Raising Finance: the new statutory pledge

Security on loans

Where one person (the debtor) is borrowing money from another (the creditor), the debtor has an obligation to pay the money back to the creditor at a particular time, according to the terms of the loan. In order to guard against the debtor not paying or becoming insolvent, the creditor can take a right in security. A familiar example is the “mortgage” (called a “standard security” in Scotland): where the debt isn’t paid, the lender can sell the specified land in order to recoup the debt. Rights in security carry a benefit for debtors too because, with them, the cost of borrowing is typically lower.

For corporeal moveable property (tangible assets which are not attached to land) the equivalent to the standard security is the pledge. It isn’t used widely because the property must be in the creditor’s possession. So, if a tractor were used as security for a loan, that would be possible, but impractical, because the debtor would not have possession of the tractor until the loan was paid off.

The new statutory pledge

The Act introduces a new right in security called the “statutory pledge”, which will be created by registration in a public register. Unlike the possessory pledge (which will also continue to be available), the statutory pledge will not involve the debtor giving up possession to the creditor while the secured loan is outstanding. Like other rights in security, the statutory pledge will be available to secure other forms of obligation, not just money debts.

Who can grant a statutory pledge?

Often, the person who grants a pledge will be the debtor. But it is also possible for someone else to grant the pledge in respect of their property, similar to when someone acts as a guarantor.

Additionally, if an individual is providing the property over which there will be a statutory pledge this can only be done if they are:

acting in the course of their business

acting as a trustee of a charity

acting as a member of an unincorporated association (that is not a charity)

acting on behalf of the unincorporated association

What kind of property?

Generally, the statutory pledge can be created over corporeal moveable property. There are some exclusions. It is expected that company shares and some other financial instruments (even though they are incorporeal) will be added to the list of things you can create a statutory pledge over. There is also a value threshold of over £3,000. That threshold excludes many sheep and cattle beasts, but not all. However, it is likely that only a specialist commercial lender would take security over an animal because of the risk of death or a drop in value, and that risk would likely mean a higher rate of interest on a loan.

Property used for a statutory pledge must be owned by the person offering to grant the pledge. So, if, for example, a combine harvester is on hire-purchase, it cannot be used by the person acquiring it because they do not become the owner until the hire-purchase has ended.

Will lenders be interested?

Although the statutory pledge will be available in principle from 1 April 2025 as a form of security, in practice it will only be available where a lender is willing to accept it. It is expected that banks and other commercial lenders may take some time to get comfortable with accepting a statutory pledge as security, and where it becomes used will be quite market-specific. Private lenders may be quicker to accept the statutory pledge.

Insights | Energy, Rural

28 February 2025
| Stuart Orr

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