Property encumbered by statutory pledge: effect of transfer by provider
Section 51 – Property encumbered by statutory pledge: transfer by provider
234.The creation of a statutory pledge will in all cases involve the registration of the pledge in the Register of Statutory Pledges. The result is that the provider of the pledge will usually keep possession of the encumbered property.
235.Subsection (1) therefore gives statutory effect to a general principle of the law of rights in security by providing that the statutory pledge will normally continue to encumber the property if it is transferred. However, there are some exceptions to this—
where it is transferred with the explicit written consent of the secured creditor to the particular transfer in a way that meets the conditions of subsection (2),
where a third party acting in good faith acquires the property unencumbered under one of the Act’s protections for innocent acquirers under section 53 to 55, or
where, in accordance with a provision of the Act, the pledge is otherwise extinguished by the provider’s transfer to a third party.
236.The final of these – the pledge being otherwise extinguished by the transfer – covers it being extinguished under the following sections: section 52 (where the secured creditor has acquiesced in trying to circumvent the rules on statutory pledges); section 93 (where there is a supervening inaccuracy in the register) or section 108 (where property is erroneously stated not to be encumbered).
237.As far as the exception relating to obtaining the secured creditor’s explicit written consent to the transfer is concerned, the secured creditor will not be able to agree in advance that the provider is free to deal with the encumbered property as they wish. That would enable the pledge to operate in the same manner as a floating charge. As such—
Subsection (2) sets out that the consent of the secured creditor must be in writing, and must relate to the particular transfer. Thus the consent cannot be to a transfer to any unnamed person, or to a class of persons. It must be a consent to a transfer first to a specific person, and second to that person taking the property unencumbered by the pledge. Subsection (2) also requires that the consent must be given not more than 14 days before the transfer.
Subsection (3) sets out that the decision on whether or not to give consent must be at the discretion of the secured creditor. Thus a contractual provision under which the secured creditor must consent to any or all disposals would be ineffective.
238.Where the secured creditor acquiesces in the transfer but outwith the express consent regime provided for by this section, section 52 will apply and will result in the pledge being extinguished.
239.Subsection (4) gives the Scottish Ministers power to amend the consent provisions. This would for example enable Ministers to take account of possible future developments under English law, in relation for example to the fixed/floating characterisation of charges in an insolvency.
240.This section does not apply to possessory (common law) pledge, as the fact that the secured creditor holds the property limits the provider’s ability to deal freely with the property.
Section 52 – Extinction of statutory pledge where dealings inconsistent with a fixed security
241.This section is an anti-avoidance provision. A statutory pledge could become tantamount to a floating charge if the secured creditor acquiesces in the provider dealing with property without following the narrow process for express written consent provided for in section 51. If this does happen, the effect of this section is to extinguish the statutory pledge.
Section 53 – Acquisition in good faith from seller acting in ordinary course of business
242.Sections 53 to 55 provide for circumstances in which a person who acquires corporeal property in good faith will acquire the property unencumbered by the statutory pledge, despite the consent mentioned in section 51(2) of the Act not having been obtained.
243.It is not likely to be efficient to grant a statutory pledge over stock-in-trade given that the secured creditor must expressly consent under section 51 of the Act to each intended transfer unless they want the security to be extinguished under section 52. Even so, encumbered property may become part of the inventory of a business. For example, Alistair might grant a statutory pledge over his piano to a bank, and then subsequently sell the instrument to a music shop. The effect of subsection (1) is that a good faith purchaser from the shop will be protected.
244.Encumbered property transferred without the consent of the secured creditor will be acquired unencumbered by a statutory pledge if two requirements are met—
First, the transferor must have been acting in the ordinary course of that person’s business. For example, a motor dealer which only sells vehicles would not on the face of it be acting in the ordinary course of business if it sold its office furniture.
Second, the acquirer must be in good faith at the time of the acquisition. The acquirer will not be protected if they know that the property is subject to a statutory pledge.
245.Subsection (2) makes it clear that the acquirer is not to be deemed to have constructive knowledge of a statutory pledge for the purposes of this section merely because it is registered.
246.Where the requirements of this section are not met (for example, because the property is acquired from a business acting other than in the usual course of its business), the person who acquires the property may benefit from other measures, in particular if it is acquired in good faith for personal or related purposes (see section 54 of the Act), or the property is a motor vehicle (see section 55 of the Act).
Section 54 – Acquisition in good faith for personal, domestic or household purposes
247.This section protects an individual who acquires corporeal property for private or related purposes.
