The creation of security over intangible movables under Jersey law is currently governed by the Security Interests (Jersey) Law 1983. After a period of consultation, the new Security Interests (Jersey) Law is in a close-to-final form. The new Law will add certainty and flexibility at a time when economic conditions have led to a greater focus on protection of collateral.
When will the new Law come into force?
The most likely position is that it will come into force during the first half of 2011.
What are the main changes?
- More flexible methods of creation
The existing Law allows a security interest to be created by possession of the certificates of title (where relevant) and/or assignment of title with giving of notice. The new Law provides for creation of security by:
- in the case of a bank account, (i) the account being transferred into the name of the secured party, (ii) the account bank agreeing to act on the secured party’s instructions, (iii) title to the account being assigned to the secured party or (iv) the secured party being the account bank;
- in the case of a custody or securities account, (i) the account being transferred into the name of the secured party, (ii) the intermediary maintaining the account agreeing to act on the secured party’s instructions or (iii) the secured party being the intermediary;
- in the case of an investment security, the secured party either being registered as the holder or taking possession of the certificate representing such investment security;
- in the case of a negotiable instrument or negotiable investment security, the secured party taking possession of the instrument or relevant certificate; and
- description of the collateral without title transfer, provided that the security interest is registered (see below).
- Introduction of registration of security interests
Currently, there is no Jersey register of security interests, either centrally or maintained by the grantor. The new Law will introduce a new centrallymaintained register, accessible to the public. Registration will be an integral step for perfection where security is taken by the collateral being identified in the security agreement rather than by possession or control.
- Power to take security over after-acquired collateral
The existing Law does not permit any equivalent to the English floating charge. Rather than permitting a floating charge per se, the new Law will allow a security interest to attach to all intangible movables acquired from time to time by the debtor.
- Clarification as to creation of third party security
The existing Law is unclear as to the validity of third
party security, leading to the market practice of requiring a third party security provider to enter into a limited recourse guarantee or covenant to pay in respect of the primary debtor’s obligations. The new Law makes it clear that third party security is permitted.
Clarification as to the level of control ceded to the grantor.
Some concerns with the existing Law have been raised as to whether the grantor being given a right to deal with the collateral could impact on the validity of security. The new Law makes it clear that the grantor can retain the right to deal with the collateral without the validity of the security interest being affected.
- Wider powers of enforcement
Under the existing Law, a secured party’s rights on enforcement are limited to a power of sale. The new Law permits a power of appropriation, as well as making it clear that the secured party may take ancillary actions in support of enforcement.
- Removal of the 14 day statutory grace period on enforcement
The existing Law provides that, where the event of default complained of is “capable of remedy”, the power of sale is only exercisable after the expiry of a 14 day period. The new Law allows this period to be excluded by agreement.
What happens to security interests created under the old Law?
Transitional provisions apply so that, notwithstanding that the new Law is in force, an existing security interest will continue to be effective as a valid security interest under the old Law. However, if there is an “amendment” to the old security interest (such as securing new obligations or adding new collateral), it will be deemed to be a security interest created under, and subject to, the new Law.
It is therefore important for the secured lender to be aware of the consequences of any such amendments, given that it should (a) make sure that any amendments to the security agreement include any provisions necessary to take advantage of the new Law and (b) check whether, depending on the nature of the collateral, any registration of the security is necessary in order to ensure continued perfection.
What should a secured lender be doing now? • Considering the form that its standard security documents should take once the new Law is in force.
- Reviewing its existing standard security documents to see if any changes are necessary to enable it, if it so wishes, to require a borrower to enter into a security agreement under the new Law.
- Reviewing the categories of collateral held under existing security agreements to assess the impact of them becoming subject to the new Law.
- In light of the wider range of intangible movables that can be secured without the need for assignment of title (such as book debts), considering whether there are additional financing opportunities in Jersey or additional collateral over which security could be taken.
- Considering whether the registration of any security created in favour of the secured lender can be avoided, if commercially acceptable, where the client objects to registration.
What about tangible movables?
The existing Law applies only to security over intangible movables. This will not be changed by the new Law in its initial form. However, the second stage of the process of updating the Law will extend its provisions to tangible movables. It is currently expected that this will come into force towards the end of 2011.