Liens: Unintended Consequences? – lexology
Our Banking team recently provided an overview of the new statutory lien proposed by The Moveable Transactions (Scotland) Bill (the “Act”). Here we will focus on the implications for both consumers and businesses that legal liens could have if introduced.
At present, the only form of secured lending available to individuals for personal property (e.g. jewelry, paintings, etc.) is pledging. Pledge is the legal term, but colloquially it is referred to as pledge. You know how it works – a private person brings their goods to the pawnbroker, the pawnbroker gives him a loan (cash) based on the value of the goods and keeps the goods as collateral for the loan. If the private individual repays the loan (along with the interest) within an agreed period of time, the pawnbroker returns the goods to the private individual. If he does not comply with the loan repayment terms, the pawnbroker is entitled to sell the goods to repay the loan.
The bill introduces a new type of security, the statutory lien. It works by allowing a person to use their goods as collateral for a loan without having to give up ownership of them. If enacted, it would allow borrowers to use the equity in an asset they own to raise finance without having to physically give it up ie Using a valuable painting as collateral for a high-quality loan. This means that a borrower could potentially get more credit than they could otherwise get without posting any collateral.
In general, and with the exception of home mortgages, the majority of lending to individuals is on an unsecured basis, e.g. B. Loans for the purchase of furniture and cars, etc. If a debtor defaults on an unsecured loan, the lender must initiate court proceedings to recover the debt and then try to enforce the decree using the various means at their disposal . In Scotland, without court approval, a lender may not enter a debtor’s home and take possession of property in order to settle a debt owed. In certain circumstances, the court may be willing to issue an Extraordinary Preservation Order, but obtaining such orders is quite unusual.
The creation of a legal lien may make lenders less willing to offer unsecured loans, preferring legal lien instead because it provides them with a mechanism to recover tangible property, sell it, and recover the balance from the debtor. A possible consequence may be an increase in secured loan for items previously purchased with unsecured loan.
The results could be quite harsh for the debtor, as it could mean that the debtor recovered the property (e.g., a couch) from the lender, but still owes money that the lender can collect through other means. The current position is that they would pay off the debt but at least keep the couch.
The introduction of legal lien can transform the entire landscape of personal lending in Scotland. As a result, we anticipate further consultation and deliberation on the consequences of issuing a statutory pledge.