Report to the Minister for the lodging of the Security Interests (Jersey) Law 201-
1. ISSUE AND RECOMMENDATION
1.1. Following a lengthy consultation process, a draft Security Interests (Jersey) Law 201- (“the Security Interests Law”) has been finalized and both approved by the Law Officers Department and confirmed by them as compatible with human rights legislation. It is recommended that the Minister for Economic Development approves the Security Interests Law for lodging and debate by the States at the earliest opportunity.
Overview
1.2 Intangible property in general and investment securities in particular are of huge importance as collateral in modern financing. Jersey is a leading offshore international finance centre. Consequently, it is important that the existing legal framework governing the creation of security interests over intangibles is kept up to date. This Law creates a new regime for giving and taking security by repealing the existing law (the Security Interests (Jersey) Law 1983). Security interests created under the 1983 Law will nevertheless remain and will continue in force without amendment after entry into force of Part 3 of the draft Law. The draft Law is the product of extensive consultation with interested parties, both through meeting with consultees and through the receipt of written comments.
Purpose of this Law
1.3. The central objective of this Law is to provide Jersey with a simplified, modern, efficient legal regime for the creation, perfection, priority, transfer and enforcement of consensual security interests in intangible movables (“collateral”) and their proceeds. It is designed to give Jersey one of the most up-to-date legal regimes in this field and thereby to enhance Jersey’s attractiveness both to local and to foreign investors. This Law will also cover, for the purposes of perfection and priority only, outright assignments of receivables; that is to say, assignments made otherwise than by way of security.
1.4. The overriding aim is to facilitate the creation and protection of security interests and assignments with the minimum of formality and to lay down priority rules that meet the reasonable expectations of the business community. A number of provisions reflect in a simplified form the approach adopted throughout the United States and Canada and in New Zealand and, most recently, Australia. In addition much assistance has been derived from the English Law Commission’s two reports, Company Security Interests: A Consultative Report[1] and Company Security Interests[2] so far as these relate to intangibles.
Principal features
1.5. The principal features of this Law are the following:
● A unified concept of security interest which accommodates not only security by possession and title transfer but also hypothec (charge).
● The ability to ensure the creation of a security interest in present and future intangibles with the minimum of formality through a single agreement.
● Provision for a modern electronic filing system in which registrations may be effected and searches made on a computer-to-computer basis without human intervention, and which is based on notice-filing rather than transaction filing.
● Perfection by control, as an alternative to registration, for security interests in deposit accounts and investment securities.
● A set of priority rules, including protection against general insolvency creditors, which respond to the reasonable expectations of the market.
● A range of efficient, easily exercisable default remedies, but with safeguards for the grantor of the security interest.
1.6 After Part 3 of this Law comes into force no security interest to which the Law applies may be created except under this Law (Article 12). However, a person giving security governed by foreign law over property situated outside Jersey is deemed to have had capacity to give it under Jersey law (Article 13(2)).
Structure of the Law
1.7. Apart from the definitions set out in Article 1 the draft Law covers eight main areas. Parts 1 to 3 lay down the interpretation and scope of the Law and the conditions for the attachment and perfection of security interests and of assignments of receivables, that is, assignments otherwise than by way of security. Parts 4 and 5 deal with the priority of competing interests in collateral and the protection of purchasers. Part 6 sets out the rights of an assignee of receivables and Part 7 the methods of enforcement of security interests. Part 8 deals with the registration of security interests (including security assignments of receivables) and outright assignments of receivables. Finally, Schedule 1 deals with amendments and repeals, while Schedule 2 contains transitional provisions.
2 SCOPE
Transactions covered by the Law
2.1. The new Law applies to consensual security interests in intangible movable property and intangible proceeds, and proceeds of proceeds, of such property, and in addition, for the purposes of perfection and priority only, the outright assignments of receivables.[3] Outright assignments or re-assignments of other forms of intangible property, such as loan debts, fall outside the Law, as do interests in land, which are subject to a distinctive legal regime. The Law governs only security interests created by agreement (Article 15(1)). Liens and other security interests and assignments taking effect by operation of law and rights of set-off, combination and netting are also outside the scope of the Law (Article 8).
