Loans & Security Enforcement in Scotland

Bank loans

Bank loans are usually governed by a facility agreement which sets out the basic terms of the loan, such as interest payable, dates of repayment, financial covenants and numerous warranties and indemnities in relation to the position of the business. In Scotland, bank loans to companies are generally secured by means of a “bond and floating charge” and “standard securities” over any land owned by the company.

Different security is used in Scotland to secure different types of property. In Scotland, the security mechanisms typically used for commercial transactions are a standard security, floating charge, assignation in security and share pledge.

Security/enforcement

Taking a standard security (SS) is the only way to create fixed security over land and buildings in Scotland. It is a statutory creation, following a prescribed statutory form, and includes specific commercial terms of the document and various mandatory terms and standard conditions which apply to all standard securities.

It is also possible to create a floating charge over real estate in the same way as for other types of assets. In taking security over investment property, it is also common for a lender to take a separate assignation of the right to rents received from occupational tenants by way of an assignation of rents.

Floating charges

Floating charges are another mechanism broadly similar to that in England, including the Insolvency Act 1986 provisions in respect of administration (although different Insolvency Rules apply in Scotland).

The Law of Property Act has no application in Scotland, meaning LPA receivers are not recognised over Scottish property. Generally, a receiver cannot be appointed only to part of the assets charged by a FC; an administrator will need to be appointed where all assets are charged.

Share pledge

In order to create a fixed security right in Scotland, shares need to be transferred to the charge holder (or its nominee). The charger will sign a stock transfer form and the charge will be entered into the company’s register of members. The security is completely ineffective until the necessary transfer formalities have been carried out.

The share pledge document regulates the rights and obligations of the parties to the charged shares, both before and after enforcement. The security is completely ineffective until the necessary transfer formalities have been carried out. It is normal for voting and dividend rights to be retained by the charger by virtue of the share pledge until default (or another enforcement trigger event) has occurred.

Good to Know

It is important to note that taking security over property in Scotland is different from doing so in England. There is no concept of an equitable charge in Scotland and no distinction between a mortgage and a charge. There are also peculiarities in taking security over book debts, cash deposits and intellectual property rights in Scotland.

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