The States of Jersey approved the Security Interests (Jersey) Law 201- (the 'New Law') on 19 July 2011. It is likely to come into force in the first half of next year. It changes the methods of taking and enforcing security over bank accounts, shares, securities and other intangible moveable assets situate in Jersey.
More Flexible Security
More flexibility will be given in creating security. Some collateral will be able to be secured with relative ease for the first time such as book debts, other receivables and after-acquired property. Whilst stopping short of introducing an English style floating charge, under the New Law it will be possible to secure all the intangible moveable assets of a borrower (both present and future), and permit the borrower to deal with those assets without jeopardising the security.
Taking security over uncertificated securities traded on an exchange will also be easier. Under the existing law there is little option but for either the securities to be delisted and certificates to be issued, so that the lender can take security by possession of share certificates, or for the secured party to actually become registered as the holder of the shares (which many lenders are naturally reluctant to do). Neither will be required as other methods may be used to create and perfect under the New Law.
Some aspects of taking security will also be clarified by the New Law, such as removing the current necessity of obtaining guarantees (which are inevitably limited recourse) to support "third party" security. Once the New Law is in force, any lingering doubts about the validity of taking security over the grantor's assets to secure the obligations of a third party will be removed. Guarantees or covenants to pay will no longer be required.
Also, removed are any concerns about allowing the borrower to utilise the collateral until an event of default occurs, as that might invalidate the security due to a lack of control required for effective security over a bank account held with the lender.
A public registration system for security interests in Jersey will also be introduced for the first time. It will be electronic and available online. However, it will not be comprehensive or compulsory as security interests under the New Law may be perfected and priority achieved in other ways, for example, by having possession of certificates of title to shares held as collateral. Also, existing security will not necessarily have to be registered unless it is amended after the New Law comes into force. Nevertheless, the registration system is likely to be popular with lenders.
Enforcement Options
The New Law will broaden and enhance enforcement options. Under the existing law, the only option that a secured party has on default is to exercise a power of sale in respect of the collateral (except for cash held in a bank account which may be appropriated). The existing power of sale can sometimes be a rather blunt remedy for a secured party.
The New Law allows the secured party the appropriate collateral and to exercise the borrower's rights in relation to it, for example, enjoying the revenue stream generated by the collateral or otherwise exercising the borrower's contractual rights. It also confirms that a secured party may purchase the collateral itself on enforcement. There are, of course, safeguards for obtaining fair value for the collateral.
The current requirement to give a borrower a notice of default and a period of 14 days to correct any remediable defaults may be wavered under the New Law.
Action for Lenders
Before the New Law comes into force, lenders should:
- Review their standard security agreements for compliance with the New Law;
- Review their 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;
- Review 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;
- Review 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 an existing power of sale; and
- Consider if they can take advantage of fresh opportunities afforded by the New Law, for example, by introducing new products such as invoice financing.
Existing Security Interest Agreements
There are transitional provisions in the New Law aimed at preserving the validity of existing security interest agreements. However, care must be taken in amending existing agreements after the New Law comes into force as this may trigger additional requirements to ensure continued validity and priority such as registration.
Further enhancements to Jersey's security laws are expected next year to facilitate the taking of security over tangible moveable assets, the availability for which is currently limited due to the general necessity for possession.
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.