SCOTTISH INDEPENDENCE? THE IMPACT ON ASSETS, LIABILITIES AND CURRENCY - AUGUST 2021
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SCOTTISH
INDEPENDENCE?
THE IMPACT ON
ASSETS, LIABILITIES
AND CURRENCY
AUGUST 2021
SCOTTISH INDEPENDENCE? THE IMPACT
ON ASSETS, LIABILITIES AND CURRENCY
If Scotland were to vote for independence from the rest of the
United Kingdom, the UK's assets would need to be divided
between the two countries. The most difficult decision that
Scotland would face is over its currency. Cautious voices
recommend maintaining sterling for a lengthy period,
but others want Scotland to have its own currency at,
or shortly after, independence.
In our previous two briefings in this series, The prevalent view was that
we have looked at how Scotland could apportionment should be on the basis of
hold a valid independence referendum population, rather than, say, spending or
(probably only with Westminster tax revenue. The purpose of
legislation), when it might be (before the independence is not to perpetuate or
end of 2023) and when independence undo fiscal transfers that have already
might occur (before the next Scottish taken place between Scotland and rUK,
elections, in May 2026). We also looked but to separate the two populations for
at how independence would affect laws the future.
in Scotland and the rest of the United
The Scottish Government identified
Kingdom (rUK), as well as individuals and
certain of the United Kingdom's assets
companies on either side of the border.
that it would like, such as military
We turn now to the division of the UK's hardware and foreign embassies. The
assets and liabilities between rUK and assets that must be split between
Scotland and, probably the most difficult Scotland and rUK encompass property of
issue that would face an independent every kind, including gold and foreign
Scotland, its currency. We also consider currency reserves, intellectual property,
the effect of independence on contracts. staff, software and computer systems,
works of art, shareholdings, contracts,
The UK's assets and and the seabed.
liabilities This last aspect (the seabed) could prove
Scottish independence would require the particularly contentious because of the oil
assets and liabilities of the United and gas below it. There are, however,
Kingdom to be split between rUK and reasonably well-established, if not easy to
Scotland. The House of Lords Select apply, principles of public international
Committee on the Constitution explained, law upon which the seabed is divided
prior to the first referendum, that: between neighbouring states. If Scotland
and rUK cannot reach agreement, it may
"The key principle governing the be that this issue could be resolved
apportionment of assets and liabilities through arbitration or other legal means.
is that they should be shared equitably Indeed, many issues that might arise
between the continuator and the between Scotland and rUK could
successor states. It is a legal principle ultimately be referred to a third party for
that fixed or immovable assets (such as resolution. For example, the Anglo-Irish
Government or military buildings) would Treaty of 1921 establishing the Irish Free
automatically become assets of the State provided for the Irish Free State to
state in which they were located. Other, assume part of the United Kingdom's
moveable assets (such as military public debt, the amount to be determined
equipment) would become subject to by arbitration in default of agreement.
apportionment through negotiations –
with the only applicable legal principle The major, but not the only, liability of the
being that the apportionment should be United Kingdom that must be divided
equitable. Liabilities would be similarly between Scotland and rUK is the UK's
subject to apportionment through national debt (other debt includes, for
negotiations." example, long-term pension liabilities and
the UK's obligations to the EU under the
2 CLIFFORD CHANCE
SCOTTISH INDEPENDENCE? THE IMPACT ON ASSETS, LIABILITIES AND CURRENCY
Withdrawal Agreement). The UK and all major UK national political parties
Government said at the time of the first stated that they would not support rUK's
referendum that there would be no formal entering into a currency union with
transfer to Scotland of any part of the Scotland. A currency is a medium of
national debt; rUK would remain liable but exchange, a store of value and a unit of
Scotland would indemnify rUK in respect account, not an asset that appears on a
of a certain proportion of the debt. This balance sheet and that can be divided.
would involve discussion of what amount The Bank of England is one of the
Scotland should take, what maturities institutions of the UK's Government
should be allocated to Scotland, what which, by opting out of the UK, Scotland
interest rates, what currencies and so on. would have foresworn. For example,
rUK may even consider seeking security Scotland might be entitled to some of the
for Scotland's obligations (e.g. gold UK's foreign embassies, but it would not
reserves allocated to Scotland could be entitled to use in perpetuity the
continue to be held by, and pledged to, services of the Foreign, Commonwealth
the Bank of England, though these would and Development Office.
only secure a fraction of Scotland's likely
As a result, the SNP's position appears to
debt to rUK).
have changed. It set up a Sustainable
How assets and liabilities are divided Growth Commission to look at economic
affects business in different ways. The issues arising on independence, including
UK's commitment to continue as the currency, which reported in May 2018.
obligor on existing UK Government debt The SGC took a very cautious approach
may reassure creditors, although as regards currency, determined not to
independence could have some impact alarm investors, holders of accounts at
on the credit standing of the rUK Scottish banks or others.
