The creation of security over intangible movables under Jersey law is currently governed by the Security Interests (Jersey) Law 1983. The new Security Interests (Jersey) Law is awaiting approval by the States of Jersey and the Privy Council and it is anticipated this law will come into force during the first half of 2012.
How will security be created under the new Law?
- Under the new Law, the general rule is that security will be created pursuant to a security agreement when:
- value is given in respect of the security agreement, (in this context, value means money or money’s worth sufficient to support an onerous contract);
- the grantor has rights in or the power to grant rights in the collateral (i.e. proprietary rights); and
- the secured party (or someone on its behalf other than the grantor) has possession o control of the collateral; or
- the security agreement contains a description of the collateral sufficient to enable it to be identified.
Methods of creation
Under the new Law, security can be created in a number of ways depending on the type of asset to be secured:
The creation of security by possession is only relevant to documentary intangibles (namely negotiable instruments and negotiable investment securities). A secured party has a security interest by possession when it (or someone on its behalf other than the grantor) takes possession of the negotiable instrument or the certificate representing the negotiable investment security.
Creation of security by way of control is only available in respect of certain specific types of collateral. The most relevant are as follows:
- deposit accounts
- securities accounts maintained by an intermediary (such as a custodian)
- certificated investment securities
A secured party will have control over:-
- a deposit account if (i) the account is transferred into the name of the secured party, (ii) the grantor, the secured party and the account bank agree in writing that the account bank will act on the secured party’s instructions, (iii) title to the account is assigned to the secured party and notice of that assignment is given to the account bank, or (iv) the secured party is the account bank;
- a custody or securities account if (i) the account is transferred into the name of the secured party, (ii) the grantor, the intermediary maintaining the account and the secured party agree in writing that the intermediary will act on the secured party’s instructions, or (iii) the secured party is the intermediary;
- certificated investment securities if (i) the secured party is the registered holder of the securities, or (ii) the secured party is in possession of the certificate of title to such investment securities.
The creation of security by way of identification is available in respect of all types of intangible movables. Any security created in this manner must be perfected by way of registration (see below).
Security will be created by identification when a security agreement in writing signed by or on behalf of the grantor contains a description of the collateral sufficient to enable it to be identified. The description may be to the specific item or can identify collateral by type or by reference to all present and future collateral.
Can security be created in respect of property acquired after a security agreement is executed?
Yes. The new Law allows for the security in after acquired property (similar to a floating charge under English law). Security in respect of after acquired property will be created when the grantor acquires rights in the relevant property.
Does the grantor have a right of use in respect of the collateral?
Where the grantor returns control over the collateral, there are some situations where security under the existing Law may be lost. The new Law addresses these concerns and expressly provides that a grantor can, if the security agreement so provides:-
- substitute equivalent collateral or withdraw excess collateral; and
- deal with collateral without a duty to account for the proceeds or to replace the collateral,
in each case without invalidating security created by control.
A security interest under the new Law must be perfected on order to establish priority agreement claims of third parties and any insolvency official.
It is notable that under the new Law there may be several perfected security interests in respect of the same collateral with the strength and ranking of each security interest being determined by the priority rules set out in the Law.
How is security interest perfected under the new Law?
In general terms, a security interest will be perfected when:-
- the security interest has been validly created; and
- any further steps required to perfect such security have been completed.
Perfection can be achieved by way of control, possession or registration:-
Possession and Control
Perfection of security by way of possession or control will occur at the same time the security is created. An important part is that registration is not required for perfection in these circumstances.
In terms of priority, a security interest perfected by possession or control will take priority over security perfected by registration.
Registration can be used to perfect a security interest in any type of collateral, but will be of particular importance in respect of collateral which cannot be perfected by way of possession or control.
The registrar of companies in Jersey will act as the registrar of securities and will maintain a central on-line system with real-time searching and filing.
In order to perfect security by registration, a financing statement will need to be filed. This will set out the name of the grantor and the secured party, a description of the collateral and the period of registration. It will be important to check that any information in the financing statement is accurate as, any information which is ‘seriously misleading’ may lead to the registration being invalid.
Registration will be time stamped which may prove important where there are competing security interests in the same collateral.