create a presumption that there was no implied acquiescence to a disposal. Then, I suspect, a Scottish court would look for evidence as to whether the secured creditor in fact was aware of a disposal or a series of disposals of pledged assets and took no steps to prevent this – in other words, the analysis would move from a contractual one to a factual one. If, in fact, the secured creditor could be shown to have been aware of the disposals then the terms of the contractual matrix would be disregarded.

In this sense, the judicial analysis would be quite similar to the ‘two stage test’ affirmed by the House of Lords in Spectrum Plus - as the process an English court must undertake to decide whether a charge is fixed or floating. I therefore suspect that the Scottish courts will pay close attention to the English line of cases in this regard as, in many ways, these notions of ‘control’ and ‘implied acquiescence’ are similar, amounting to different sides of the same coin. The English case law here may therefore prove to be of significant importance in terms of the evolution of the Scottish jurisprudence on the matter.

Other thoughts

Section 52 is only concerned with disposals of pledged assets subject to a Statutory Pledge with a view to ensuring that the new security right does not create impediments to ordinary commerce and day to day dealings between persons buying and selling second hand assets (on eBay, for example). It does not strike at other dealings in pledged assets. Therefore, the hiring out of a vehicle subject to a Statutory Pledge contrary to a restrictive covenant, say, will not torpedo the Statutory Pledge over that asset or any other asset subject to the Statutory Pledge. Nor will the creation of a further Statutory Pledge over any such vehicle, albeit any such subsequent Statutory Pledge would rank behind the first Statutory Pledge insofar as the first Statutory Pledge was registered first in the RSP.

Conclusions

The 2023 Act introduces many new principles and concepts into Scots law, the evolution of which in terms of jurisprudence will take many years, since it will require decided case law or statutory intervention. It will be fascinating to watch these principles evolve and develop, and to note the extent to which the Scottish courts have regard to existing English precedent in this area.

Of course, the English law of personal property is not codified and is a mixture of common law and statutory rules. Whereas, in Scotland, once the 2023 Act comes into force, our law of moveable property will be largely codified in one statute, albeit that the common law will remain relevant. In this sense, the Scots law of moveable property will bear closer resemblance to the laws of other jurisdictions which also have a codified law of personal property (such as the United States, Canada, New Zealand and Australia) than it will to the law of England. I suspect that the Scottish courts will therefore look to precedent and case law in those other jurisdictions as well.