Pictured: Alan Knowles and Lindsay Lee

Key things to know about taking security over whisky in Scotland:

1. There is room for improvement in, and modernisation of, the current position on taking security over whisky for lenders and whisky businesses seeking secured finance due to the drawbacks of a floating charge and the delivery requirements of the common law pledge.

A floating charge allows the security granter to deal with the whisky in the ordinary course of business (unless and until the floating charge crystallises) but in insolvency ranks behind fixed securities, preferred creditors (such as HMRC) and the prescribed part of proceeds set aside for unsecured creditors. Also, only companies and LLPs can grant floating charges.

Common law pledge requires the security holder to have physical possession (or control) of the whisky. Commonly, in the context of whisky, delivery is ‘constructive’ rather than actual, involving the whisky casks or bottles being placed in the custody of a third party warehouseman or bondsman who will act according to the instructions of the security holder, at a cost ultimately borne by the borrower/security granter. As assets subject to a common law pledge must be owned by the pledgor (security granter) at the time of granting security, any future whisky to be used as collateral would involve further pledges.

2. The new statutory pledge will allow security to be taken over whisky casks without the need to deliver the casks to the security holder, or a third party under the control of the security holder, by registration in the new Register of Pledges (maintained by the Registers of Scotland).

3. The new statutory pledge will allow future whisky casks produced or acquired to be included in the security – the current law does not facilitate this, with further common law pledges required for future casks. A statutory pledge can be drafted to include identifiable future property and can be registered even though the grantor does not own the property at that point in time. The registered statutory pledge over future assets becomes effective once the granter owns the assets.

Where future whisky assets are not included in a statutory pledge, for example because they are not at that point identifiable, they can be added to the registered statutory pledge by amendment to the registered security.

4. For entities subject to the Companies Act 2006 charges regime, a statutory pledge over whisky casks will need to be registered at Companies House as well as in the Register of Pledges. The 21-day time limit for registration at Companies House will remain but no time limits apply to registrations in the Register of Pledges at the Registers of Scotland.

5. The new statutory pledge will be attractive to whisky businesses and lenders alike. The new fixed security puts a lender in a stronger position on insolvency than a floating charge would otherwise and removes the need for third party warehousing costs under current pledge requirements. Lower borrowing costs should result.

The MTB is anticipated to be passed in the coming months with the new statutory pledge provisions coming into effect shortly thereafter.

Alan Knowles is a partner and Lindsay Lee is a senior associate at Brodies LLP