Moveable Transactions (Scotland) Act 2023

Moveable Transactions (Scotland) Act 2023

2023 asp 3

Commentary on Sections

Part 2 – Security over Moveable Property

Chapter 1 - Pledge

Pledge, secured obligation and encumbered property

Section 43 – Secured obligation and encumbered property

196. Subsection (1)(a) sets out that the obligation secured by a pledge (the “secured obligation”) can cover both present and future obligations. This is also the case with a standard security over land or buildings (see section 9(8)(c) of the Conveyancing and Feudal Reform (Scotland) Act 1970 in respect of obligations that can be secured on such heritable property). The effect is that it is competent to grant a pledge securing all sums due and to become due to the creditor.

197. Subsection (1)(a) also provides that a pledge can secure third party debt. As such, the obligation need not be one owed to the secured creditor. This would be the case where, for example, the secured creditor is a security trustee. It also need not be an obligation owed by the provider.

• Example

  George has an overdraft with the Iron Bank, and the Bank is willing to accept a pledge as security for the debt. But George does not have moveable property of any value, so his friend Holly agrees to pledge her car. Holly is thus a third party providing security for the loan by the Bank to George.

198. Subsection (1)(b) provides that ancillary obligations are also secured by a pledge. The typical ancillary obligation is interest on a debt, but the pledge will cover other obligations such as any obligation to pay the creditor damages for a loss they have suffered (which is considered important where non-monetary obligations are secured). A pledge might also secure costs arising from the extra-judicial recovery of interest or damages, such as interest due for the late payment of debts for the purposes of Directive 2000/35/EC on combating late payment in commercial transactions.

199. Subsection (2) gives statutory effect to a general rule of law. Unless agreed otherwise, the secured creditor is entitled to the natural fruits of the encumbered property (such as the young of animals), but not entitled to the civil fruits (such as dividends on shares, or rent payments). However, it should be noted that this default rule is only about what property is encumbered under the pledge. It does not affect the secured creditor’s right under the Act’s enforcement provisions to enforce the security by leasing or licensing the encumbered property and then apply the rents or royalty payments to the debt.

200. Subsection (3) provides that the encumbered property must be transferable. This reflects general security law, as a security over a non-transferable right has no practical value (as the property could not be sold to satisfy the secured obligation). However, sometimes – notably in the case of certain intellectual property licences – ­the property is transferable subject to restrictions, and it will be possible to take security over such property.