COVID-19: Economic recovery

We generally welcome the Report of the Scottish Government Advisory Group on Economic Recovery. We agree that it was advisable for the group to be established and we acknowledge the high level of expertise of the group’s members across different sectors of the economy. Although the Report identifies major economic challenges and diagnoses a number of pre-existing and new problems afflicting the economy in Scotland, a more positive vision of the future economy is also presented.

We do, however, note that there are important omissions in the Report. These include a lack of discussion regarding averting bankruptcies and corporate insolvencies and the absence of reference to the Scottish Law Commission’s proposals to reform the law of moveable transactions. The latter is discussed further in response to the next question, while matters involving debt and insolvency are dealt with by two of our number (Alisdair MacPherson and Donna McKenzie Skene) in a response to the consultation regarding “Impact on Businesses and Workers as Lockdown Eases”.

As mentioned in our response to the previous question, we consider it regrettable that the reform of the law of moveable transactions was absent from the Report (this area of the law includes the transfer of rights and granting security over assets such as intellectual property, financial instruments, vehicles and other goods). At various points, the Report emphasises the need for measures to stimulate the economy. In addition to this, it is undesirable for the law to place obstacles in the way of raising finance. The current crisis will be exacerbated if businesses and individuals find it difficult to obtain adequate finance to carry out their activities and to develop, innovate and contribute to economic growth. The inability to access finance will also lead to higher levels of insolvency, with all the concomitant negative effects that that will bring for debtors as well as for local and wider economies.

A major hurdle in relation to the raising of finance in Scotland is the current state of the law of moveable transactions. The Scottish Law Commission has reviewed the law of moveable transactions and considers it to be inadequate, outdated and in desperate need of reform in order to support economic activity in Scotland (see Scottish Law Commission, Report on Moveable Transactions (Scot Law Com No 249) (2017) available at: https://www.scotlawcom.gov.uk/law-reform/law-reform-projects/completed-projects/security-over-corporeal-and-incorporeal-moveable-property/). The present system in Scotland also compares unfavourably to other jurisdictions, including England and Wales. A number of other countries have reformed their laws to promote economic efficiency and to attract finance. There is significant and wide-ranging dissatisfaction with the current law in Scotland and also support for the proposed reforms in legal practice, academia and amongst the business and finance communities. This has been emphasised over recent years in law journals, other forms of media and in written submissions and oral evidence to the Economy, Energy and Fair Work Committee, in the context of its “Inquiry on Reform of the Law on Moveable Transactions” (https://www.parliament.scot/parliamentarybusiness/CurrentCommittees/113651.aspx).

One problem with the current law arises from the general rejection of non-possessory security over goods in Scots law. This means that a debtor is unable to continue to use such property if a security is created over it. In many cases, the debtor will not want to give possession to the creditor and often the creditor will actually not wish to take possession. As such, a lender may refuse to provide finance or may offer it but on less favourable terms to the borrower, due to the greater risk of lending involved. The borrower may find the less favourable terms, such as higher interest rates, unduly onerous. This will be especially true in the wake of the coronavirus crisis due to higher levels of debt and cash-flow difficulties for individuals and businesses. There are some exceptions to the rejection of non-possessory security in Scots law (most notably the floating charge for companies and some other corporate entities) and certain workaround solutions can be used in particular situations but these are problematic and can add costs to transactions, which again makes lending more expensive and thereby less favourable to the borrower (as the costs will ordinarily be borne by them). The Scottish Law Commission proposes the introduction of a new form of non-possessory security to address these problems. Other reforms outlined by the Commission will clarify, simplify and modernise the existing law and will thereby make raising finance easier and cheaper.

We believe that there is a wide degree of consensus amongst key stakeholders about the need for reform and for the particular reforms recommended by the Scottish Law Commission. The reforms should be introduced as soon as possible to support finance and economic recovery in Scotland.

Further details about our views in this area can be found in our submission to the Economy, Energy and Fair Work Committee’s Inquiry – see https://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/EEFW-S5-20-MT-03-CentreScotsLaw-UniversityAberdeen.pdf.

In addition to the law of moveable transactions, there are other areas of the law relevant to business and economic recovery that should be reformed. These include areas for which the Scottish Law Commission has recommended reforms but which have not yet been the subject of legislation. A notable example is the law of trusts (see https://www.scotlawcom.gov.uk/law-reform/law-reform-projects/completed-projects/trusts/). We consider that steps should be taken to implement reforms such as these as soon as possible.

Following on from our response to the previous question, we consider that in the next 6 months steps should be taken to identify the precise form that implementing legislation for moveable transactions should take.

Again, following on from our response above, appropriate legislation to reform the law of moveable transactions should be introduced to the Scottish Parliament, passed and brought into force in the next 12-18 months (or 2 years at most).

Of course, a major issue in relation to the 2008 economic downturn was the drying up of lending by financial institutions and the consequent difficulties of individuals and businesses in accessing adequate finance. The uncertain climate of the current pandemic and its aftermath is likely to have some impact on lending in Scotland. As such, all reasonable steps should be taken to address this and to encourage finance and responsible lending by banks and other similar institutions. As already outlined, we think that reforming the law of moveable transactions would be a desirable step in this direction.