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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

30 JUN 2011

Scottish Law Commission discussion paper on moveable transactions

The Scottish Law Commission has published a new Discussion Paper on Moveable Transactions (DP 151). As the Scottish Law Commission note the document examines "three connected areas of law, all important to the smooth running of the Scottish economy. In all three areas Scots law appears to be out of date, and insufficiently business-friendly. From an international perspective current Scots law would appear to be in need of radical reform. 

(i) The transfer of financial rights (ie a creditor transferring the right to payment, so that the debtor will have a new creditor). 

(ii) Security over corporeal moveable property. (“Security” means security for a debt.) Although Scots law, like other systems, allows security by delivery to the lender (eg handing over a gold watch to a pawnbroker), there are legal hurdles in the way of non-possessory security. 

(iii) Security over incorporeal moveable property. Here too the current law would seem to be capable of considerable improvement. 

The Discussion Paper discusses the current law, identifies its shortcomings, and suggests possible ways forward. Other legal systems are looked at, including the model that originated in the USA and has now been adopted (with some variations) in a number of other countries including Australia, Canada and New Zealand. Although the paper concludes that a wholesale adoption of this model would not be appropriate, at least at the present time, it is suggested that Scots law would benefit from adopting some of its ideas. 

It is proposed that there should be a new type of security right, that could cover both corporeal and incorporeal moveable property. There would be a new online Register of Moveable Transactions, in which the security right would be registered. The new register could also be used to register transfers of financial rights, for example in securitisations and factoring. 

Lord Drummond Young, the Chairman of the Commission, said: “The value of moveable property which may be transferred or used as security for a debt is substantial but much of Scots law in this area is regarded as being out of date and cumbersome in operation.  This may place Scottish businesses at a competitive disadvantage and lead to the loss of legal financial and commercial business to England and elsewhere. Our aim, through the introduction of a new type of security right and improvements to the existing law, is to simplify Scots law making it more efficient in economic terms and thus more attractive to users or potential users." 

On insolvency specifically the report notes:

"1.19 The law of rights in security is closely linked to insolvency law. Insolvency law has its own policies about the effect of security rights on the debtor's insolvency, for example about eve-of-insolvency securities and about ranking. This project is not about insolvency law and is thus intended to leave the policies of insolvency law substantially unaffected. If the way that insolvency law treats security rights is in need of review, that review would have to be a separate review. Our approach is thus the same as that of the Law Commission of England and Wales, which in its recent project said that the reforms that were being proposed would not make significant changes to insolvency law.."

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