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16 January 2020
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:
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:
These powers became exercisable upon:
The powers can be exercised more than once after an event of default and in respect of all or part of the collateral.
A secured party must give 14 days' written notice of an appropriation or sale of the collateral to:
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:
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:
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 ( 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:
In Re Kidd v All Service Group Holdings ( 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.
Upon an appropriation or sale, the secured party must produce a statement of account within 14 days showing:
The statement of account must be sent to the grantor and any other person that has:
The surplus must then be distributed by the secured party in the following order:
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.
For further information on this topic please contact Katrina Edge, Simon Felton or Bruce MacNeil at Ogier by telephone (+44 1534 504 000) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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