Jersey

Enforcing Jersey security interests over intangible moveable property 

Nicholas Crocker and Paul Sugden, of Carey Olsen in Jersey, examine how security interests can be enforced 

The Security Interests (Jersey) Law, 1983, as amended, governs the manner in which security is created over intangible moveable property (excluding leases) and the way in which such security may be enforced. This article summarises some of the issues that arise in relation to enforcement of a security interest or interests under a Jersey security interest agreement pursuant to the Security Interests Law, and briefly refers to the possibility of enforcing (outside the scope of the law) set-off provisions in such an agreement. It looks mainly at shares in a Jersey company as the security property, but is also in large part relevant to, and has some separate treatment of, certain other sorts of intangible moveable property security. 

Steps prior to enforcement 

Limitations on marketability/ transferability of the collateral As a first step, the secured party should check any factors which could affect the marketability/transferability of the collateral. Where the security has been taken over shares in a Jersey company these factors could include, for example, any restrictions on transfer contained in the company's constitutional documents and any requirement to obtain regulatory approval to a change of ownership. Conversion of possessory security into title security It is usual for a security agreement over securities or policies of life assurance to be drafted to create a title security interest but with the agreement of the grantor of the security that, to the extent that title security in the collateral has not been achieved, the secured party shall have possessory security (by having possession of the certificates of title to the securities or possession of the policy, as applicable). 

Prior to the enforcement, it may be appropriate for a secured party which holds such possessory security to convert that security into title security, or, if there is doubt on whether the security is title security, to take steps to ensure that it is title security. Such conversion of the security should not constitute enforcement. This has the advantage of, among other things, reducing the risk that, should the grantor's property be declared en désastre (a Jersey form of voluntary or involuntary bankruptcy) pursuant to the Bankruptcy (Désastre) (Jersey) Law 1990, the shares or other securities or policies will vest in the Jersey Viscount, the insolvency officer of the Royal Court. 

Pre-marketing 

Any pre-marketing must be done with great care. For example, the process should not constitute the exercise of the power of sale without the necessary procedure being followed.  

Security power of attorney 

The secured party will usually have the benefit of a security power of attorney from the grantor, meeting the requirements of the Powers of Attorney (Jersey) Law 1995, so that it survives insolvency of the grantor. This could be valuable in pre-enforcement (for example for achieving definitive title security or the exercise of voting rights) or as an adjunct to the enforcement process, but it is unlikely that this could be used effectively to realise the security property outside the procedure required by the Security Interests Law or to negate the restrictions on enforcement by the secured party arising in insolvency of the grantor. 

Exercise of power of sale 

Enforcement by exercise of power of sale 

A power of sale (or, in the case of a limited group of collateral for example money, appropriation) is the only means of enforcing a security interest contemplated by the Security Interests Law. The ability of a secured party to enforce its security other than by exercising the statutory power of sale is untested in the Jersey courts. The ability of a secured party to conduct a self-sale under the Security Interests Law must be very doubtful. Furthermore, that law does not expressly permit part only of the collateral to be sold or, therefore, more than one exercise of the secured party’s powers under a security agreement. 

Procedure 

Pursuant to the Security Interests Law, the power of sale of the collateral arises after the occurrence of an event of default under the security agreement. But in order to exercise a power of sale following an eventof default, the secured party must serve on the grantor a notice specifying the particular event of default complained of and, if the default is capable of remedy, requiring the grantor to remedy it. Only if the grantor fails to remedy the default, if it is capable of remedy, within 14 days after receipt of such notice does the power of sale become exercisable. Unless otherwise provided by the terms of the security agreement, a power of sale may generally only be exercised on the authority of an order of the court (the exception being for money where appropriation is the means of realisation).

In exercising its power of sale, the Security Interests Law requires the secured party to take all reasonable steps to ensure that the sale is made within a reasonable time and for a price corresponding to the value on the open market at the time of sale of the collateral being sold. This places emphasis on the correctness of the methodology for valuation and manner of sale for the collateral. The Royal Court would be likely to require the grantor to cooperate with the secured party in providing information likely to ensure that a sale can take place at a proper value. This may be underpinned by contractual rights the secured party may have to require the grantor to deliver such information. 

Practicalities; documentation of sale 

The Companies (Jersey) Law 1991 requires delivery of an instrument of transfer to register a transfer of shares in a company and it is common practice for a secured party to take from the grantor pre-signed instruments of transfer of shares, with the name of the transferee left blank. On exercise of the power of sale the secured party could either use those pre-signed instruments of transfer if the signatories are still current, or execute new ones itself. Other sale documentation will be for the secured party and a buyer to settle and the terms of these will depend on the circumstances of the sale.

Transfer of the shares in a company will raise KYC/CDD issues, and maybe conflict issues, for the Jersey administration of that company. The proactive use of court sanction Even where a security agreement permits the exercise of the power of sale without recourse to the Royal Court, it may be useful for a secured party to pro-actively obtain the court's sanction in certain circumstances. For example, the Royal Court could be asked to validate a methodology for sale where, otherwise, the secured party is unable to obtain relevant certainty in the face of anticipated challenge by the grantor. The possible advantages of seeking such court sanction, and as against the possible disadvantages, would however need careful prior consideration. 

