Moveable Transactions (Scotland) Act 2023 - insolvency definition consultation

Introduction and background

2.1 The Moveable Transactions (Scotland) Act 2023 ('the Act') [1] implements the recommendations contained in the Scottish Law Commission’s Report on Moveable Transactions (2017) [2].

2.2 In broad terms the legislation modernises the law of Scotland in relation to transactions covering moveable property and introduces a new statutory scheme for moveable transactions law in relation to both: the assignation of claims over moveable property; and security over corporeal and certain non-corporeal moveable property.

2.3 In their Report, the Scottish Law Commission recognised that “(t)he law of rights in security is closely linked to insolvency law” [3] but as the project was not about insolvency law and to include it would have made the project too large and unwieldy, the policies of insolvency law are left substantially unaffected. We note that the subject matter of insolvency is, to a large extent, reserved. 

Assignation of claims

2.4 The Act makes provision for the effect of the assignor’s insolvency where the assignor has granted an assignation document in respect of a claim not yet held by them. An assignation document granted before the assignor becomes insolvent will, as a general rule, be ineffective in relation to a claim if the assignor is insolvent at the time of becoming the holder of the claim.

2.5 The assignation of certain subsequently-held claims (claims to income deriving from property) are not however rendered ineffective as a result of the claim coming to be held by the assignor after the commencement of an insolvency process – except to any income attributable to anything agreed to, or done by, the assignor after the assignor becomes insolvent.

Statutory Pledge

2.6 The statutory pledge is subject to the general rules about rights in security to be found in insolvency legislation. A statutory pledge can extend to assets acquired after the grant of the pledge. However, property acquired after the commencement of insolvency will not be subject to the statutory pledge.  

Definition of insolvency in the Act as passed

2.7 Sections 4 and 50 of the Act define insolvency in relation to assignations and pledges, respectively.  

• Section 3 of the Act sets out when a claim will transfer under an assignation document, and one of the requirements that must be met is that the assignor holds the claim. Insolvency is relevant in relation to assignations because, under section 4, if an assignor grants an assignation document and then becomes insolvent before actually becoming the holder of the claim, that claim will not in general transfer even when the assignor becomes the holder of the claim. For example, if someone assigns future invoices for work and then becomes insolvent, that assignation will not transfer the benefit of invoices for work that the assignor carries out after becoming insolvent. Instead, the proceeds will be an asset in the administration of the assignor’s bankruptcy.
• Similarly, provision regarding insolvency is made in respect of statutory pledges. Section 50 applies where a statutory pledge is granted over property which has not yet been acquired by the provider. If the provider becomes insolvent after granting the pledge but before acquiring the property, the statutory pledge will not attach to that property even after the provider acquires it.

2.8 The Scottish Law Commission acknowledged that:

“There are many different types of insolvency (and similar) processes both within Scotland and elsewhere. Moreover, there are variations within some of the processes. For example, not all liquidations are “insolvent liquidations”. Deciding on exactly which processes should be subject to the above rules is not an easy matter, not least without the benefit of formal consultation." [4]

2.9 Their approach was therefore to include in their draft bill a list of Scottish insolvency processes but to provide powers for the Scottish Ministers to amend the provisions and the definition of insolvency, for the purposes of the legislation. This approach was largely taken into the provisions of the Bill as was introduced. 

2.10 When the legislation was introduced [5] to the Scottish Parliament, the Bill set out the circumstances in which either the provider of a statutory pledge or assignor of an assignation, who is an individual and the provider of a statutory pledge or assignor of an assignation, who is not an individual, would be deemed insolvent as follows:

2.11 Where the provider/assignor is an individual [6], they become insolvent when:

• their estate is sequestrated
• they grant a trust deed for creditors or make a composition or arrangement with creditors
• they are adjudged bankrupt 
• a voluntary arrangement proposed by them is approved, 
• their application for a debt payment programme is approved under section 2 of the Debt Arrangement and Attachment (Scotland) Act 2002, or
• they become subject to any other order or arrangement analogous to any of those mentioned anywhere in the world 

2.12 Where the provider/assignor is not an individual they become insolvent when:

• a decision approving a voluntary arrangement entered into by them has effect under section 4A of the Insolvency Act 1986 (the '1986 Act') 
• they are wound up under Part 4 or 5 of the 1986 Act or under section 367 of the Financial Services and Markets Act 2000
• an administrative receiver, as defined in section 251 of the 1986 Act, is appointed over all or part (being a part which includes the claim) of their property, or
• they enter administration ('enters administration' being construed in accordance with paragraph 1(2) of schedule B1 of the 1986 Act)