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01 June 2012
The Security Interests (Jersey) Law 1983 governing security over intangible movable property in Jersey (eg, securities, accounts and contractual rights) has been in force for almost three decades. Although the 1983 law is clear and concise legislation that has generally worked well, it has become increasingly outdated in the context of modern banking and finance transactions. The 1983 law will soon be replaced by the new Security Interests (Jersey) Law, which was passed by the States of Jersey on July 19 2011 and is expected to come into force after Privy Council approval in 2012.
The explanatory note to the new law states that its central objective is to provide Jersey with a simplified, modern, efficient legal regime for the creation, perfection, priority and enforcement of security interests in intangible movable property. Furthermore, the new law is designed to give Jersey one of the most up-to-date legal regimes in this field and thereby to enhance Jersey's attractiveness to local and foreign investors.
The new law reflects a simplified form of the personal property securities approach adopted in the United States, Canada, Australia and New Zealand. Therefore, the case law of those jurisdictions is likely to be relevant in future Jersey cases concerning the new law.
Jersey entities (eg, companies, trusts and limited partnerships) are often established as holding bodies (eg, for real estate or operating groups), investment funds and special purpose vehicles. When lending to structures including Jersey entities, secured parties usually take Jersey law security over the Jersey-based assets, such as securities issued by Jersey entities and any Jersey accounts.
The 1983 law provides that no security over intangible movable property (eg, securities, accounts and contractual rights) can be created under Jersey law, except under the provisions of the law. Jersey currently follows English common law conflict of laws principles, applying the law of the jurisdiction in which the assets are situated (ie, the lex situs) to security. Therefore, under the current law, to ensure that the secured party has enforceable security over intangible movable property situated in Jersey, it is generally recommended that the parties enter into a security interest agreement (SIA) that is governed by Jersey law and that complies with the requirements of the 1983 law.
The new law will apply to both:
The new law also includes provisions on assignments of receivables by Jersey persons (although those provisions are not analysed in this update).
Article 4 of the new law identifies which intangible movable property is capable of being subject to a security interest under the new law. These rules require a Jersey connection for the new law to apply, such as the securities register or account being maintained in Jersey.
Therefore, after the new law comes into force, to ensure that the secured party has an enforceable security interest over intangible movable property with a Jersey connection under Article 4 of the new law, it is generally recommended that the parties enter into a security agreement that is governed by Jersey law and that complies with the requirements of the new law. The security interest can cover original collateral and any proceeds of dealing with the collateral (ie, identifiable or traceable property that is intangible movable property).
Further, under Article 5 of the new law, two or more persons can agree that, in their relations with each other, the new law will apply to an agreement to which they are a party, providing for a security interest over intangible movable property outside Article 4 of the new law. This would include both:
However, generally that agreement will affect only the relations between the parties, as opposed to property rights affecting third parties.
The new law does not purport to apply to foreign law security, except to provide that a Jersey person is deemed to have capacity to give foreign law security over property situated outside Jersey (repeating provisions from the 1983 law). Therefore, the requirements of the new law (eg, in relation to perfection and registration) do not apply to foreign law security over property situated outside Jersey (whether granted by a Jersey person or not).
The following table compares the 1983 law to the new law and summarises the main upcoming changes.
Scope of collateral
Creation, attachment and perfection
Security interest agreement complying with the 1983 law, as well as:
No concepts of attachment or perfection (only creation).
Security interest agreement complying with the new law, as well as:
Attachment makes security enforceable against the grantor, whereas perfection makes security enforceable against third parties and ensures priority over unperfected security.
Third-party security (ie, security granted in support of the obligations of a third party) is not expressly contemplated. This issue is usually dealt with by including a limited recourse guarantee or covenant to pay in the security interest agreement.
Third-party security is expressly permitted.
Rights to deal
The law does not expressly provide for the grantor having rights to deal with the collateral (eg, secured accounts).
The law expressly provides that security is not affected by the grantor either:
No public registration of security.
Registration of security on an online register open to public searches.
Power of sale is the only enforcement remedy (requiring 14 days' notice before enforcement of security where the event of default is capable of remedy).
Wider enforcement remedies, including:
No 14-day notice period before enforcement of security (assuming this is contracted out of).
The new law applies only to security interests created by agreement, although to ensure the enforceability of any security interest against the grantor and third parties, it is necessary for the security interest to be subject to attachment and perfection.
