The Security Interests (Jersey) Law 2012 (the "New Law") is due to come into force on 2 January 2014. The New Law represents a significant reform of the ways in which security may be granted over intangible movable property in Jersey. It is anticipated that the enhanced regime will provide greater certainty and flexibility for both lenders and borrowers and will bring Jersey's security offering more into line with internationally recognised standards and practices.
THE CURRENT REGIME
At present, security over intangible movable property situate in Jersey is governed by the Security Interests (Jersey) Law 1983 (the "1983 Law"). The 1983 Law allowed the creation of security over a range of collateral by way of possession, control or assignment and has operated successfully for many years. However, with the advent of more sophisticated security requirements it has become clear that the 1983 Law is too restrictive.
THE NEW FRAMEWORK
The New Law seeks to address the limitations of the 1983 Law as follows:
- Security over present and future property: It
will be possible to take security over a grantor's present and
future intangible movable property in Jersey, similar to the
concept of an English law debenture – this will include
receivables and book debts. Where further advances are made, the
New Law specifies that these advances will have the same priority
as all previous advances by the same secured party.
Under the 1983 Law the requirement that the security agreement must confirm provisions sufficient to identify the collateral to be charged and the obligation to be secured means that an "all moneys" security interest is not possible.
- Security over proceeds of sale: Under the New Law, a secured party will have a security interest in the proceeds of any unauthorised dealing in the collateral (provided that such proceeds are themselves intangible movable property, e.g. money in a bank account). Under the 1983 Law there is no such power or right.
- Third party security: The New Law will allow
the creation of a third party charge whereby a third party (perhaps
a parent company) charges collateral as security for the
indebtedness of the grantor (perhaps its subsidiary). The New Law
also allows the creation of security over investment securities
held by an intermediary (e.g. a custodian) in a Jersey securities
The 1983 Law cannot be used to create a third party charge per se but, instead, it is necessary to create a separate guarantee liability that is then the subject of the security interest - a convoluted and somewhat needless requirement.
- Perfection: The New Law provides for two ways in which the security interest can be perfected (or validated) The first is by the secured party having possession or control of the collateral. The second is by registering the security interest on the new on-line, fully automated security registration system. Whilst the register will not be definitive (it will not for example include security constituted under the 1983 Law), it will give greater comfort to lenders looking to establish whether there are competing security interests in place, and purchasers of secured parties will be able to identify encumbrances to a greater degree than is currently the case. Unless otherwise specified in the security interest agreement, a registration will expire after ten years, although it may be renewed. The 1983 Law only permits perfection by the secured party having possession or control of the collateral and so security could be discharged if, say, a share certificate (the possession of which creates a security over shares) is accidentally lost or destroyed.
- Clear rules dealing with priority of security: The New Law provides certainty as regards how competing security interests will rank in particular situations. While the 1983 Law anticipates the creation of subordinated security over the same collateral, in practice this is difficult to achieve given that it is not possible for more than one party to take possession, or an assignment, of the collateral. In such cases it is instead necessary to appoint a security trustee to hold security for senior and junior creditors.
- Enhanced enforcement methods: Under the New Law the power of enforcement may be exercised in many ways including by selling the collateral or appropriating it or exercising the grantor's rights under it. The power of enforcement will be exercisable immediately upon an event of default, subject to certain notice provisions which may be waived by agreement between the parties.
The remedies available to a secured party under the 1983 Law are limited to a power of sale which may be unattractive where a secured party wishes instead to appropriate the collateral or take the benefit of a secured contract (e.g. to see the contract through to completion and thereby realise more value).
There will be no need to register existing security interests created under the 1983 Law, although any amendments that constitute the grant of new security will have to be perfected in accordance with the new regime. It may be that lenders choose to require their borrowers to enter into new security interest agreements where possible to take advantage of the New Law.
In the case where there might be security over the same collateral pursuant to both the 1983 Law and also the New Law, the security taken pursuant to the 1983 Law will take priority.
There are steps that lenders can take now in preparation for the introduction of the New Law – in particular, lenders may wish to consider:
- preparing new standard form documentation for use once the New Law comes into force;
- adopting clear policies and procedures for dealing with recording, registering and renewing security interests;
- whether existing security interest agreements should be amended or replaced to take advantage of the benefits of the New Law (it may be possible to require this under any further assurance clause contained in the loan documentation, although care should be taken to ensure that the re-execution of security does not inadvertently re-activate the statutory hardening off periods); and
- whether the collateral over which security is granted could be extended, e.g. to receivables or book debts and other future intangible movable property – this may in turn allow the lender to increase its lending.
There may be opportunities for potential or existing borrowers to borrow moneys or borrow more moneys from lenders in light of the New Law given that it enables lenders to attain more comprehensive security than is possible under the 1983 Law.
The New Law represents a significant reform to security law in Jersey and will create a more modern, flexible regime in line with international practice. Lenders should act now to ensure that they understand the impact of the introduction of the New Law so that they are prepared once the New Law comes into force.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.