The Security Interests (Jersey) Law 2012 (the New Law) came fully into force on 2 January 2014, changing the way in which security is created over Jersey intangible movables. This briefing note is one of a series relating to the New Law, dealing with enforcement of security interests on an event of default.
Enforcement under the 1983 Law
Under the Security Interests (Jersey) Law 1983 (the 1983 Law), the powers of a secured party on enforcement were limited to a power of sale, although a power of appropriation was available where the collateral was money or represented by a negotiable instrument or moneys held in a bank account. 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.
Powers of enforcement
The New Law has introduced a wider range of enforcement powers, as follows:
- appropriating the collateral
- selling the collateral
- taking any of the following actions:
- taking control or
possession of the collateral
- exercising the rights of the grantor in relation to the collateral
- instructing any person who has an obligation in respect of the collateral to carry out
such obligation for the benefit of the secured party
- applying any remedies provided for by the security agreement to the extent that such remedies do not conflict with the New Law.
These powers became exercisable upon (a) the occurrence of an event of default as provided for in the security agreement and (b) the secured party serving written notice on the grantor specifying the event of default. The powers can be exercised more than once after an event of default and in respect of all or part of the collateral.
Notice of appropriation or sale
A secured party must give 14 days' written notice of an appropriation or sale of the collateral to:
- the grantor. However, this can be waived and a well-drafted security agreement will include such a waiver
- any person who, at least 21 days before the appropriation or sale has either (a) registered a financing statement at the Jersey Security Interests Register (the SIR) in respect of a security interest in the collateral or (b) given the secured party notice of a proprietary interest in the collateral. It follows that, 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, if the third party has only 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, again, no such notice need be given. 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:
- the collateral is a quoted investment security (which would include those held in a securities account)
- the secured party believes on reasonable grounds that the collateral will decline substantially in value if not disposed of within 14 days, or
- the Royal Court of Jersey orders that no notice need be given.
Duties on appropriation or sale
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 take all commercially reasonable steps to obtain fair market value of the collateral at the time of sale, must act in all other respects in a commercially reasonable manner in relation to the sale and must enter into any agreement in relation to the sale on commercially reasonable grounds.
The Jersey 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 Jersey 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: (i) the secured party had repeatedly attempted to sell the underlying property owned by the borrower; and (ii) an independent valuer had confirmed that it was unlikely that an offer for the property would be made that would exceed the proposed purchase price of the borrower's shares (which was a lot less than the debt owed).
The Royal Court further clarified the position on the 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 in Kidd and Ors v All Service Group Holdings  JRC221). 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 only apply on an appropriation or sale, and not on the other enforcement actions (although there may be general obligations applicable where the collateral is dealt with). Subject to these duties, there are no limitations on the method of sale.
Statement of account and distribution of surplus
Upon an appropriation or sale, the secured party must within 14 days produce a statement of account showing:
- the gross value realised on the appropriation or the gross proceeds of sale
- the secured party's reasonable costs in connection with the appropriation or sale
- the amount of any other reasonable expenses incurred by the secured party in enforcing the security agreement after the event of default
- the net value of the collateral or proceeds of sale, and
- the surplus. This is defined as the amount by which the net value of the collateral or net proceeds of sale (after deducting the secured party's reasonable costs) exceeds the amount or monetary value of the obligations owed to the enforcing secured party.
The statement of account must be sent to the grantor and any other person who (a) has a subordinate security interest in the collateral and has registered a financing statement in the SIR, or (b) has given the secured party notice of a proprietary interest in the collateral.
The surplus must then be distributed by the secured party in the following order:
- any person who has a subordinate security interest in the collateral and has registered a financing statement in the SIR
- any person who has given the secured party notice of a proprietary interest in the collateral; and
- finally, the grantor.
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 of Jersey 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 co-operation of the senior secured party.
Redemption and reinstatement
The grantor and any person to whom 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. The effect is that the person redeeming takes the collateral free of the security interest.
The grantor may reinstate the 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. The effect is that the security interest is reinstated on the same basis as prior to the event of default. This right may be waived by agreement in writing.
However, if the secured party has entered into an agreement to sell the 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.
Other briefing notes in this series cover the following topics:
- attachment and perfection
- taking free of security
- registration and
- transitional provisions.
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.