The new Security Interests (Jersey) Law 2012 (the New Law) has been a long time coming. The draft of the New Law received the approval of the States of Jersey as early as July 2011, and privy council approval on 10 July 2012 but implementation has been delayed by important debate concerning the scope of the New Law and, in particular, the mechanism for registration of security interests. That debate culminated with subordinate legislation amending the New Law in the shape of the Security Interests (Amendment of Law) (Jersey) Regulations 2013. Still, good things come to those who wait.
The New Law is set to see a phased implementation and promises to revolutionise the methods for taking and enforcing security in Jersey.
Phase 1 begins on 1 October 2013 and permits registration of existing outright assignments of receivables for a period of three months until Phase 2 is implemented. Phase 2 begins on 2 January 2014 and brings into force the remaining provisions of the New Law related to security over intangible moveable property. Phase 3 relates to securities over the rest of tangible movable property, and these provisions are expected to be implemented in late 2014. The New Law also includes transitional provisions to deal with security interests created under the Security Interests (Jersey) Law 1983 (the 1983 Law), which the New Law replaces.
Key Provisions of the New Law
The New Law provides a security framework far better suited to the complex cross border financing arrangements that are a feature of the Jersey financial services industry, whilst retaining a pragmatic flexible approach. Key provisions include:
- Greater Collateral Scope - The classes of collateral over which security may be taken under the New Law are far wider than previous legislation. The New Law includes security over the proceeds of sale of collateral, book debts and present and future property. Furthermore, the taking of "whole business" security will be permitted, creating a security of all intangible moveable assets of a borrower.
- A Register of Securities - A comprehensive system of registration and priority has been introduced, with the creation of a Securities Interest Register. The Register will be an online directory hosted by the Jersey Financial Services Commission and will be open to public searches; making it accessible, current and transparent. The ability to register security interests will be placed in the hands of law firms and other registered providers to provide flexibility of registration in transactional scenarios. It is important to note that security interests created under the 1983 Law will retain priority under the transitional provisions without the need for registration, and also that trusts will not be required to register.
- Clarification on Priority - A clear set of rules have been provided to deal with priority of security interests created under the New Law. The concepts of attachment and perfection are introduced in Jersey for the first time. These sit neatly alongside the registration process and should ensure that priority is never surrendered as a result of documents or certificates being misplaced. This provides greater protection and certainty in insolvency scenarios.
- Enforcement Power - Enforcement powers available to secured parties have been widened significantly. Where the 1983 Law provided only for a power of sale, the New Law includes specific powers for secured parties to appropriate and deal with collateral on behalf of the grantor. No notice is required to be given to the grantor prior to enforcement.
- Dealing with Property - Grantors of security under the New Law will be able to continue to "deal" with collateral during the subsistence of a security interest without potentially jeopardising the validity of that security.
- Third Parties - The New Law also specifically permits the granting of security in respect of third party obligations without the need for guarantees to be entered into. Secured parties are also able to agree to subordinate their security interests to the interests of any other transaction party.
What Should Transaction Parties do Next?
Don't panic – security interests created under the 1983 Law will retain priority over any security interest created under the New Law, unless amended to include additional collateral. Prudent lenders should consider:
- Updating standard security agreements for compliance with the New Law (these will not be required until Phase 2);
- Updating internal policies and procedures for compliance with the New Law, in particular to cover registration and alternative options where public registration might be commercially sensitive to borrowers;
- Updating documentation and procedures for proposed extensions and amendments to existing secured facilities, for example, upgrading the terms favourable to lenders and considering registration to avoid inadvertently losing priority upon amendment;
- Reviewing security suites to consider whether perfection of a particular security interest by registration on or around 1 October 2013 might be beneficial;
- Reviewing the options for facilities in default, for example, taking additional collateral or using wider enforcement powers such as appropriating or taking control of collateral, rather than exercising a power of sale;
- Considering whether the New Law affords fresh opportunities in terms of the type of collateral available to be secured or implementation of new products or facilities.
Existing Security Interests under the 1983 Law
The New Security Law contains transitional provisions which will preserve the validity of existing security interest agreements. There will be grandfathering of security interests created under the 1983 Law so existing security interest agreements will not have to be amended or publicly registered once the New Security Law comes into force. However, we believe that in many cases lenders will wish to improve their position by requiring that existing security interest agreements be amended or replaced once the New Law comes into force (for example, in reliance on further assurance provisions in existing documentation referring to the New Law).
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.