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One of the most common parts of our jobs as offshore Banking
& Finance legal specialists is advising on security packages as
part of pre-deal structuring and fee quoting. Often we are asked
what security should be taken in respect of Jersey entities (and
their assets) in the borrower group, how that security is taken and
what registration and perfection steps are required.

In keeping with its status as a major international finance
centre, Jersey has a modern, flexible regime for taking security
over intangible moveable property such as shares, units, bank
accounts and contractual rights which is governed by the Security
Interests (Jersey) Law 2012 (as amended)
(“SIL“).

SIL superseded the Security Interests (Jersey) Law 1983 (the
1983 Law“) which had governed such
matters prior to 2 January 2014. The 1983 Law continues to govern
all existing security taken in accordance with it prior to that
date unless and until any further collateral is added to an
existing 1983 Law security interest agreement which was not within
the general purview of the parties when the agreement was
originally entered into. In such cases, a new security interest
agreement under SIL would usually be entered into by the parties
and “layered” over the existing 1983 Law security.

Security Interests (Jersey) Law 2012

The principal features of SIL are:

  1. The ability to secure present and
    future intangibles with minimum formality through a single
    agreement.

  2. A grantor may grant a valid security
    interest in relation to obligations owed by a third party (which
    most practitioners considered had not been possible within the
    framework of the 1983 Law).

  3. A publically accessible registration
    system for Jersey law governed security interests. The system is
    fully automated and real-time with registrations and updates
    requiring completion of simple, on-line statements.

  4. Clear and detailed rules as to
    priority of Jersey law security interests (see further below).

  5. A range of efficient, easily
    exercisable, default remedies for secured parties. The 1983 Law
    provided simply for the exercise of a power of sale of collateral
    and the appropriation of monies.

There are a number of specifically excluded security interests
to which SIL does not apply, such as rights of set-off and netting,
liens and charges arising by operation of law and any interests in
ships or aircraft.

Creation of security

SIL applies only to security interests created by agreement and
there are two fundamental steps that must be taken to ensure that a
security interest is valid and binding: Attachment and
Perfection.

Attachment

The general rule for Attachment is that a security interest
attaches to the relevant collateral when:

  1. value has been given with respect to
    the security interest agreement;

  2. the grantor has rights in the
    collateral or power to grant rights in the collateral to the
    secured party; and

  3. one or both of the following apply:

    1. the secured party or someone on its
      behalf has possession or control of the collateral; and

    2. the security interest agreement is in
      writing, signed and adequately identifies the collateral.

The significance of Attachment is that when the security
interest in the collateral attaches, it becomes enforceable against
the grantor.

Perfection

There are then three ways in which the security interest may be
perfected. Once perfected, a security interest is valid and binding
with respect to third parties, such as other creditors, purchasers
and the Viscount (the Executive Officer of the Jersey courts
responsible for administering insolvency proceedings).

The three methods of Perfection are registration, possession or
control:

  1. To perfect a security interest by way
    of registration, the secured party will file an on-line financing
    statement. This method may be used in relation to any type of
    collateral and in the case of contract rights and receivables, is
    the only method of perfection available. Registrations take the
    form of notice filings and no underlying transaction documents need
    be registered. There is a specific confidentiality exemption that
    allows trustees (other than trustees of a prescribed unit trust) to
    perfect security other than by filing on the public register. In
    such cases, the security interest will instead be perfected
    immediately upon attachment without the need for any further
    perfection steps to be taken. Registrations may be amended by
    filing a financing change statement which may be required, for
    example, to record a partial discharge of collateral from the
    security.

  2. Possession of a “documentary
    intangible” – which consist of negotiable instruments such as
    bills of exchange or promissory notes and negotiable investment
    securities – by or on behalf of a secured party will perfect a
    security interest that has attached to that documentary
    intangible.

  3. Control of collateral (as
    specifically defined in SIL) by or on behalf of a secured party
    will perfect a security interest which has attached to bank
    accounts (including securities accounts) and investment securities
    that are certificated but which are not bearer securities.

Possession or control of collateral each give rise to
simultaneous attachment and perfection. Therefore, where either
exists, there is no strict legal requirement to also register the
security interest but it is common market practice to do so.

Priority

SIL contains detailed rules as to priority of security
interests, but the general rules are as follows:

  1. a perfected security interest will
    have priority over an unperfected security interest;

  2. among competing, perfected security
    interests, the first secured party to take a perfection step shall
    have priority; and

  3. among competing, unperfected security
    interests, the order of attachment will determine priority.

A practical point to note in connection with 2. above is that
SIL allows a secured party to take a perfection step (for example,
to register its security interest) prior to attachment and it is
therefore common practice in Jersey for security interests to be
pre-registered and/or for original title documents to be delivered
to a secured party in advance of a security interest agreement
becoming effective.

There are also specific situations in which a secured party can
avail itself of enhanced priority rights under SIL, namely:

  1. where one secured party has control
    of the collateral and competing security holders do not;

  2. where a secured party has loaned
    funds for the purposes of an acquisition of the collateral and
    therefore has a “purchase money security interest”;
    or

  3. where the secured party is granted a
    security interest over one of its own accounts (i.e. a
    charge-back).

SIL also provides for a secured party to subordinate its
security interest to any other interest.

Enforcement

If an event of default occurs and the secured party wishes to
enforce the security it must first serve notice on the grantor
specifying the default. Where the secured party wishes to
appropriate or sell any of the collateral it must give fourteen
days’ notice prior to doing so to the grantor, any other
secured party with a registered security interest in the collateral
and to any other person with an interest in the collateral which
has notified the secured party of same (the “Notified
Parties
“). The Notified Parties have a right to
redeem the collateral by fulfilling the relevant secured
obligations and also paying the reasonable costs and expenses
incurred as part of the enforcement at any time prior to the
appropriation or sale of the collateral or the secured party having
otherwise acted irrevocably in relation to it.

Unless the security interest agreement provides otherwise the
grantor will also have a right to reinstate the agreement if it
makes good the situation. This right is usually excluded in the
relevant security interest agreement as a matter of course.

Having served notice, and subject to the foregoing rights, the
secured party may then do any of the following:

  1. appropriate the collateral or
    proceeds from it;

  2. sell the collateral or proceeds from
    it whether by auction, public tender, private sale or another
    method;

  3. take control or possession of the
    collateral or proceeds;

  4. exercise any rights of the grantor in
    relation to the collateral or proceeds;

  5. instruct any person who has an
    obligation in relation to the collateral or proceeds to carry out
    the obligation for the benefit of the secured party; and

  6. apply any remedy that the security
    interest agreement provides for as a remedy that is exercisable
    pursuant to the power of enforcement, to the extent that the remedy
    is not in conflict with SIL.

If the collateral is to be appropriated or sold the secured
party must take all commercially reasonable steps to either
determine or obtain (respectively) the fair market value of the
collateral and act in a commercially reasonable manner. Following
the sale or appropriation (as applicable) the secured party must
within fourteen days provide a statement of account to the Notified
Parties.

There is no equivalent role of a receiver of assets under SIL or
Jersey law generally. Enforcement of a security interest is a
self-help remedy carried out by the secured party itself. For
further information on the enforcement of Jersey security interests
please refer to our note on enforcement of Jersey security.

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.

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