But it's not equitable: Invoice Finance in Scotland

The root of the difficulty is that the system of "equity" as it has developed in English law has no equivalent in Scotland (nor, generally, in any other legal system which is not a spin-off from the English one).  In invoice finance transactions in England, invoice financiers rely heavily on equity - they take equitable assignments of debts; they rely on equity to protect them if the arrangement is confidential and notice is not given to the debtors. 

You need to be cautious if you think Scots law is irrelevant to the business.  What you regard as English facilities may have Scottish elements. 

One final point by way of introduction - the Referendum and the Independence debate is irrelevant to all this.  Scots law is already a separate system of law, and that will not change no matter what happens on 18 September. 

When does Scotland matter?

Consider each of the following in relation to an English invoice financier:

• English client: debtors in England and Scotland
• Scottish client: debtors in England and Scotland
• English client: debts all governed by English law but some debtors' addresses are in Scotland

In all of the above cases you need to consider the impact of Scots law.  The last one, in particular, is the one which can easily slip by unnoticed. 

Because Scots law is less user-friendly to invoice financiers than English law and because of how common the above three circumstances are, you usually want to be sure that your documentation works in Scotland as well as in England even if your invoice finance agreement is governed by English law.

Why do you need to worry?

Rome I Regulation:

What you need to do to transfer title (absolutely or in security) to a purchaser (the invoice financier) is whatever is required by the law of the contract under which the debt arises.  So, if an English client has a debt with a customer and the contract under which the debt arises is governed by Scots law, then Rome I says that Scots law is what matters. 

Ticketus:

This is a stray case in the Court of Session, resulting from the administration of Rangers FC in 2012.  The judge decided that Rome I was not the whole story.  Property rights on the transfer of a debt, he said, are decided by the law of the place where the debt is.  And the place where the debt is, is the place where the debtor's address is (the address of the person who owes the debt to your client).

So, if you have an English client whose debts are governed by English law but the debtor's address is in Scotland, the only safe course is to ensure you cover-off the Scots law rules. 

(This decision has been much criticised but, as it sits there in the recent judicial precedents, it is brave to ignore it)

So, what are the differences?

Two principles lie behind the differences:-

• There is no equity in Scots law.  So, you actually have to carry through and do what you intend to do.
• The Publicity Principle.  This is the principle, which goes all the way back to Roman law, that two parties should not be able to effect secret transfers of property which affected third parties don't know about.  In contrast, equity can allow this in English law. 

You have to have an assignment

In English law, if a seller and a buyer agree to buy and sell a debt and the buyer pays the price of the purchase then equity will provide that the purchaser has an equitable assignment of the debt. 

In Scotland, there must be an actual assignment (which we call assignation, but there is nothing in the difference).  There are no magic words of formality required - there just needs to be some document which clearly indicates an intention to make a transfer, conveyance or assignment. 

There is one further possible problem.  It is not settled in Scots law whether an assignment of a debt which does not exist yet is competent.  Because of the risk, the notifications by the client to the invoice financier on a regular basis of the debts now subject to purchase should contain words of assignment as, of course, the existence of the notification tells you that those debts now exist.  Where the notification is electronic, the invoice finance agreement needs to have provisions making it clear that each electronic notification is deemed to contain words of assignment.

Assignation is not enough

The Publicity Principle: the buyer now holds the assignment/assignation but no-one else knows about it.  So, the Publicity Principle tells us that the buyer has no title to the debt in a challenge by third parties (which, for this purpose, include the administrator or liquidator of the client) until notice is given to the debtor of the assignment.  (We call notice "intimation" but, again, nothing hangs on the difference.)

It is probably the case that notice cannot be validly given before the debt exists.  So, letters in advance to a debtor with whom the client has a continuing relationship do not do much good.  A sticker on the invoice, however, is regarded as sufficient in the usual way. 

So, what do you do if you are not giving notice?

Scots law does recognise trusts.  So, in the invoice finance agreement, the client, as in England, declares that debts which have not vested in the English financier as buyer are held in trust for the buyer by the client as trustee of the trust. 

But Scots law likes a bit more formality in creating this trust.  So, the well adapted invoice finance agreement will contain a declaration of trust and a clear provision that the client/seller appoints itself as trustee of the trust for the buyer/invoice financier as beneficiary.

The Publicity Principle again: this is a secret trust as no-one else knows about it, because the seller, as settlor of the trust and as trustee of the trust, is one and the same person.  There is an established rule in trust law in Scotland that such a settlor as trustee trust is valid as long as notice is given to the beneficiary.  But, in our case, the invoice financier is the beneficiary, so the invoice financier can accept notice of the trust in the invoice finance agreement.  This is a bit of a nonsense as it does not really assist the publicity principle in any way - but it is where we are. 

However, the notice probably needs to be given in respect of debts which become the subject of the trust once they are in existence, as and when they arise over the period of the financing.  So, the notice needs to be given to the invoice financier when debts come into existence which again can easily be done by adding simple wording to the notification.  Again, if the notifications are electronic, then the invoice finance agreement needs to provide that each notification is deemed to include notice to the beneficiary, the invoice financier, that the listed debts are now the subject of the trust until title fully vests in it.

Summary of the Scottish requirements in an invoice finance agreement

1.     Ensure that the client actually assigns present and future debts to the invoice financier.

2.     Include a provision that the notification of the debts is to contain an assignation of the debts listed in it. 

3.     If the notification is to be electronic, insert a provision in the invoice finance agreement which deems such assignation wording to be in the notification.

4.     Ensure that there is a proper declaration of trust appointing the client as trustee. 

5.     Provide that notifications contain notice to the invoice financier that the listed debts are property of the trust.

6.     Again, if notification is to be electronic, make sure the notifications are deemed to include the notice that the debts are now part of the trust.

7.     Because of the importance of giving notice to the debtors of the assignation, it is good practice to reserve the right, even in confidential cases, to give notice to the debtors at any time.  In contrast, in English law documents, you will probably be restricted from giving notice until there is an event of default.

There are some other minor tweaks - for example, some of the events of insolvency will be slightly different. 

Other issues

1.     Scots law does not have the Bill of Sale Acts or any equivalent.  The above rules apply whether your client is a company, a partnership, a sole trader or whatever. 

2.     You cannot use the trust as a device to protect your title if the assignment of the debt to the invoice financier is not absolute but is only in security.  If you are taking a security assignment, there is no alternative to giving notice to the debtor if you want to have a fixed charge.

3.     But Scots law does have floating charges as a security mechanism.  They have the same basic effect as floating charges in English law. 

Which leads to the topic of security in Scots law.  That is for another day.