Types of security:
Currently, the only way that fixed security can be taken over whisky casks located in Scotland is under a security document called a common law pledge, whereas for casks located in England and Wales and Ireland it is possible to take a fixed charge, but consideration should be given to the cost of doing so. A floating charge is also often taken over casks as additional security, as will be discussed below.
- Scots law common law pledge
A pledge is a type of security that attaches immediately to the asset over which the security is granted. In order to create security under a pledge, the pledged asset must be delivered to, and retained by, the security holder. The pledgor is prevented from dealing directly with the asset without consent of the security holder. In the context of whisky casks, it is likely to be impracticable for the security holder to take actual physical possession of the casks and therefore delivery is normally 'constructive' rather than physical. We usually see this achieved by the security holder instructing an independent third-party warehouse to maintain and protect the whisky casks in a bonded warehouse and to hold them to order of the security holder.
The pledge does not secure future casks and consequently any future casks require new pledges to be granted over them, which can be timely and cost consuming. In light of these practicalities, a floating charge is often also taken over casks in addition to, or in the place of, a pledge.
- Scots law floating charge
With some exceptions, a floating charge normally allows a borrower to deal with the charged assets in the ordinary course of its business until the charge is enforced. It can also secure both current and future assets of the chargor. One constraint of the floating charge is, only companies and LLP's can grant a floating charge - individuals cannot. Additionally, floating charges afford a security holder a lower level of priority over the proceeds of sale of charged assets than a pledge. A pledge holder will have absolute priority over such proceeds, in insolvency. Conversely, the holder of a floating charge will have to wait until certain other preferential creditors of the chargor have been paid out of such proceeds before the same will flow to it.
A Scottish solution
The Moveable Transactions (Scotland) Act 2023, which should be implemented during 2025, contains much welcomed reform that will modernise security rights over assets such as whisky casks located in Scotland. The new statutory pledge created under the Act will not require delivery of the secured assets to the security holder or third-party control of the secured assets under the instructions of the security holder. Moreover, the new pledge will be able to secure future property provided the same is identifiable.
The arrival of this new statutory pledge is therefore eagerly anticipated by portfolio lenders as it should enhance the commercial viability of including whisky casks in their collateral pool.
- English law governed security
Where the casks are located in England, it may be possible to take fixed charge security over them. In order to do so, control over the premises in which the casks are located must be exercised by a third party, which in practical terms means controls over entry points to the storage location and lists of casks to be removed being provided for approval by the relevant lender before those casks leave the warehouse. Under English law, a fixed charge holder ranks ahead of all creditors, other than the expenses of an administration, upon an insolvency. If the level of control exercised by the lender over the casks is not deemed sufficient for a fixed charge, the charge will be characterised as a floating charge.
- Irish law governed security
At present, the only way to take security over whiskey casks which are located in Ireland is by way of a fixed charge or a floating charge. In practice, due to the degree of control which is generally required to be exercised by a security holder over assets which are being secured by way of a fixed charge, whiskey casks in Ireland are more often secured by way of a floating charge – which allows the security provider to deal with the assets in the ordinary course of business until the charge is enforced.
While the provision of a fixed charge over whiskey casks would ultimately leave a security holder in a stronger position upon an insolvency, where they would rank ahead of all preferential creditors, security providers will often seek to avoid requiring lender consent in order to deal with the whiskey casks, and therefore a floating charge is often the most practical security option.
