Enforcement of pre-2014 Jersey security agreements

The Security Interests (Jersey) Law 2012 came into force on 2 January 2014, introducing a new regime for creating security over Jersey situs intangible movable property under Jersey law. However, some security packages may still include security created in accordance with the Security Interests (Jersey) Law 1983.

Even though any new security interests would need to be created under the Security Interests (Jersey) Law 2012 (the SIJL 2012), any security created in accordance with the Security Interests (Jersey) 1983 Law (the SIJL 1983) will continue to be governed by the SIJL 1983.

For enforcement of security interests created after 2 January 2014, read our related briefing: The Security Interests (Jersey) Law 2012 – enforcement.

When were pre-2014 Jersey security interest agreements used?

Prior to 2 January 2014, security over Jersey situs assets, such as shares of a Jersey company, units of a Jersey unit trust (such as a JPUT), bank accounts in Jersey or a portfolio of assets held by a Jersey intermediary (such as a custodian or a bank), was created in accordance with the SIJL 1983. Jersey law did not recognise the concept of the floating charge, so it was important to create specific security over material Jersey situs assets, rather than rely on general charging clauses.

How was a Jersey security interest created under the SIJL 1983?

A Jersey security interest over shares or other securities was created by either:

• the secured party or its trustee or agent having possession of the certificates of title pursuant to a security agreement, or
• title to the securities being assigned to the secured party or its trustee or agent pursuant to a security agreement (together with the giving of written notice to the issuer of the securities)

A Jersey security interest over a bank account was created:

• where the secured party was also the account bank, by the secured party having control of the account pursuant to a security agreement, or
• otherwise, by title to the account being assigned to the secured party or its trustee or agent pursuant to a security agreement (together with the giving of written notice to the third-party account bank)

A Jersey law security interest over rights in a custody account or a custodian agreement was created by title to such rights being assigned to the secured party or its trustee or agent pursuant to a security agreement (together with the giving of written notice to the counterparty).

The SIJL 1983 is silent as to the creation of third party security, so it was market practice for the collateral provider to enter into a guarantee or covenant to pay to create a primary obligation in favour of the secured party.

There were no perfection steps (such as public registration of security as under the SIJL 2012) to be completed in Jersey under the SIJL 1983 other than the giving of written notice as described above.

What are the rights of a secured party on enforcement of a pre-2014 security?

Upon the occurrence of an event of default (as specified in the security agreement), the power of sale arises. However, such power of sale is not exercisable unless the secured party has served written notice on the debtor specifying the event of default complained of. If the particular event of default is “capable of remedy”, the notice must require the debtor to remedy it, and the power of sale is exercisable only if the event of default is not remedied within 14 days of receipt of the notice.

Under the SIJL 1983, an order of the Royal Court is required before the power of sale is exercisable (save where the collateral is money, negotiable instruments or money in a bank account). However, this requirement can be, and invariably is, waived under the provisions of the security agreement.

It is notable that, unlike the SIJL 2012, the SIJL 1983 does not give the secured party a power of appropriation or foreclosure (save where the collateral is derived from money, negotiable instruments or money in a bank account). In those circumstances, the secured party therefore needs to sell the collateral to a separate legal entity, although there is no restriction on this entity being connected to the secured party.

The secured party is under a duty to take all reasonable steps to ensure that the sale is made within a reasonable time and for a price corresponding to open market value at the time of sale. The SIJL 1983 is silent as to the manner of the sale – this could include private sale or auction. The power of sale applies to collateral held as possessory security as well as security by way of assignment of title.

Upon the sale (or appropriation in the case of collateral derived from money, negotiable instruments or money in a bank account), the proceeds are applied as follows:

• costs and expenses of the sale
• discharge of any prior security interest
• discharge of the secured obligations of the secured party exercising the power of sale
• discharge of subsequent ranking security interests, and
• return of the balance to the debtor or the appropriate insolvency official.

One of the key features of the SIJL 2012 that makes it more creditor friendly in comparison to the SIJL 1983 is the ability of the secured party to exercise its powers of enforcement once an event of default has occurred and the secured party has served written notice on the grantor specifying the event of default, as the requirement to give 14 days' notice is usually waived in the relevant security agreement.

What is the effect of the debtor’s insolvency on a Jersey security interest?

A declaration of désastre or a creditors' winding-up under the Companies (Jersey) Law 1991 (the Companies Law) are the two primary insolvency procedures in Jersey which can be commenced by creditors. In a creditors' winding-up, the powers of the directors of the company will typically vest in a liquidator whereas on a declaration of désastre, the Viscount, a court official, takes title and possession of the debtor's property. The SIJL 1983 does not prevent this, but the declaration of désastre or creditors' winding-up does not affect the power of a secured party to realise or otherwise deal with the collateral. 

On a declaration of désastre, the Viscount has the power to apply to the Royal Court for an order for the rights of the secured party in the collateral to be vested in him. This is only likely to be exercised if the secured party is dilatory in enforcing its security, to the extent that this has a detrimental effect on the administration of the désastre.

As well as being initiated by creditors, both a désastre or creditors' winding-up can be initiated by an insolvent company (in the case of a creditors' winding-up through a special resolution) but again, this would not affect the power of a secured party to realise or otherwise deal with the collateral.

Jersey law also recognises the concept of an irrevocable power of attorney given for the purpose of facilitating the exercise of the powers of a secured party under the SIJL 1983 or under the provisions of a security agreement. The Powers of Attorney (Jersey) Law 1995 provides that, in such circumstances, an irrevocable power of attorney (a) survives the bankruptcy of the donor, (b) has effect notwithstanding any law which, on bankruptcy, vests property of the donor in any other person (such as the Viscount on a désastre) and (c) allows the secured party to act as if that other person had given such power of attorney. It is usual practice for Jersey law security agreements to contain an irrevocable power of attorney.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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