Invoice finance is used by tens of thousands of businesses across the UK to maintain a healthy cash flow and access the funding they need to achieve a wide range of objectives. However, there are some important differences between invoice finance in Scotland and England that affect how invoice finance transactions are structured and documented. Therefore, it is advisable for businesses and financiers to seek legal advice before entering into such transactions across different jurisdictions.
In this article, we will explain some of the key differences between invoice finance in Scotland and England.
Legal System
One of the main differences between invoice finance in Scotland and England is the legal system. England and Wales share a common law system, while Scotland has a mixed legal system that incorporates elements of both civil law and common law. This means that some legal concepts and terminology may differ between the two jurisdictions, such as the distinction between real rights and personal rights in Scots law.
A real right is a right that can be enforced against anyone who interferes with it, such as ownership or possession of property. A personal right is a right that can only be enforced against a specific person or party who owes an obligation, such as payment of a debt or performance of a contract.
In English law, when an invoice is assigned to a financier, both the legal and beneficial title to the invoice are transferred to the financier. This means that the financier has both a real right and a personal right to claim payment under the invoice. In Scots law, however, when an invoice is assigned to a financier, only the personal right to claim payment under the invoice is transferred to the financier. The real right to enforce payment against the customer remains with the business until notice of assignment (or intimation) is given to the customer.
This has implications for how invoice finance transactions are completed and perfected in Scotland and England, as we will discuss in the next sections.
Security
Another difference between invoice finance in Scotland and England is how security over assets is taken by financiers. Security is a legal arrangement that gives a creditor (such as a financier) certain rights and remedies over an asset owned by a debtor (such as a business) in case of default.
In England, a financier can take a fixed charge or a floating charge over the assets of a business, depending on the degree of control that the financier has over those assets. A fixed charge attaches to specific assets and prevents the business from dealing with them without the financier’s consent. A floating charge attaches to a class of assets that may change from time to time, such as stock or cash, and allows the business to deal with them in the ordinary course of business until an event of default occurs, at which point the charge crystallises and becomes fixed.
In Scotland, however, a financier can only take a floating charge over the assets of a business, which is called a standard security. A standard security must be registered at Companies House and at the Register of Floating Charges to be valid and enforceable. A standard security covers all the assets of the business, unless specifically excluded, and gives the financier certain statutory rights and remedies in case of default, such as appointing a receiver or petitioning for winding up.
This means that financiers may have more flexibility and options in taking security over assets in England than in Scotland. However, this also means that businesses may have more freedom and control over their assets in Scotland than in England.
Assignment
A further difference between invoice finance in Scotland and England is how invoices are assigned by businesses to financiers. Assignment is a legal process that transfers rights or obligations from one party (the assignor) to another party (the assignee).
In England, a financier can take an assignment of the invoices of a business, either by way of security or by way of sale. An assignment by way of security transfers only the legal title to the invoices to the financier, while the business retains the beneficial interest and remains responsible for collecting the payments from the customers. An assignment by way of sale transfers both the legal and beneficial title to the invoices to the financier, who becomes responsible for collecting the payments from the customers. In both cases, notice of assignment must be given to the customers to perfect the assignment and prevent them from paying the business instead of the financier.
In Scotland, however, a financier can only take an assignation (the Scots term for assignment) of the invoices of a business by way of security. An assignation by way of security transfers only the personal right to claim payment under the invoices to the financier, while the business retains the real right to enforce payment against the customers. Notice of assignation must be given to both the customers and any prior assignees to perfect the assignation and prevent them from paying or claiming payment from anyone else.
This means that financiers may have more certainty and protection in assigning invoices in England than in Scotland. However, this also means that businesses may have more flexibility and discretion in assigning invoices in Scotland than in England.
Survey
A minor difference between invoice finance in Scotland and England is who pays for surveys when land or property is involved as collateral. A survey is an inspection or valuation of land or property by an expert or professional.
In England, surveys are paid for by the purchaser, whereas in Scotland, surveys are paid for by the seller. This means that in invoice finance transactions involving land or property as collateral, it is usually the responsibility of the business to provide information about its customers’ creditworthiness and payment history to the financier.
Taxes
Another minor difference between invoice finance in Scotland and England is what taxes are payable on transactions involving land or property as collateral. Taxes are compulsory contributions levied by governments on individuals or businesses for public services or purposes.
In England, stamp duty land tax (SDLT) is payable on transactions involving land or property, whereas in Scotland, land and buildings transaction tax (LBTT) is payable instead. This means that in invoice finance transactions involving land or property as collateral, different tax rates and thresholds may apply depending on where they are located.
Risk of non-payment
A final difference between invoice finance in Scotland and England is the risk of non-payment by customers or debtors. Non-payment can occur when a customer fails or refuses to pay an invoice by the due date, or becomes insolvent or bankrupt.
The risk of non-payment may vary depending on the legal system, security, assignment, and insolvency procedures in Scotland and England. For example:
In Scotland, the financier only acquires a personal right to claim payment under the invoices until notice of assignation is given to the customers. This means that if the business becomes insolvent before notice is given, the financier may rank as an unsecured creditor and may not be able to recover the full amount advanced to the business.
In England, the financier acquires both a legal and beneficial title to the invoices upon assignment.
This means that if the business becomes insolvent after assignment, the financier may rank as a secured creditor and may be able to recover the full amount advanced to the business.
In Scotland, the financier can only take a floating charge over the assets of the business as security. This means that if the business becomes insolvent, the financier may have to share the proceeds of sale of the assets with other creditors who have a preferential claim or a prior ranking charge.
In England, the financier can take a fixed charge over specific assets of the business as security. This means that if the business becomes insolvent, the financier may have priority over other creditors who have a lower ranking charge or no charge at all.
In Scotland, there is no equivalent of an Official Receiver who administers insolvency proceedings on behalf of creditors. This means that if a customer becomes insolvent, the financier may have to appoint an insolvency practitioner to act as an interim liquidator or trustee and pursue payment from the customer’s estate.
In England, there is an Official Receiver who administers insolvency proceedings on behalf of creditors. This means that if a customer becomes insolvent, the financier may have less costs and hassle in pursuing payment from the customer’s estate.
In Summary
Invoice finance is a useful way for businesses to improve their cash flow and access working capital by using their unpaid invoices as security for funding. However, there are some significant differences between invoice finance in Scotland and England that affect how invoice finance transactions are structured and documented. These differences relate to the legal system, security, assignment, survey, taxes, and risk of non-payment in each jurisdiction. Therefore, it is advisable for businesses and financiers to seek legal advice before entering into invoice finance transactions across different jurisdictions.
