The Security Interests (Jersey) Law 2012: changes to Jersey's security regime

On 2 January 2014, the Security Interests (Jersey) Law 2012 came into force in respect of Jersey law security over intangible movable property (for example shares / securities, bank accounts and custody assets). The Security Interests (Jersey) Law 2012 replaced the Security Interests (Jersey) Law 1983 and introduced a number of important changes that modernise Jersey's security regime.

The Security Interests (Jersey) Law 2012 (the SIJL) is particularly relevant for banking and finance transactions (and share transfer property transactions) where there is Jersey situs collateral to be secured. This article summarises the main changes under the SIJL (particularly advantages for lenders) and the transitional provisions which apply to security granted under the Security Interests (Jersey) Law 1983 (the 1983 Law).

Main features of the SIJL

Creation vs perfection

The 1983 Law only had the concept of creation (as opposed to perfection) of security. This was generally done by the secured party having possession of the certificates of title (for example share certificates) or by the grantor assigning title to the collateral to the secured party (together with serving written notice on the secured company), in each case, pursuant to a Jersey security interest agreement (SIA).

Under the SIJL, security is still created under an SIA, but there is also the concept of perfection. It is only when a security interest has been perfected under the SIJL that it becomes enforceable against third parties (for example creditors and insolvency officials). Security can be perfected under the SIJL by control and / or by registration. However, security perfected by control will have priority over security perfected by registration.

Control vs registration

Under the SIJL, security over certain types of specific collateral (shares or units / securities, bank accounts and securities accounts) can be perfected by control. The SIJL has a statutory definition of "control" which avoids some of the uncertainty under English law as to the level of control required to have first ranking security. For example, a secured party can take control over shares by taking possession of the share certificates, and can take control over bank / securities accounts by written agreement with the grantor and the relevant account bank or custodian (although the SIJL provides for different control options). The SIJL helpfully provides that security will generally not be prejudiced by the grantor having a right to deal with the collateral (for example by giving account instructions to the relevant account bank or custodian).

Security over any type of collateral can be perfected by registration on the Jersey Security Interests Register (SIR) under the SIJL. For example, this includes security over (a) all present and future intangible movable property (the 1983 Law did not permit the creation of any equivalent to an English law floating charge), (b) contract rights / book debts, or (c) specific collateral which has also been perfected by control (as explained above). Security which is not perfected by control must be perfected by registration on the SIR.

Jersey Security Interests Register

Under the SIJL, registration involves the filing of financing statements (or financing change statements) on the SIR.

Under the 1983 Law, Jersey did not have a public register for security interests over intangible movable property, and Jersey is the first major offshore financial centre to introduce such a register. The SIR is an automated public register (maintained by the Jersey Registrar of Companies) for which all the searches and registrations are done online.

Access the SIR website and guidance notes.

It should be noted that there is an important carve out from the registration regime, where the grantor is the trustee of a private trust granting a security interest over trust property. Refer to our briefing on the exemption from registration under the Security Interests (Jersey) Law 2012 for further details.

Enforcement

The 1983 Law provided that, where the event of default was capable of remedy, the security could not be enforced until the secured party had given the grantor 14 days' written notice of default. This was not popular with lenders under the 1983 Law, particularly for security over custody assets / other collateral which could materially decline in value if not sold quickly.

Under the SIJL, it is possible for the grantor and the secured party to contract out of the 14 days' notice period before enforcement, and this is market standard for security interests created under the SIJL (although the secured party will still need to give the grantor written notice specifying the event of default before enforcing). The SIJL also provides for wider enforcement remedies for the secured party, such as appropriation (in addition to sale) and taking other ancillary actions.

Under the 1983 Law, a secured party's rights on enforcement were limited to a power of sale. The SIJL permits a power of appropriation and step-in rights, as well as making it clear that that secured party may take wider ancillary actions in support of enforcement. 

Jersey security interest agreements 

The Jersey security interest agreements under the SIJL are similar to those under the 1983 Law, except they will reflect the control, registration and enforcement provisions explained above and may potentially cover a wider range of assets.

Market practice under the 1983 Law was for each SIA to create security over one type of collateral (for example shares, bank accounts or custody assets). A similar market practice has continued under the SIJL, except it is also possible under the SIJL to have a Jersey general security interest agreement creating security over all present and future Jersey situs intangible movable property of the grantor (similar to an English law debenture). A general security agreement must be perfected by registration and will secure all assets from time to time such as securities, accounts and other intangible movable property.

Third party security 

The 1983 Law was 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 in respect of the primary debtor's obligations. The SIJL makes it clears that third party security is permitted without the need for a guarantee. 

Transitional Provisions

The transitional provisions under the SIJL provide that security created under the 1983 Law will continue to be governed by the 1983 Law, unless the SIA is amended to add new collateral not contemplated under the original SIA. This means that, for the vast majority of historical transactions, there will be no need to amend the SIAs entered into under the 1983 Law. However, any Jersey law security over intangible movable property created on or after the SIJL came into force (2 January 2014) will be governed by the SIJL. 

Recent Case Law on enforcement of SIJL security 

Refer to our briefing on the Security Interests (Jersey) Law 2012 – enforcement for a summary of recent Jersey case law on the enforcement of security created under the SIJL.

Conclusion

Overall, the SIJL has a number of advantages over the 1983 Law, particularly in relation to registration (which creates transparency for lenders) and facilitates enforcement of security. A detailed review of the SIJL has been undertaken to identify a series of recommendations to amend the SIJL to further enhance Jersey's competitive position as an offshore financial centre, to protect against reputational risk by removing uncertainty and to reflect developments in case law. It is proposed to further extend the scope of the SIJL in future to cover security over tangible movable property (for example inventory, equipment and consumer goods), which should open up new opportunities for lending against Jersey collateral.

In the meantime, the framework implemented under the SIJL draws on experience and legal concepts from other jurisdictions such as the United Kingdom, New Zealand, Australia and Canada. It will be interesting to see how market practice develops under the SIJL and if other offshore financial centres follow suit with similar legislation.

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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.

Regulatory information can be found under Legal Notice