A security interest created under the new law can attach in possession, control or identification (or a combination thereof), depending on the type of collateral. The effect of attachment of a security interest is that it becomes enforceable against the grantor and with respect to the collateral. Under the formal requirements for attachment, it must be proved that both:
For attachment of a security interest, one or both of the following conditions must also be satisfied:
This applies only to collateral consisting of documentary intangibles, namely:
Possession can be obtained by the secured party (or someone on its behalf other than the grantor or obligor) taking possession of the negotiable instrument or certificate representing the bearer security. However, as these types of collateral are rare for Jersey banking and finance transactions, control and identification of the collateral are expected to be the most common methods of attachment.
This applies only to certain types of collateral, of which the most relevant are deposit accounts (maintained by a bank or other deposit-taking institution), securities accounts (maintained by a custodian or other intermediary) and certificated investment securities. Control can be obtained as follows:
This can apply to any type of collateral. The description of the collateral can be by item or type, or a statement that the security agreement covers all present and future intangible movable property (similar to a floating charge) with the option to specify any excluded collateral. A security interest which only attaches in this way must be perfected by registration.
The ability to attach a security interest created under the new law by identification without any transfer of possession, control or title to the secured party represents a significant change from the 1983 law, which requires such transfer. The new law provides that a security interest in the nature of a hypothec or charge can be created over intangible movable property. This was not previously recognised under Jersey law. Therefore, market practice under the 1983 law has been for the parties to enter into a separate SIA for each type of collateral (eg, securities, accounts or contractual rights), depending on the relevant method of creation of the security interest. After the new law comes into force, it is expected that market practice will change and that secured parties will now often seek to take a security interest over all the grantor's present and future intangible movable property (similar to a floating charge) under a general security agreement, drafted in a similar style to an English law debenture. Alternatively, depending on the commercial terms, the parties could enter into a security agreement in respect of a specific type of collateral under the new law (eg, securities).
A security interest created under the new law can be perfected in one or more of the following ways, depending on the type of collateral (ie, possession, control or registration).
The effect of perfection of a security interest is that it becomes enforceable against third parties (eg, other creditors, purchasers of the collateral and insolvency officials). Perfection ensures priority over unperfected security interests, although the priority between perfected security interests in the same collateral is determined by the priority rules under the new law.
For perfection of a security interest, both of the following conditions must be satisfied:
A security interest which has attached by the secured party (or someone on its behalf other than the grantor or obligor) having possession or control of the collateral is perfected at the same time.
When to register
There is currently no public registration of security interests created under the 1983 law.
Under the new law, registration can perfect a security interest in any type of collateral. Registration will be critical for collateral where the security interest cannot be perfected by possession or control (eg, a security interest over contractual rights, or all present and future intangible movable property).
Even where the security interest is perfected by possession or control, it is expected that secured parties will usually also perfect their security by registration for the following reasons:
Therefore, it is expected that market practice will be to register all security interests where it is possible to do so, except where there are confidentiality concerns.
When not to register
Registration may be undesirable in certain circumstances - for example, where there are confidentiality concerns for certain individuals and trustee grantors. In these circumstances, the security interest could simply be perfected by the secured party having possession or control of the collateral (with this being maintained throughout the security period).
After the new law comes into force, it will not be necessary or desirable to register either:
It will not be necessary to register security interests created under the new law which are perfected by possession or control of the collateral, although it may still be desirable to register in these circumstances.
The two conditions for perfection (ie, that the security interest has attached and any further steps required under the new law for perfection have been completed) can be satisfied in any order, meaning that it will be possible for a prospective secured party to pre-register its security interest before the security agreement has been entered into and the security interest has attached. However, it is expected that pre-registration would generally require grantor consent for bank confidentiality reasons. Furthermore, a security interest under which a secured party has possession or control of a certificated investment security, securities account or deposit account has priority over a security interest in the same collateral under which a secured party does not have that possession or control. Therefore, for these types of collateral, pre-registration would be of limited value, as the registering secured party could still lose priority to a subsequent secured party taking possession or control of the collateral.
Registration and search practicalities
The registrar of companies under the Companies (Jersey) Law 1991 will be the registrar for the purposes of the new law and will maintain the Jersey security interests register. This will be an automated online register open to public searches, allowing for:
The above matters will require the payment of fees (to be published by the Jersey Financial Services Commission), although basic searching will be free of charge.
The contents of financing statements and financing change statements will be prescribed in an order or guidance notes to be issued by the registrar. It is expected that financing statements will need to include basic details of the grantor, secured party, collateral and duration for the registration. Financing change statements will need to include any change to the information provided in the original financing statement (eg, if the original registration is subject to amendment, renewal or discharge). It will not be necessary or possible to register copies of any security agreements or other finance documents, so third parties seeking information not on the register would need to contact a party to the security agreement for more information.
