Creation of security interests
General rules on priority
Priority for control security
Voluntary subordination
Purchase money security interests


The Security Interests (Jersey) Law 2012 came fully into force on January 2 2014. The law changes the way in which security is created over Jersey intangible movables. This is the third update in a series(1) relating to the new law and deals with the provisions on priority and ranking.

Creation of security interests

The new law permits a secured party to take security by description and registration, without having to take title, possession or control. Consequently, it is now much easier to create a second ranking security over intangible movables. The new law therefore must provide more detailed rules on competing security in the same collateral than was necessary under the Security Interests (Jersey) Law 1983.

The new law distinguishes between attachment, which is the creation of a security interest enforceable against the grantor, and perfection, which ensures that the security interest is binding on third parties and insolvency officials.

Security interests are created under the new law by either:

  • possession or control of certain prescribed categories of collateral (eg, deposit accounts, securities (or custody) accounts and certificated investment securities) as set out in Article 3 of the new law. Possession and control constitute both attachment and perfection, so that registration with the Jersey Security Interests Register is not required for perfection; or
  • attachment by, among other things, description of the collateral in a security agreement and perfection by registration of a financing statement in respect of the security with the Security Interests Register.

General rules on priority

The general rules on priority are as follows:

  • A perfected security interest has priority over an unperfected security interest in the same collateral.
  • Priority among perfected security interests in the same collateral is determined by the order in which they were perfected, whether by registration, possession or control or otherwise under the new law.
  • Priority among unperfected security interests in the same collateral is determined by the order in which they are attached.
  • When a security interest is transferred, it maintains the same priority that it had immediately before the transfer.
  • A security agreement may provide that the secured obligations include further advances, so that the priority of the original security is maintained for such further advances.

Priority for control security

However, there are certain exceptions to the general rules on priority. In particular, special rules apply in respect of deposit accounts at an account bank, securities accounts at an intermediary (eg, a custodian) and certificated investment securities, where security can attach and be perfected by control.

Deposit accounts
A security interest that has attached and been perfected by control under Article 3(3)(a) of the new law (where the deposit account is transferred into the name of the secured party with written agreement from the grantor and the account bank) has priority over all other security interests in the deposit account. In addition, this security interest overrides the account bank's right of set-off.

A security interest that has attached and been perfected by control under Article 3(3)(d) of the new law (where the secured party is the same legal entity as the account bank) has priority over all other security interests in the deposit account other than as set out in the paragraph above.

All other control security interests have priority over all other security interests in the deposit account other than as set out in the two paragraphs above (so that, generally, security interests attached and perfected by control have priority over security interests perfected by registration).

Securities accounts
A security interest that has attached and been perfected by control under Article 3(4)(a) of the new law (where the securities account is transferred into the name of the secured party with written agreement of the grantor and the intermediary) has priority over all other security interests in the securities account.

A security interest that has attached and been perfected by control under Article 3(4)(c) of the new law (where the secured party is the same legal entity as the intermediary) has priority over all other security interests in the securities account other than as set out in the paragraph above.

All other control security interests have priority over all other security interests in the securities account other than as set out in the two paragraphs above (so that, generally, control security interests have priority over security interests perfected by registration).

Certificated investment securities
A security interest that has attached and been perfected by control (whether by the secured party with possession of the certificates of title or by being the registered holder) has priority over all other security interests in the investment securities.

Voluntary subordination

A secured party can agree with another secured party to subordinate its security interest. The agreement is effective without registration, but registration is recommended to ensure that a transferee of a subordinated security interest is bound by the subordination agreement. A practical matter is that the junior secured party will register the subordination, so care should be taken to ensure that it is contractually prohibited from amending or discharging the registration without the prior consent of the senior secured party.

Purchase money security interests

A security interest that is a purchase money security interest (PMSI) has priority over another security interest in the same collateral (subject to the special rules applicable in respect of deposit accounts, securities accounts and certificated investment securities). A 'PMSI' is defined as a security interest taken in collateral by:

  • a seller in order to secure the obligation to pay the purchase price of the collateral; or
  • a financier in order to secure an obligation to repay money lent to the grantor for the purpose of an acquisition of the collateral.

The rationale behind the PMSI is to avoid credit providers or suppliers that provide finance to debtors in order to acquire specific assets (eg, inventory) still ranking after general credit providers that have taken security perfected by registration over all property (including after-acquired property). In the absence of subordination agreements with all creditors, a credit provider or supplier might otherwise choose not to proceed.

For further information on this topic please contact Matthew Swan at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (matthew.swan@ogier.com). The Ogier website can be accessed at www.ogier.com.

Endnotes

(1) For further details please see "The Security Interests (Jersey) Law 2012 – enforcement" and "The Security Interests (Jersey) Law 2012 – taking collateral free of security".