Government and of rUK businesses
The SGC recommended that Scotland
whose credit is linked to their sovereign's
should continue unilaterally to use sterling
credit. The split of assets and, more
for "a possibly extended transition period"
importantly, liabilities and the impact on
after independence, only moving to a
the credit standing of the Scottish
Scottish currency when six tests were
Government will be more critical for
met. The SGC considered that it was
current and future creditors of the
unlikely that its tests would be met until
Scottish Government – and at least some
towards the end of the first decade
Scottish businesses – in international
following an independence vote.
capital markets.
The chair of the SGC was quoted as
saying that rushing into a new currency
Currency would be "short-term risky, politically
"... by laying sole claim as the continuing difficult, and it would make the cost of
state to the public asset of the Bank of Government borrowing much more
England, it would see [rUK] take full expensive… The monetary policy
responsibility for the £1.6 trillion national situation that we have should continue
debt." So said Alex Salmond, Scotland's until such a time that it's no longer in
First Minister at the time of the 2014 our interests."
referendum, linking Scotland's willingness
The SGC's six tests included: fiscal
to accept a share of the UK's debt to
sustainability, including credible budget
rUK's agreeing to enter into a formal
deficit and debt levels; a credible Scottish
currency union with Scotland (the debt is
central bank and stability in the price of
now well over £2 trillion). His argument
Governmental debt issuances; sufficient
that rUK was obliged to enter into a
foreign exchange and financial reserves to
currency union with Scotland rested on
allow currency management; and
the assertion that the Bank of England,
Scotland's economic cycle moving
as the issuer of sterling, is an asset of the
away from rUK's such that an
United Kingdom, not of rUK alone.
independent monetary policy was
As such, Scotland would be entitled to
feasible and desirable.
the continued use of this asset,
namely sterling. The SGC recommended that any new
currency be pegged at 1:1 with sterling in
The UK Government and most
the short and possibly medium term, that
commentators dismissed this argument,
CLIFFORD CHANCE 3
SCOTTISH INDEPENDENCE? THE IMPACT ON ASSETS, LIABILITIES AND CURRENCY
the currency used in private contracts banks in Scotland might, for example,
should not be changed retrospectively by be moved to banks or branches in rUK or
Scottish legislation (i.e. contracts, such as elsewhere, potentially creating an
loans and bank deposits, in sterling immediate liquidity crisis at banks in
should continue in sterling), and that Scotland, as well as a shortage of foreign
individuals and companies should be free currency reserves The formal currency
to continue to use sterling in Scotland if union between the Czech Republic and
they so wished. The SGC concluded that Slovakia in 1993 survived only five weeks,
it would be impractical to impose capital as monies flowed from Slovakia to the
controls to protect a Scottish currency. Czech Republic, which was regarded as
the economically stronger of the two.
The SGC's approach would leave
Scotland without any influence over rUK's In any event, the introduction of a new
(and therefore Scotland's) monetary currency is likely to give rise to issues for
policy, without its own central bank and some businesses or individuals, whether
without any access for its financial or not Scotland mandates the
institutions to the Bank of England as redenomination into the new Scottish
lender of last resort for a significant period currency of obligations under some or all
of time. A foreign currency is used existing contracts. Some will end up
domestically in this way by, for example, facing mismatches between the currency
Montenegro, which uses the euro, of assets and liabilities or future income
and Panama, which uses the US dollar. and outgoings that will be difficult or
Even some larger countries, such as expensive (even, perhaps, impossible) to
Ecuador, use the US dollar, issuing only hedge. These impacts are likely to be
local coins. most significant for businesses that are
highly leveraged (such as banks),
The SGC's proposal was rejected at
operate in both Scotland and rUK or have
the SNP's conference in April 2019.
Some businesses, may face The conference passed a resolution to
assets or liabilities that are governed by
mismatches between the both Scottish and English or other laws.
"authorise the preparation of a Scottish
These issues are reduced by a long
currency of assets and currency as soon as practicable after a
transition period with a 1:1 peg as
liabilities that may be difficult vote for independence." This, presumably,
shorter term contracts can be run-off
contemplates replacing sterling with
to hedge a new currency at, or shortly after,
and parties can readjust their positions
but are increased if there is a more
independence.
rapid transition.
The success, or otherwise, of the SNP's
Currency is one of the hardest issues an
conference policy would depend upon
independent Scotland would face. It is
the perception of a new Scottish
understandable – indeed, it is to be
currency. If it was perceived that the new
expected – that a new country would
currency would be strong (at least,
want its own monetary policy, rather than
stronger than sterling), there would be
be beholden to the state it has rejected.
fewer problems. Parties would, in general,
This requires a currency, but launching a
be content to move sterling assets,
new currency into the global financial
including bank accounts, into the Scottish
markets involves considerable risks,
currency, and creditors would be
as the SGC recognised, not least in the
positively keen for contracts to be
light of the current deficit in Scotland's
redenominated. But even in this situation,
public finances and the (post COVID-19
parties could face a risk that does not
pandemic) debt it would inherit from
now exist if their assets and liabilities no
the UK.
longer matched in currency terms.
