INTRODUCTION
Jersey vehicles are popular entities for asset holding structures and therefore lending institutions are often asked to put in place debt structures for Jersey vehicles. In doing so a lending institution must secure and protect its position. Consequently it is essential the differences between Jersey and English law are known.
This briefing highlights issues that may be relevant when lending to a Jersey entity, including creation of security, corporate benefit issues and insolvency regimes relevant to Jersey.
FORMS OF JERSEY ENTITIES
Companies
The primary statute relating to Jersey companies is the Companies (Jersey) Law 1991 (the "Companies Law") which is largely based upon the UK Companies Acts and established English law legal principles. The Companies Law allows a wide variety of companies including companies limited by par or no par value shares and guarantee. Unlimited companies and protected and incorporated cell companies are also available, the incorporated cell company being an unique innovative step for Jersey so that each cell has separate legal personality.
Partnerships
Jersey law provides for limited partnerships, separate limited partnerships, incorporated limited partnerships, unlimited partnerships and limited liability partnerships.
For the purposes of lending, the most popular partnership structure is the limited partnership, established pursuant to the Limited Partnerships (Jersey) Law 1994 and by the execution of a limited partnership agreement (which is not required to be filed). Similar to England, it is not a separate legal person, but acts by its general partner which must contribute (without limitation of liability) to the assets of the limited partnership whereas a limited partner is not liable to contribute more than that he agreed to contribute unless he involves himself in the management of the limited partnership.
Separate Limited Partnerships (regarded as a legal person, but not as a body corporate) and Incorporated Limited Partnerships (regarded as a body corporate having legal personality separate from that of its members) were both introduced in 2011 and should prove popular in the future. Please see our separate briefing on these partnerships for more information.
Trusts
The primary statute relating to Jersey trusts is the Trusts (Jersey) Law 1984 (the "Trusts Law") and established English trust law principles. The Trusts Law provides for private wealth trusts, unit trusts, will trusts, charitable and non-charitable purpose trusts. However, a notable difference to English law is that the Trusts Law provides that where a trustee is a party to any transaction, or matter affecting a Jersey trust, and the other party knows that the trustee is acting as trustee, any claim by the other party shall be against the trustee to the extend only of the trust property.
SECURITY IN JERSEY
Where security has a Jersey situs, it is highly recommended that this it is created using security governed by Jersey law.
The Security Interests (Jersey) Law 1983 (the 'Security Interest Law') governs the taking of security over Jersey intangible movables (such as shares of a Jersey company or monies in a Jersey bank account). However, please note that the SIA Law does not recognise a floating charge, although in practice this has not been negative because Jersey assets are usually readily identifiable, but the new security interest law will introduce a floating charge. It should be noted that Jersey law does not restrict the creation by a Jersey company of non-Jersey security over non Jersey situated assets.
Companies
A security interest in respect of shares of a Jersey company is created in one of two ways: (1) the secured party having possession of the share certificates pursuant to the provisions of a security agreement; or (2) assignment to the secured party of title to the shares pursuant to the provisions of a security agreement, together with the giving of notice by the secured party to the Jersey company.
Bank Account
A security interest in respect of a Jersey bank account is created pursuant to the Security Interests Law by assignment to the secured party of title to the account pursuant to a security agreement, together with the giving of notice by the secured party to the account bank. Where the secured party is the account bank, security is created instead by the secured party taking control of the account pursuant to a security agreement.
Event of Default
If an event of default occurs (as defined in the security agreement), the Security Interest Law provides that the power of sale arises in respect of the collateral. The collateral must be sold, but the power only becomes exercisable on the debtor being given notice, specifying the relevant default, and provided that the default is not capable of being remedied within 14 days of the notice.
When selling shares, the secured party must take all reasonable steps to ensure that the sale is made within a reasonable time and for a price corresponding to open market value at the time of sale. Where collateral is represented by monies in a bank account, the secured party may appropriate such monies and may apply them as if they were proceeds of sale. In either case, the Security Interest Law provides that the proceeds of sale, or monies representing such proceeds, must be applied in accordance with the priority of payments set out in the Security Interests Law.
