The Security Interests (Jersey) Law 2012 came fully into force on 2 January 2014 and changed the way in which security is created over Jersey intangible movables. This article examines the enforcement of security interests in the event of default.
Under the Security Interests (Jersey) Law 1983, the powers of a secured party on enforcement were limited to a power of sale. However, a power of appropriation was available where the collateral was:
- money;
- represented by a negotiable instrument; or
- moneys held in a bank account.
In addition, the 1983 law required a 14-day statutory grace period before exercise of the power of sale where the event of default complained of was capable of remedy.
The 2012 law introduced a wider range of enforcement powers, such as:
- appropriating the collateral;
- selling the collateral;
- taking any of the following actions:
- taking control or possession of the collateral;
- exercising the rights of the grantor in relation to the collateral; or
- instructing any person with an obligation in respect of the collateral to carry out such obligation for the benefit of the secured party; and
- applying any remedies provided for by the security agreement, to the extent that they do not conflict with the 2012 law.
These powers became exercisable upon:
- the occurrence of an event of default as provided for in the security agreement; and
- the secured party serving written notice on the grantor specifying the event of default.
The powers can be exercised more than once after an event of default and in respect of all or part of the collateral.
Notice of appropriation or sale
A secured party must give 14 days' written notice of an appropriation or sale of the collateral to:
- the grantor (but this can be waived and a well-drafted security agreement will include such a waiver); or
- any person which, at least 21 days before the appropriation or sale, has either:
- registered a financing statement in the Security Interests Register (SIR) in respect of a security interest in the collateral; or
- given the secured party notice of a proprietary interest in the collateral.
If no such registration or notice has been made or given, there is no person to whom notices of appropriation or sale need be given. Further, no such notice need be given if the third party has made such registration or given such notice to the secured party in the seven days prior to the date on which the secured party would otherwise have had to give notices of appropriation or sale. In these cases, appropriation or sale can happen immediately.
In addition, on a sale, but not an appropriation, the requirement to give 14 days' written notice does not apply to the extent that:
- the collateral is a quoted investment security (this includes those held in a securities account);
- the secured party believes on reasonable grounds that the collateral will decline substantially in value if not disposed of within 14 days; or
- the Royal Court orders that no notice need be given.
Duties on appropriation or sale
On an appropriation, a secured party must take all commercially reasonable steps to determine the fair market value of the collateral at the time of appropriation and must act in all other respects in a commercially reasonable manner in relation to the appropriation.
On a sale, a secured party must:
- take all commercially reasonable steps to obtain fair market value of the collateral at the time of sale;
- act in all other respects in a commercially reasonable manner in relation to the sale; and
- enter into any agreement in relation to the sale on commercially reasonable grounds.
The courts have recently considered the duty of a secured party to take all commercially reasonable steps to determine the fair market value of the collateral prior to a sale or appropriation.
In Re Bayswater Road (Holdings) Limited ([2019] JRC 102), the Royal Court concluded that the secured party had taken all commercially reasonable steps to obtain a fair market value for the collateral prior to the sale of the borrower's shares as:
- the secured party had repeatedly attempted to sell the underlying property owned by the borrower; and
- an independent valuer had confirmed that it was unlikely that an offer for the property would be made that would exceed the proposed purchase price of the borrower's shares (which was significantly less than the debt owed).
In Re Kidd v All Service Group Holdings ([2019] JRC221), the Royal Court further clarified the position on a secured party's duty to take all commercially reasonable steps to determine the fair market value of the collateral at the time of an appropriation. This case suggests that a secured party should not rely on only a single valuation, especially if the value of the collateral may be more than the outstanding debt. In addition, the court confirmed that a grantor of security has the right to challenge the secured party's proposed appropriation upon receiving the statement of account.
These provisions apply only on an appropriation or sale, and not on the other enforcement actions (although general obligations may apply where the collateral is dealt with). Subject to these duties, there are no limitations on the method of sale.
Statement of account and distribution of surplus
Upon an appropriation or sale, the secured party must produce a statement of account within 14 days showing:
- the gross value realised on the appropriation or the gross proceeds of sale;
- the secured party's reasonable costs in connection with the appropriation or sale;
- the amount of any other reasonable expenses incurred by the secured party in enforcing the security agreement after the event of default;
- the net value of the collateral or proceeds of sale; and
- the 'surplus' (defined as the amount by which the net value of the collateral or net proceeds of sale after deduction of the secured party's reasonable costs exceeds the amount or monetary value of the obligations owed to the enforcing secured party).
The statement of account must be sent to the grantor and any other person that has:
- a subordinate security interest in the collateral and has registered a financing statement in the SIR; or
- given the secured party notice of a proprietary interest in the collateral.
The surplus must then be distributed by the secured party in the following order:
- any person that has a subordinate security interest in the collateral and has registered a financing statement in the SIR;
- any person that has given the secured party notice of a proprietary interest in the collateral; and
- the grantor.
Given that this puts the onus on the secured party to deal with subordinate secured parties and other interested parties, it may be preferable for an enforcing secured party to pay the surplus into the Royal Court for it to deal with claims for distribution.
On an appropriation or sale, all security interests subordinate to that of the enforcing secured party are extinguished. Any appropriation or sale remains subject to any senior security interest. It would be difficult for a junior secured party to enforce its security effectively without the cooperation of the senior secured party.
A grantor and any person to which notice of an appropriation or sale must be given may redeem the collateral in full by paying the obligations secured by the security interest and paying a sum equal to the reasonable costs and expenses of the secured party in enforcing the security agreement after the event of default. Consequently, the person redeeming takes the collateral free of the security interest.
A grantor may reinstate a security agreement by paying any arrears or otherwise remedying the event of default and paying a sum equal to the reason reasonable costs and expenses of the secured party in enforcing the security agreement after the event of default. As a result, the security interest is reinstated on the same basis as prior to the event of default. This right may be waived through a written agreement.
However, if a secured party has entered into an agreement to sell collateral on enforcement or taken some other irrevocable action in respect of the collateral after an event of default, the rights of redemption and reinstatement cease.
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