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The Statutory Pledge is a fixed security that can be granted over moveable property such as plant and equipment (excluding ships and aircraft), intellectual property such as patents and trademarks, and financial instruments such as stocks. The pledge is created on the presentation of an executed document which identifies the property charged and the secure obligation. Further detail on creation of a Statutory Pledge can be found in our previous article on the Statutory Pledge.
The Bill sets out the rules for a secured creditor enforcing their rights in terms of the Statutory Pledge and enforcement can only be carried out in accordance with these rules.
When can a Statutory Pledge be enforced?
A pledge can be enforced where (1) there has been a failure to perform the secured obligation or (2) in circumstances agreed in writing between the person who has granted the pledge (the provider) and the secured creditor - which we expect to mean that, in practice, the finance agreement will set out the circumstances in which the pledge will become enforceable.
In enforcing a pledge, a secured creditor must conform with reasonable standards of commercial practice so it will be expected that the secured creditor will allow the provider opportunity to remedy any failure to perform the secured obligation and will progress any enforcement in a fair and timely matter rather than taking an excessively long period to complete an enforcement procedure.
How is a Statutory Pledge enforced?
Pledge Enforcement Notice
Before taking steps to enforce a pledge, a Pledge Enforcement Notice must be served on various parties including the provider, the holder of any other security (where known), and any occupier. The Pledge Enforcement Notice must be in specific terms.
If the pledge has been granted in connection with a regulated agreement in terms of the Consumer Credit Act 1974 then a Pledge Enforcement Notice can only be served if a 14 day default notice has first been served and expired without payment.
Court action
If payment is not made in response to the Pledge Enforcement Notice, then a court action must be raised to obtain a court order authorising enforcement of the pledge where:
- the provider is an individual and is a sole trader and the property subject to the pledge is a business asset; or
- the property subject to the pledge is the sole or main residence of an individual unless, once the pledge becomes enforceable, the secured creditor, the provider and the occupier agree in writing to enforcement without a court order; or
- enforcement will lead to taking possession of certain property.
There are additional requirements to be met if the property subject to the pledge is the sole or main residence of the provider. It is expected that this will be relatively unusual as a pledge cannot be granted over land and buildings so this issue would only be likely to arise where the property subject to the pledge is, for example, a motorhome or houseboat.
Enforcement
Provided a Pledge Enforcement Notice (and default notice, if required) have expired and a court order has been required if it is necessary, and there are situations where it won't be necessary, the secured creditor can carry out the following enforcement steps:
Taking possession of the property
The secured creditor can take possession of the property and/or take steps to ensure the property is not disposed of or used in an unauthorised way by the provider. These steps can only be taken by the secured creditor where the property is not in the possession of a person who has a priority or equal ranking security in respect of the property or has executed diligence which has priority or equal ranking to the pledge unless the person in possession of the property has consented or consent of the court has been obtained.
Selling the property
Where a Pledge Enforcement Notice has been served and a court order obtained, if required, the secured creditor can sell the property. In selling the property, the secured creditor must take all reasonable steps to obtain the best price that is reasonably obtainable - the reasonable steps to be taken will depend on the property pledged and will vary from case to case. The secured creditor may purchase the property if it is sold by public auction and they purchase it for a price close to market value.
Letting/licencing the property
The secured creditor is also entitled to let the property or grant a licence over intellectual property subject to certain conditions.
Appropriation
The secured creditor can also, in specific circumstances and subject to certain conditions, appropriate and become owner of the property. A further notice will require to be served on various parties unless the provider and the secured creditor have agreed that the secured creditor is entitled to appropriate. Such agreement can be provided before the pledge becomes enforceable and we anticipate that this will be provided for in any agreement between the secured creditor and the provider at the outset.
Proceeds of enforcement
Any proceeds arising from the enforcement of a pledge are to be applied in the following order:
- To pay all expenses reasonably incurred by the secured creditor in connection with enforcement;
- To pay the amount due to (i) anyone that held a right in security over the property, and (ii) any creditor who has executed diligence against the property.
Any funds remaining are to be paid to the provider. The secured creditor is required to provide to various parties a written statement detailing how the proceeds from enforcement have been applied.
Going forward
Whilst a date hasn't yet been confirmed for the provisions coming into force, it's promising that we're now one step closer to the Statutory Pledge being a security option available in Scotland.