248.Subsection (1) sets out that an individual who acquires encumbered property without the consent of the secured creditor having been obtained will acquire the property unencumbered if certain conditions are met:
the property must be wholly or mainly acquired for personal, domestic or household purposes (business purchasers are not protected),
the person must give value for the property acquired, which will normally mean adequate monetary value (i.e. payment of a purchase price) but also covers by means, say, of exchanging other property, and
the acquirer must be in good faith.
249.Subsection (2) makes it clear that the acquirer is not to be deemed to have constructive knowledge of a statutory pledge for the purposes of this section merely because it is registered. It follows that the individual does not need to search the Register of Statutory Pledges before acquiring the property.
250.Subsection (3) allows the Scottish Ministers to introduce a further rule into subsection (1) that the value of the property at the time of acquisition must not exceed a specified amount, and then to vary that amount from time to time.
Section 55 – Acquisition in good faith of motor vehicles
251.This section protects any person who acquires a motor vehicle that is encumbered property. It is similar in effect to the measures in section 27 of the Hire-Purchase Act 1964 in respect of motor vehicles hired under a hire-purchase contract, or purchased under a conditional sale agreement.
Example
D Ltd supplies a motor vehicle to Barry under a hire-purchase agreement with a three-year duration. Barry will not become the owner until he makes the final payment at the end of the three years. But after six months Barry sells the vehicle to Charlotte, who believes that Barry is the owner. Under section 27 of the 1964 Act, Charlotte will become owner of the vehicle if she is in good faith and is a private purchaser.
252.This section achieves the same result where Barry is the owner of the vehicle but grants a statutory pledge over it. Charlotte would take the vehicle unencumbered by the pledge if she is a good faith private purchaser from Barry.
253.Subsection (1) sets out four conditions which must be met if the property is to be acquired unencumbered, despite the consent of the secured creditor to the transfer not having been obtained:
The first condition is that there is a sale agreement (which could be a conditional sale agreement) or a hire-purchase agreement in respect of a motor vehicle.
The second condition is that the motor vehicle must be encumbered property under a statutory pledge.
The third condition is that the hirer or purchaser of the encumbered property cannot be carrying on a business described in section 29(2) of the 1964 Act, namely a business which consists wholly or partly of:
purchasing motor vehicles for the purpose of offering or exposing them for sale, or
providing finance for purchasing motor vehicles for the purpose of hiring them under hire-purchase agreements or selling them under conditional sale agreements.
The fourth condition is that the purchaser or acquirer must be in good faith. However, subsection (6) makes it clear that the purchaser or acquirer is not to be regarded as not being in good faith only because the pledge is registered. This means that they are not expected to check the register.
254.Where all of these conditions are met, subsection (2) provides that the property will be acquired unencumbered. Subsection (3) protects the purchaser or hirer by preventing enforcement of the statutory pledge prior to the property being transferred in implementation of an earlier hire or sale agreement.
255.Where a motor dealer transfers a vehicle in a way that results in it becoming unencumbered by the pledge, subsection (4) entitles the secured creditor to a limited right of recovery against the motor dealer rather than having to pursue the now unsecured debt against the provider. Subsection (5) provides that if this right is relied upon and the secured creditor receives a payment directly from the motor dealer, the provider’s liability to the secured creditor is reduced accordingly, but instead the motor dealership can pursue the provider for the amount paid out.
Example
John grants a statutory pledge over his car to the Ayr bank. He then sells the car to a motor dealer without the consent of the Bank. The motor dealer is not protected by subsection (2) because it is a motor dealing business and so should have made a search in the Register of Statutory Pledges against John and/or the car. But if the motor dealer then sells the car to a private purchaser who is protected then the Bank is entitled to be compensated by the motor dealer. The motor dealer can in turn try to recover this money from John, whose debt to the Bank has been reduced.
256.The term “motor vehicle” is defined in section 29 of the 1964 Act as “any mechanically propelled vehicle intended or adapted for use on roads”, and that definition is adopted in subsection (7) for the purposes of this section. The definitions of “conditional sale agreement” and “hire-purchase agreement” are also given by reference to the 1964 Act.
257.Subsection (8) provides for the Scottish Ministers to be able to exclude by regulations certain classes of vehicle from the application of this section. Those regulations can also (but do not have to) exclude vehicles from other purchase protections.
Example
The Driver and Vehicle Licensing Agency requires UK registered vehicles to have a vehicle identification number (VIN). If RSP Rules make it compulsory for an entry in the RSP to include the VIN, making it easier to check whether a particular vehicle is subject to a pledge, then Ministers might consider that the protection should not apply (say) to commercial vehicles. They would then be able to either disapply just the protection in this section in relation to such vehicles or, if desired, to disapply the protection in other sections too so that the VIN is checked even when buying from a business seller.
