In financing transactions, it is common for companies of a borrowing group to provide some sort of security.
Such security may be over the shares or accounts of companies of the borrowing group, including offshore entities, either by taking legal or equitable security over those shares or accounts.
The safest way to secure an asset is to take possession of it, however practical considerations dictate that the overwhelming majority of loan security is non-possessory.
This gives rise to a potential problem – if a borrower retains the secured asset, what is to stop it, albeit fraudulently, from selling or re-securing the asset to a third party? The problem is alleviated by the creation and registration of security interests -- placing the security document on a public register.
There are four key steps to creating a valid security interest:
- Agreement: agreement to create a particular security interest between debtor and creditor (typically by executing a security document);
- Attachment: ensuring that the security interest binds on specific assets;
- Perfection: ensuring that the security is valid through execution by the parties; and
- Registration of priority: ensuring that the security will have priority in Bermuda over any unregistered charges, and over any subsequently registered charges.
Part V of the Bermuda Companies Act 1981 (as amended) (Companies Act) provides for the operation of a public register of charges, which functions as a system of registration and priorities amongst registered and unregistered charges.
The original or a certified copy of the security document together with the relevant registration form containing the particulars of the charge are required to be filed with the Bermuda Registrar of Companies. A certificate of registration of charge will subsequently be issued by the Registrar of Companies
Registration is not mandatory and failure to register a charge does not render the security interest void or invalid against the creditors or the liquidator of the company. However, the effect of registration is to confer priority over any charge of a similar type registered subsequently irrespective of the date of creation of such charge -- and over any unregistered charge.
Charges created before 1 July 1983 continue to have the priority they had prior to that date, irrespective of whether they were subsequently registered under the provisions of the Companies Act.
Priority is only established between charges that are capable of registration and is not given over any interest that cannot be registered. Section 55 (8) of the Companies Act provides that for these purposes a charge "includes any interest created in property by way of security, including any mortgage, assignment, pledge, lien, or hypothecation".
There is no time limit for registration of a charge. However, in view of the fact that priority of the charged interest is determined by the date of registration, it is advisable to register a charge as soon as possible following its creation.
Registration under the Companies Act applies to any charge on the assets of a Bermuda company wherever situated and to any charge on property located in Bermuda created or acquired by a company outside Bermuda.
Charges granted by Bermuda companies, or by foreign companies over assets in Bermuda, are generally uncontroversial as they will often by governed by Bermuda law and be subject to the jurisdiction of the Bermuda courts. This is typically done to minimise any procedural or conflicts of laws arguments being raised on enforcement.
However, it is not uncommon for security to be granted under the laws of another jurisdiction nor for the assets to be located overseas – principally in connection with financings where the credit and security is governed by foreign laws, in which case it is still advisable to register such security; however, enforcement considerations will arise which should be discussed with local counsel as evidenced by the recent British Virgin Islands judgment handed down on 26 November 2014, by the Judicial Committee of the Privy Council (Board) in Stichting Shell Pensioenfonds (Shell) (Appellant) v Krys and another (Respondents) [2014] UKPC 41 if such security is registered in another jurisdiction.
Bermuda's security protection framework provides a creditor-friendly environment that is designed to facilitate financing and other transactions and provide lenders and chargees with the security and certainty that they require.
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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