Enforcement of security in Jersey and Guernsey remains relatively rare, and cases before the Islands' Royal Courts rarer still. Notwithstanding this, the global pandemic and the associated increasing focus on distress in offshore holding structures have led to a steady rise in the number of queries we receive around this topic. In particular, we are now regularly asked to prepare memoranda summarising the enforcement process at the outset of transactions. We have also presented numerous webinars on the topic driven by market sentiment.
The judgments in the few Jersey cases that exist relating to the enforcement of security have clarified some key points and expanded on the principles relevant to a secured party discharging its statutory duties. While there have been no Guernsey judgments specific to enforcement to date, it is likely that the Guernsey courts would find the Jersey cases and principles relevant should a case come before them. These cases and principles will be covered in more detail in a Walkers' publication to follow this one, however, it seems timely to set out a few key practical considerations.
Each enforcement process is dependent on its specific circumstances and the below is non-exhaustive. We have also focused on the enforcement of share security under Jersey and Guernsey law, which is the most common scenario on which we are asked to advise.
Seek advice as early as possible
Security agents and secured parties wishing to enforce should engage lawyers as early as possible. This is key. The lawyers will be able to lay out the procedural steps, as there are some important statutory deadlines and requirements that will need to be considered, as well as help with practical issues such as satisfying the KYC/CDD requirements of the Jersey or Guernsey corporate administrators of the secured company in respect of any new shareholder or (if relevant) new director.
On the borrower side, grantors of the security should also seek legal advice at the earliest opportunity, in order to satisfy themselves, amongst other things, that the secured party has complied with requirements of the Security Interests (Jersey) Law 2012 (the "Jersey SIL") or the Security Interest (Guernsey) Law, 1993, as amended (the "Guernsey SIL"), as applicable. In addition to the grantor, the secured company's corporate administrator may also wish to obtain independent legal advice as notwithstanding any challenge to the action by the grantor, it may not have any discretion but to comply with the secured party's request to transfer the shares on presentation of a signed stock transfer form and original share certificate. This will likely depend on the terms of the articles of association/ incorporation of the relevant company (which are typically amended at the outset of a transaction to remove such discretion).
Each of the Jersey SIL and the Guernsey SIL set out certain duties on the secured party to be complied with in enforcing security interests. While the detail of these duties is outside the scope of this article (see further our links to additional material below), any failure to comply with these could leave the enforcement action open to challenge by the grantor of the security or the secured company itself.
Valuation, commercially reasonable and challenge
One of the key duties of the secured party on the sale or appropriation of shares under the Jersey SIL is to take "commercially reasonable steps" to determine or obtain (as relevant) a "fair market value" of the collateral. In comparison, the Guernsey SIL requires the secured party to take "all reasonable steps" to ensure the sale is made for a price corresponding to the open market value of the collateral or, where there is no such value, the best price reasonably obtainable. While case law guidance is sparse, the requirements of the Jersey SIL have been considered in Jersey in the context of a challenge to an enforcement of share security. In that recent case, the court in Jersey indicated that the statement of account that is required to be provided to the grantor under the Jersey SIL post-enforcement is for the purpose of the grantor satisfying itself that the secured party has complied with, and discharged its duties under, the Jersey SIL, including importantly, the taking of commercially reasonable steps.
Further, the Jersey court determined that where there was a possibility that the value of the collateral may exceed the value of the debt secured, more than one independent valuation may be required. Given the subjective nature of a secured party's duties, it should take advice on and carefully document each step of the enforcement process to seek to reduce likelihood of challenge by the grantor.
Within 14 days of sale or appropriation under the Jersey SIL there is an obligation on the secured party to provide a statement of account to the grantor which sets out, amongst other things the price determined or obtained for the shares and costs of enforcement. There is no corresponding duty under the Guernsey SIL, but providing the grantor with an account of the application of the proceeds of the sale would still be recommended. If the enforcement is to be challenged, then such challenge is most likely to arise following delivery of this statement of the account.
In addition, whether or not the enforcement is challenged, we note for completeness that there are some procedural filings around change of beneficial ownership that will likely need to be taken care of post transfer of the shares by the secured company's administrator.
Cross-border enforcement processes and other group considerations
If enforcement processes are taking place in multiple jurisdictions, then the timing in Jersey and/or Guernsey will likely need to be co-ordinated with such other processes, which can add an additional layer of complexity. There may be other issues to be considered carefully too, for example, whether the change of control of any regulated entities in the structure will require the upfront consent of the regulator in Jersey or Guernsey (or other jurisdiction).
Similarly, whether any change in its shareholder will lead to any default under any documentation relevant to the subsidiaries of the secured company.
We have several more detailed briefing notes on enforcement under Jersey or Guernsey law for further reading.
For specific guidance on pre-enforcement steps under Jersey and Guernsey law please follow this link.
For more detail on the process of enforcing security interests under the Jersey SIL please follow this link.
For more detail on the process of enforcing security interests under the Guernsey SIL please follow this link.
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.