THE NEW SECURITY INTERESTS (JERSEY) LAW
It is anticipated to come into force during the course of 2012. This new law will lead to a number of changes in the way security is created under Jersey law, including:
- more flexible methods of creation;
- the introduction of registration of security interests;
- the power to take security over after-acquired collateral;
- clarification as to creation of third party security;
- clarification as to the level of control ceded to the grantor;
- wider powers of enforcement; and
- removal of the statutory 14 day grace period on enforcement.
For further information on the new Security Interests (Jersey) Law, please refer to our briefing note entitled 'The New Security Interests (Jersey) Law'.
CORPORATE BENEFIT
Article 74(1) of the Companies Law requires a director of a Jersey company to act honestly and in good faith with a view to the best interests of the company; and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
As part of the security for lending, it may be that a Jersey company is required to provide an upstream or cross-group guarantee or is giving third party security. This may involve the directors of the Jersey company acting in an manner which is not in the best interests of the company and therefore being in breach of their fiduciary duties at Article 74(1) of the Companies Law. Consequently a counterparty to a contract may be on actual or constructive notice that the directors are acting in breach of their fiduciary duties and this may adversely affect enforceability of security.
A breach of directors' fiduciary duties may be rectified by following the procedure set out in Article 74(2) of the Companies Law. This requires the sanction of all the shareholders and the satisfaction of certain cash-flow solvency tests.
CORPORATE GOVERNANCE
Directors of a Jersey company have general powers of management subject to those matters requiring shareholder resolutions pursuant to the Companies Law and the articles of association and any special resolutions of the shareholders.
The concept of ultra vires was abolished in 1991 so that the power of a Jersey company is not limited by anything in its memorandum or articles of association. However, the powers of directors may be limited which may affect the ability of a third party to enforce its security if it is on notice of an excess of authority. Also, the directors may have a power to refuse registration of a transfer of shares under a security interest. Therefore reviewing the memorandum and articles is essential to ensure a lending institution is properly protected and can enforce its security.
FINANCIAL ASSISTANCE
The concept of financial assistance was abolished in Jersey in 2008.
JERSEY INSOLVENCY PROCEDURES
The two primary insolvency procedures relating to Jersey companies are as follows:
- a creditors' winding up under the Companies Law. This is commenced by a special resolution of the shareholders of a company. Therefore a creditors' winding up cannot be commenced by a third party creditor and consequently it is essential a lending institution takes a security interest over shares to ensure this option is available to it. A liquidator must be appointed to conduct the winding up; and
- upon the property of the company being declared 'en désastre' under the Bankruptcy (Désastre) (Jersey) Law 1990 (the 'Désastre Law'). In a désastre, Her Majesty's Viscount (a court appointed officer) conducts and administers the procedure. Immediately upon the making of the declaration of désastre, all the property and powers of the debtor vest in the Viscount, who will then conduct the désastre by gathering in the assets of the debtor and, after being reimbursed for his costs and expenses, paying the creditors to the extent possible, in accordance with the statutory provisions. An application for a declaration may be made by a creditor with a liquidated claim of not less than £3,000. The application must be accompanied by an affidavit of the creditor stating that, amongst other things, to the best of his knowledge and belief, the debtor is insolvent. 'Insolvency' is defined in the Désastre Law as being the inability of a debtor to pay his debts when they fall due.
The Companies Law and the Désastre Law contain provisions relating to transactions of an undervalue, preferences, wrongful trading, fraudulent trading, extortionate credit transactions and disclaimer of onerous property in materially similar terms to those that set out in the UK Companies and Insolvency Acts. Mandatory set-off provisions apply on both a désastre and a creditors winding up, in materially similar terms to Rule 4.90 of the UK Insolvency Rules in addition to statutory provisions relating to set-off while solvent.
CONCLUSION
Much of Jersey law is derived from English law and will be familiar to those involved in lending in the United Kingdom. However, there are issues arising from the material differences between Jersey and English law and this briefing is intended to provide an overview of those differences relevant to an institution lending to a Jersey entity.
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.