If, however, the perception was that a Contracts
Scottish currency would devalue against
Scotland already has its own laws and
sterling, individuals and enterprises may
legal system. Contracts expressed to be
take steps to ensure that sterling assets
governed by Scottish law would continue
remained as such and could not be
to be governed by Scottish law, and
converted into the Scottish currency
contracts expressed to be governed by
(e.g. by mandatory conversion of all bank
English law would continue to be
balances) or trapped in Scotland
governed by English law, even if the
(e.g. by capital controls). Deposits at
counterparty is Scottish. Subject to any
4 CLIFFORD CHANCE
SCOTTISH INDEPENDENCE? THE IMPACT ON ASSETS, LIABILITIES AND CURRENCY
legislation that Scotland may introduce in Other cross-border elements may also
respect of contracts governed by Scottish create issues. For example, if the contract
law and that rUK may introduce in provides for the delivery of goods or
respect of English law contracts, provision of services between Scotland
pre-independence contracts would and rUK, the contract may not anticipate
remain as binding after independence as the impact of new tariff or non-tariff
they were before. barriers to cross-border trade that come
into effect after independence.
The uncertainty over Scotland's currency
may, however, introduce performance or
execution risks for contractual Defending the borders
counterparties. For example, if In its preparations for the first referendum,
performance of a contract must take the Scottish Government pointed out
place in Scotland, a Scottish overriding that, in 2007, the UK Government valued
mandatory law could affect, say, the its military assets at £93 billion.
ability to pay in sterling. Similarly, Scottish Splitting this on a population basis
laws could determine the exchange rate would give Scotland a £7.8 billion share
at which a debt due in sterling was on independence.
converted for enforcement or other
The Scottish Government then earmarked
purposes in Scotland. If sterling is the
certain assets it would like within its
currency of account in a contract with
share, such as two frigates, four mine
strong links to Scotland, a new Scottish
counter measures vessels, two offshore
currency could lead to an argument that
patrol vessels, two light artillery units, six
this new currency, rather than sterling,
helicopters, at least 12 typhoon jets and,
becomes the unit of account.
within a decade of independence, 15,000
To consider these risks, parties would service personnel.
need to look at the terms of their existing
What the Scottish Government did not
contracts (e.g. Where is payment due? Is
want was the Trident nuclear deterrent.
there a definition of sterling?). They may
It wanted an "early agreement on the
also need to consider the drafting of
speediest safe removal of nuclear
future contracts to ensure, for example,
weapons", and would make this a
that sterling is adequately defined and
"priority for negotiations" with rUK.
that payments are to be made outside
To emphasise its determination, it
Scotland. Similarly, although the mere
identified Faslane, the home of Trident,
fact of the creation of an independent
as the headquarters of the new Scottish
Scotland is unlikely, of itself, to trigger a
defence forces. Given the lack of any
contractual default (absent any specifically
obvious other venue for rUK's nuclear
drafted provision), parties may want to
weapons, this could, at an early stage,
review covenants, undertakings and
make the negotiations between Scotland
events of default in commercial contracts,
and rUK highly contentious.
bonds, loans and swaps.
In addition, anyone with a contract with Conclusion
the UK Government or a public sector Whether and, if so, when to create its
institution needs to consider how the own new currency will probably be the
contract will be affected by Scottish most complex issue facing a newly
independence. If the contract relates only independent Scotland, but it is potentially
to services in England, the contract will also the most far-reaching.
probably continue as before. But if the An independent Scotland will,
contract has a Scottish element, can understandably, want control of its
Scotland take the benefit of the contract monetary policy, but moving to its own
or any part of it should it wish to do so? currency is likely to prove a very
Will renegotiation be required? Can rUK, challenging task.
Scotland, or both, make use of software
licences for systems each wishes to
continue to use?
CLIFFORD CHANCE 5
SCOTTISH INDEPENDENCE? THE IMPACT ON ASSETS, LIABILITIES AND CURRENCY
CONTACTS
Chris Bates Melissa Fogarty Kate Gibbons
Consultant Joint Head of Corporate Partner
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Simon Gleeson Simon James Dan Neidle
Partner Partner Practice Area Leader,
T: +44 207006 4979 T: +44 207006 8405 TPE London
E: simon.gleeson@ E: simon.james@ T: +44 207006 8811
cliffordchance.com cliffordchance.com E: dan.neidle@
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Mark Poulton Hywel Robinson Phillip Souta
Partner Partner Head of UK Public Policy
T: +44 207006 1434 T: +44 207006 8387 T: +44 207006 1097
E: mark.poulton@ E: hywel.robinson@ E: phillip.souta@
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Nigel Wellings
Joint Head of Corporate
T: +44 207006 8011
E: nigel.wellings@
cliffordchance.com
6 CLIFFORD CHANCE
SCOTTISH INDEPENDENCE? THE IMPACT ON ASSETS, LIABILITIES AND CURRENCY
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