Enforcement risks 

Non co-operation by directors 

The articles of association may have been amended to deny the directors discretion to refuse to register a transfer/to suspend registration. There may also be a direct undertaking given by the subject company, in its acknowledgment to the notice of security assignment given to it, that it will register a transfer required by the secured party. With such provisions/terms in place, if the subject company or its directors refuse to register such transfer, then injunctive relief should be available in the Jersey courts.  Supervening insolvency Insolvency may arise at the level of the grantor or, where the security is shares in a Jersey company, that company. 

Should the grantor's property be declared to be en désastre, or the grantor be subject to a creditors' winding up (insolvent winding up under the Companies Law), then the self-help remedies available to the secured party may, depending on the type of security interest, be restricted. Among other things, in a désastre: The property of the grantor (including, for example, any security shares the title of which is still with the grantor) vests automatically in the Jersey Viscount.

A secured party with such non-title security will be entitled to be paid the amount due in respect of the security interest. This will be "in priority to all other claims", but subject, if the Viscount sells the security property, to certain costs and expenses of the Viscount. If the secured party (or its nominee) has title then the secured party's ability to exercise its rights as such is subject to the rights of the Viscount to apply to the court for an order vesting in him the rights of the secured party to the security property and directing that it be sold. Where those rights are vested in the Viscount, the proceeds will be applied first to the Viscount's costs and expenses, then to discharge all moneys properly due in respect of the secured obligation. 

Meanwhile the Bankruptcy Law provides that after the declaration of désastre a creditor "shall not have any other remedy against the property or person of the debtor in respect of the debt". If the secured party has title security, then the secured property is no longer the debtor's. The position under a creditors' winding up under the Companies Law is to an extent the same or similar, with - for example - there being less restriction on self help, and it appears that the secured party's freedom of action does not differ between non-title and title security; on the other hand there is a comprehensive first deduction of costs and expenses of the winding up out of the insolvent company's assets, which will include non-title security property. 

The company whose shares are subject to the security could itself also have its property declared en désastre or become subject to a creditors' winding up. When the security is shares in a Jersey company, there are particular statutory provisions that apply in the insolvency of that company. A transfer of shares in a Jersey company, not being a transfer made to or with the sanction of the Viscount after the property of the company is declared to be en désastre, is void; and correspondingly in a creditors' winding up. Of course if the company is subject to these provisions its shares may well have no value. Application on the proceeds of sale Under the Security Interests Law, the secured party must apply the proceeds of sale in the following order: 

• in payment of the costs and expenses of such sale;
• in discharge of any prior security interest;
• in discharge of all monies properly due in respect of the obligation secured by the security agreement;
• in payment, in due order of priority, of certain secured parties whose security interests were created after those being enforced under the security agreement; and
• as to the balance (if any remains) in payment to the grantor or, in the event that the grantor has become bankrupt or has been subjected to any other judicial arrangement consequent upon insolvency, to the Viscount, receiver or other proper officer.

Money or monies in a bank account are to be applied under the Security Interests Law as if they were proceeds of sale. Receivables security (excepting bank accounts) is not cash security to be treated in this way, until the receivables are received. 

Set off 

The Security Interests Law states that "nothing in [that] law shall affect a lien or a right of set-off". This may include a right of set off in favour of the secured party (which may arise under the set off-provision in a security agreement) as well as a third party. Pursuant to the Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005, such a set-off provision may, in certain circumstances, offer an alternative to security interest based enforcement. The Netting Law defines a set-off provision widely and provides (in the case of such provisions) that "despite any enactment or rule of law to the contrary a set-off provision of an agreement is enforceable in accordance with its terms”. 

Accordingly, if a set-off provision in a security agreement makes clear that it will become exercisable by the secured party forthwith upon the occurrence of an event of default, it is likely that such a provision may be enforced in those terms without, for example, the need to exercise the power of sale in accordance with the Security Interests Law. Of additional potential benefit to a secured party is the article of the Netting Law that provides that a set-off provision "remains enforceable despite the bankruptcy of a party to the agreement or of any other person; and the lack of any mutuality of obligation between a party to the agreement and any other person". While it will be rare for the subject of the set-off to be the same as the security property, the most obvious overlap may be where the secured party has bank account security of the control type under the Security Interests Law. 

Alternative of quasi-enforcement 

This involves using voting rights under the shares security to appoint new directors to the subject company, so that the new directors can cause the subject company to use whatever rights are available to it to procure a sale of the assets or underlying assets. Commonly the security agreement will provide that voting rights are exercisable by the secured party after an event of default. Care needs to be taken that the exercise by the secured party of its contractual rights enabling it to take control of a company could not be characterised as an enforcement of security other than by exercising its power of sale (which would contravene Jersey law). If the secured party uses its voting rights to appoint directors to a company it and those directors would need to be aware of the duties that those directors have to the relevant company. Directors of a company in distress also need to be wary of personal liability arising from "wrongful trading" where there is a threat of insolvency. Potential consolidation risks and the tax consequences of such quasi-enforcement should also be considered. It will be necessary to consider carefully the nature of the security interest held and the method of enforcement under the Security Interests Law and/or the other possible options of set-off and quasi enforcement in order to maximise the return to the secured party and assess the risks of challenge by or on behalf of the grantor, or otherwise in an insolvency.

Factors including, among other things, the type of property which has been secured, the financial condition of the grantor and any restrictions on the secured party's rights in relevant transaction documents, may affect the steps to be taken. It may also be necessary to co-ordinate any such action with the enforcement of security in other jurisdictions. Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. 

Contact 

Nicholas Crocker nicholas.crocker@careyolsen.com 

Paul Sugden paul.sugden@careyolsen.com