A financing statement or financing change statement is taken to be registered at the time when a registration number, date and time are assigned and the statement is stored and capable of being searched (after which the registrar will issue a verification statement). The date and time stamp may prove to be an important factor where there are competing security interests in the same collateral. A printed search result issued by the registrar will be admissible as evidence and will be (in the absence of evidence to the contrary) proof of the registration.
The validity of the registration of a financing statement or financing change statement will be affected only by a defect, irregularity, omission or error that is 'seriously misleading'. This is an objective test, as for registration details to be seriously misleading, it is not necessary to prove that any person has actually been misled. It is expected that the order described above will include further provisions on what registration details will be seriously misleading. In particular, secured parties should be careful to register the name of the grantor accurately (eg, according to an official record, such as a passport or certificate of incorporation).
Registration will be effective for a default period of 10 years beginning on the date of registration, or more commonly, for any duration specified in the financing statement or financing change statement (unless the registration is renewed or discharged).
It is expected to be market practice for lenders and their advisers to search the register before negotiating entry into security agreements and before entering into security agreements, in order to confirm that there are no competing security interests in the same collateral.
The main priority rules under Articles 29 to 31 of the new law can be summarised as follows:
Under the new law, any priority of a perfected security interest over another security interest applies even if the first-mentioned security interest was acquired with actual knowledge of the second-mentioned security interest (eg, from searching the register or otherwise). Further, the new law provides that registration of a financing statement or financing change statement will not constitute constructive notice of the existence of the statement or its contents by any person. Therefore, registration will not put the world on notice from a legal perspective (even though it may put others on notice from a commercial perspective).
Article 32 of the new law provides that a secured party can agree, in a security agreement or otherwise, to subordinate its security interest to any other interest. That agreement (subordination agreement) is effective according to its terms between the parties to the agreement. However, that agreement is not binding on a secured party transferee of the subordinated security interest unless, at the time of the transfer, either:
The subordination provisions can be included in the security agreement, in which case the security agreement and the subordination agreement will be the same agreement. However, the usual practice is expected to include the subordination provisions in a separate subordination agreement or intercreditor agreement (which need not necessarily be governed by Jersey law). The new law clarifies that such agreement/any turnover trust will not create a security interest unless the agreement expressly provides that it does so.
The enforceability of subordination provisions in respect of security interests will be governed by Article 32 of the new law as explained above, whereas the enforceability of contractual subordination provisions in respect of debt and other claims will continue to be governed by the Bankruptcy (Netting, Contractual Subordination and Non-petition) (Jersey) Law 2005.
Second-ranking security interests
The ability to create a security interest in the nature of a hypothec or charge under the new law without any transfer of possession, control or title to the secured party means that it will be substantially easier to create second ranking security interests under the new law. This is because usually only one secured party can hold possession, control or title in respect of collateral at any given time, whereas a grantor is able (subject to negative pledge provisions) to create more than one hypothec or charge over the same collateral. This ability, together with the statutory recognition of subordination agreements as explained above, means that it is expected that second-ranking security interests will become more common in the Jersey market after the new law comes into force. For example, a second-ranking security interest could be created under a security agreement expressed to be subject to a subordination agreement or intercreditor agreement (which would rank the respective security interests).
While the power of sale is the only enforcement remedy under the 1983 law, the new law will allow secured parties to have wider enforcement remedies. The new law will also allow the parties to contract out of the current 14-day notice period required before enforcing security under the 1983 law where the event of default is capable of remedy.
Requirements for enforcement
Under the new law, the power of enforcement in respect of a security interest is exercisable when both:
An 'event of default' is defined in the new law as a failure to pay, or otherwise to perform, the secured obligations when due, or any enforcement event specified in the security agreement.
Subject to limited exceptions, the secured party must give written notice not less than 14 days before appropriating or selling the collateral to each of the following persons (unless they have agreed in writing to a different notice period, or that no notice period is required):
It is expected that it will be market standard in security agreements for the grantor to contract out of any notice period being required before appropriation or sale of the collateral. Further, 21 days before the sale or appropriation, the secured party will need to check whether any other person has a registered security interest in the collateral or has given the secured party notice of their interest, in which case such person will need to be given notice unless they have agreed otherwise.
A sale of collateral can be by auction, public tender, private sale or other method, and (unlike the position under the 1983 law) a secured party is permitted to purchase collateral that it sells.
