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 update is the fifth in a series(1) relating to the new law and deals with the methods of creation of security interests by attachment and perfection.
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.
Perfection is key to priority and enforceability. If a security interest is not perfected:
- it is void as against the viscount (a Jersey court official) or liquidator on the insolvency of the grantor;
- it will rank after all perfected security interests;
- the ability to enforce the security interest against proceeds may be lost; and
- a person who acquires the collateral for value will take it free of the security interest, unless such security interest was created or provided for by a transaction to which that person was a party.
Under the new law, the general rule is that a security interest attaches to collateral under a security agreement in the following cases:
- 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. Value need not be provided by the grantor of the security interest.
- The grantor has proprietary rights in, or the power to grant such rights in, the collateral.
- Either the secured party (or someone on its behalf other than the grantor) has possession or control of the collateral or the security agreement contains a description of the collateral sufficient to enable it to be identified.
The attachment of a security interest by possession is relevant only to documentary intangibles (eg, 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.
Attachment of a security interest by way of control is available only in respect of certain prescribed categories of collateral. The most relevant are as follows:
- bank accounts at an account bank (defined in the new law as 'deposit accounts');
- custody accounts maintained by an intermediary, such as a custodian (defined in the new law as 'securities accounts'); and
- certificated investment securities.
A secured party will have control over:
- a deposit account if:
- the account is transferred into the name of the secured party;
- the grantor, the secured party and the account bank agree in writing that the account bank will act on the secured party's instructions;
- title to the account is assigned to the secured party and notice of that assignment is given to the account bank; or
- the secured party is the account bank;
- a securities or custody account if:
- the account is transferred into the name of the secured party;
- 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
- the secured party is the intermediary; and
- certificated investment securities if:
- the secured party is the registered holder of the securities; or
- the secured party is in possession of the certificates of title to such investment securities.
The attachment of a security interest by way of description applies to all types of intangible movable, including those that can also be secured by possession or control. Security attaches when a written security agreement 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 intangible movable property.
Perfection of security by way of possession or control will occur at the same time that the security attaches. Registration is not required for perfection in these circumstances.
All other security interests (subject to certain exclusions) are perfected by registration of a financing statement in the Jersey Security Interests Register, accessible via the Jersey Financial Services Commission's website (www.jerseyfsc.org/registry). Detailed guidelines for the use of the Security Interests Register are available via this website. Registration can be used to perfect a security interest in any type of collateral, but will be of particular importance in respect of collateral that cannot be secured by way of possession or control.
In order to perfect security by registration, a financing statement will need to be filed. This will set out, among other things, the name and details of the grantor and the secured party, a description of the collateral and the period of registration. Care should be taken to ensure that the details in the financing statement are accurate. A financing statement that has a defect, irregularity, omission or error that is "seriously misleading" may be invalid. In particular, a secured party should obtain copies of official identification documents to ensure that the grantor's name is correctly inputted.
The new law allows for a security interest to attach to intangible movable property on acquisition by the grantor (defined in the new law as 'after-acquired property'), without the need for any specific appropriation by the secured party. This requires the security agreement to provide expressly for a security interest in such after-acquired property and the financing statement registered in the Security Interests Register to refer to after-acquired property in the description of collateral.
Where the secured party permits a grantor to have some degree of authority to deal with the collateral before an event of default, there were concerns under the previous law and still under the new law that this could adversely affect the validity of the security.
The new law expressly provides that if the security agreement so provides, a grantor can, without invalidating the security interest:
- substitute equivalent collateral or withdraw excess collateral; and
- deal with collateral without a duty to account for the proceeds or to replace the collateral.
The new law allows a security interest in collateral to extend to proceeds, which is defined as 'intangible movable property' in the hands of the grantor derived directly or indirectly from a dealing in that collateral. A dealing would require some element of disposition or conversion of the original collateral; interest and dividends are not proceeds. The security interest would also continue in the original collateral in the hands of the acquirer (and subsequent acquirers), unless the secured party expressly or implicitly authorised the dealing. This is also subject to the provisions in the new law on third parties taking collateral free of security in certain circumstances.
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 (email@example.com). The Ogier website can be accessed at www.ogier.com.
(1) For further details please see "The Security Interests (Jersey) Law 2012 – enforcement", "The Security Interests (Jersey) Law 2012 – taking collateral free of security", "The Security Interests (Jersey) Law 2012 – priority" and "The Security Interests (Jersey) Law 2012 – transitional provision".