After some considerable delay, it is now anticipated that Jersey's new security interests law, the Security Interests (Jersey) Law 201- (the "New Law"), will come into force some time during the second quarter of 2012. The New Law considerably refines and enhances Jersey's existing regime for taking security over intangible movables such as bank accounts, shares or contract rights.
No Need to Panic
First some reassurance: if you have the benefit of security created under Jersey's existing security interest law (i.e. under the Security Interests (Jersey) Law 1983 (the "Old Law")), there is no need to panic. Subject to one key proviso, your security will remain in full force and effect, and subject to the Old Law once the New Law comes into force. The key proviso is as follows: if you decide to amend your Old Law security interest, it will be deemed to have been reconstituted as a security interest under the New Law. The New Law defines what it means by "amend". A secured party amends a security interest agreement governed by the Old Law if it:
- alters the security interest so that it relates to an obligation not previously secured;
- alters the terms on which the obligation to which the security interest relates is secured so far as those terms relate to that security interest;
- extends or reduces the duration of the security interest; or
- adds to or modifies the collateral to which the security interest relates.
On the face of it amending a security interest agreement governed by the Old Law so that the secured party can avail itself of the greater flexibility and powers available to it on enforcement under the New Law seems attractive. Indeed, many security interest agreements entered into in anticipation of the New Law coming into force contain express wording in the their further assurance provisions to the effect that the grantor of the security undertakes to do whatever is necessary to give the secured party the full benefit of the enhanced powers available to it under the New Law.
Such powers include the ability, on enforcement, to dispense with the statutory 14 day grace period in relation to remediable event of default and the right to exercise the rights of the grantor in relation to the collateral (e.g. exercise voting rights and/or the right to receive dividends). However, the potential benefits of amendment have to be carefully weighed up against the potential costs.
The potential costs stem from the fact that the amendment is treated as creating a brand new security interest with effect from the date of the amendment. This could potentially have serious consequences in terms of priority. If more than one security interest has been created in the same collateral, a security interest that was first ranking under the Old Law could, if amended, become a second ranking security interest under the New Law. In addition, the timer in relation to statutory hardening periods (i.e. in relation to transactions at an undervalue and preferences) is reset to zero and starts to tick again.
It may well be that, in any particular case, the benefits of amendment outweigh the potential downside. However, there will undoubtedly also be instances where the superficial attraction of amendment, particularly in relation to enforcement, should be resisted and the security interest should be left untouched.
A further factor to be borne in mind when amending an existing security interest created under the Old Law and creating security interests under the New Law, once it is in force will be whether to register the security on the internet-based and publicly available register that will be introduced by the New Law. Registration goes to the concept of perfection. Under the New Law there are three methods of perfection: possession, control and registration. Any security interest can be perfected by registration. Not all, but most, security interests can be perfected by possession or control. Two of the most common types of security interest encountered in Jersey's finance industry – security over certificated securities (e.g. shares or units) and security over bank accounts – can be perfected under the New Law by possession, in the case of certificated securities, and control, in the case of bank accounts.
In these instances, secured parties will have to weigh up what, if anything, registration adds. Some will conclude that having notice of their security on a publicly available register, whilst not necessary to perfect their security, improves their position. Equally others may conclude, often, one would imagine, under client pressure, that their security arrangements are essentially private in nature and therefore opt for the confidentiality of a security interest perfected by possession or control alone.
The New Law undoubtedly enhances Jersey's security interest regime and its coming into force is eagerly awaited by the Island's finance industry. However, as is to be expected with any initiative of this type, it will take time for a consensus to be reached amongst industry participants as to what is market-standard in terms of the amendment of Old Law security interests and registration.
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.