Redemption and reinstatement
Prior to a sale, appropriation, or irrevocable act being taken in respect of the collateral by the secured party:
The secured party can exercise the power of enforcement in respect of a security interest by:
The new law provides that the secured party can also exercise other contractual rights under the security agreement which are not in conflict with the new law, whether before or after the power of enforcement becomes exercisable. Further, the court can, on application by the secured party following the occurrence of an event of default, make wide-ranging orders to facilitate realisation of the collateral (including orders for the delivery or transfer of title in respect of collateral).
Effect of grantor's bankruptcy
The new law provides that in the case of any bankruptcy of the grantor of a security interest, the security interest is void against the viscount or liquidator (as applicable) and the grantor's creditors, unless the security interest is perfected before the grantor becomes bankrupt. In certain circumstances, even a perfected security interest could potentially be challenged by the viscount or liquidator (as applicable) under insolvency legislation (eg, as a transaction at undervalue or a preference).
Subject to the comments above, the new law provides that the grantor becoming bankrupt (as defined in Article 8 of the Interpretation (Jersey) Law 1954), or the grantor or its property becoming subject, whether in Jersey or elsewhere, to any other insolvency proceedings, will not affect the power of a secured party to appropriate or sell collateral, or otherwise act in relation to, collateral under the new law.
Duty of secured party
A secured party who sells or appropriates collateral under the new law owes a duty to the grantor and any other persons who have a security interest in the collateral:
Upon an appropriation or sale of the collateral, the relevant security interests are discharged. Within 14 days after the date on which the collateral was appropriated or sold, the secured party must give a written statement of account to the grantor and any other persons who have a security interest in the collateral. In summary, the statement of account must show:
Where a surplus exists after an appropriation or sale of the collateral (which would be rare in practice), the secured party is obliged to pay the surplus in a prescribed order (eg, to other secured parties and the grantor), or can alternatively pay the surplus into court (in which case the surplus will only be paid out by court order following an application by a person entitled to the surplus). Where there is any uncertainty or potential dispute as to proper distribution of the surplus, it is expected that the secured party will take the safe option of paying the surplus into court.
The transitional provisions are set out in Schedule 2 to the new law.
Amendment of continuing security interests
The new law includes grandfathering provisions stating that the 1983 law will continue to apply to continuing security interests created under the 1983 law, provided they are not amended (as defined in the new law) after the new law comes into force. Therefore, the requirements of the new law (eg, in relation to perfection and registration) will not apply to those security interests.
The definition of 'amend' includes:
Therefore, any amendment to an SIA created under the 1983 law, or any related document describing the terms of the secured obligations (eg, a facility agreement) should be reviewed to check whether it results in the continuing security interest being amended. If the amendment occurs unintentionally, this could detrimentally affect the position of the secured party, and in a worst-case scenario, resulting in the secured party having unperfected security (losing priority to any perfected security and being void against third parties on the grantor's bankruptcy) or no security.
The new law will apply to any continuing security interest created under the 1983 law that is amended after the new law comes into force. Therefore, at the time of any amendment, secured parties should check that the amended SIA complies with, and takes advantage of, the new law - for example, including provisions on:
In many cases, it is expected that lenders will wish to take advantage of the new law by requiring that SIAs created under the 1983 law be amended or replaced once the new law comes into force (eg, in reliance on further assurance provisions).
Priority of continuing security interests
The new law provides that a continuing security interest created under the 1983 law over collateral has priority over any security interest created under the new law over the same collateral (unless the respective secured parties otherwise agree).
However, if a continuing security interest created under the 1983 law is amended after the new law comes into force, then it will be taken to be a new security interest created under the new law at the time of the amendment (to which the priority rules under the new law will apply).
This means that the amendment of an SIA created under the 1983 law will result in the creation of a new security interest under the new law, such that hardening periods will restart under insolvency legislation (eg, for transactions at undervalue and preferences).
The new law will represent a major development in the Jersey law of security over intangible movable property. We are anticipating an increased amount of financing and refinancing activity involving Jersey entities once the new law comes into force in 2012, especially as this coincides with European debt of up to €50 to €75 billion being due to mature and come to market for refinancing over the next five years.(1)
The second stage of the new law will be to extend its provisions to cover tangible movable property (eg, inventory, equipment and consumer goods), although the draft legislation for this is subject to ongoing consultation. It is likely that the new law will result in a number of substantial changes to market practice in Jersey, namely that:
For further information on this topic please contact Matthew Swan or Bruce MacNeil at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (firstname.lastname@example.org or email@example.com).
An earlier version of this update first appeared in the Practical Law Company Finance Multi-Jurisdictional Guide 2012.
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