2.2. In principle the Law is confined to transactions with a Jersey connection of a kind set out in Article 4, described in more detail below. However, under Article 5 nothing in the Law precludes the parties from agreeing that in their relations with each other the Law is to apply to an agreement relating to intangible movable property, wherever situated, which would be governed by the Law if the agreement was not outside the scope of Article 4. This ability to extend the application of the Law is limited to relations between the parties, typically the rights and obligations created by the security agreement, as opposed to property rights affecting third parties. The same Article empowers the parties to agree that a security interest created under the prior law and continuing in force under the new Law without amendment shall be governed by the new Law.
“Grantor”; “obligor”; “secured party”
2.3. “Grantor” means the person who grants a security interest. Usually this will be the person owing the obligation secured by the security interest, who is termed the “obligor”, but this is not necessarily the case, as a security interest may be given to secure the obligations not of the grantor but of a third party. The person to whom the security interest is granted is termed the “secured party”, who may hold for his own benefit or for the benefit of another person or for the benefit of both. So a security interest may be taken by a person as trustee for others.
“Security agreement”; “security interest”
2.4. “Security agreement” means an agreement that creates or makes provision for a security interest, and includes an agreement that varies, renews or extends a security agreement as well as writing that evidences a security agreement. A “security interest” is an interest in intangible movable property, being an interest that, under a security agreement, secures payment or performance of an obligation. The phrase “security interest” is thus a generic term covering all existing forms of security created or provided for by a security agreement, including mortgages, charges (hypothecs), pledges and contractual liens. Parties are free to adhere to existing terminology in their agreements but for the purposes of the Law the old labels are replaced by the single label “security interest”. The new Law removes the barrier to a hypothec of intangible movable property, a barrier creating a serious obstacle to modern financing, and also makes it clear that a security interest can be taken over after-acquired property. To avoid doubt, Article 6 of the new Law provides that a bank holding a deposit of money and a securities intermediary having an obligation to transfer securities or cash can each take a security interest in its own obligation.
2.5. The concept of a floating charge, by which a debtor company is by the terms of the security agreement given power to dispose of its assets in the ordinary course of business free from the security interest, is not known to Jersey law, nor is it recognised as a distinct form of security under the new Law. However, there is nothing to preclude a company, whether or not registered in Jersey, from creating a floating charge over property situated in a jurisdiction whose law provides for it. So a Jersey or foreign company could grant under, say, English law a floating charge over property situated in England. But once the property moves to Jersey the security interest attracts all the incidents of Jersey law.
“Intangible movable property”
2.6. Intangible movable property means a documentary intangible or any other movable property that does not consist of goods, money (in the sense of currency) or documents of title to goods (Article 1). Though physical money is excluded, other forms of cash, namely cheques, drafts and deposit accounts, are within the Law.
2.7. Intangible movables are of two kinds. The first consists of documentary intangibles; that is, rights to money or securities embodied in an instrument which can be transferred by delivery of the instrument with any necessary endorsement and can thus be the subject of a possessory security interest. Into this first category fall negotiable instruments (bills of exchange, promissory notes, and the like) and negotiable investment securities such as bearer bonds and bearer shares. The second kind comprises all other intangibles (in this Report termed “non-documentary intangibles”) insofar as they are not excluded by Article 8 or Article 9. Into this second category fall all types of investment security, as well as policies of insurance, deposit accounts, receivables arising from the supply of goods and services, debts repayable under loan agreements or promissory notes and other contract rights, including contractual rights to the delivery of goods, but not the goods themselves. “Investment security” is given a wide meaning, covering most forms of financial collateral, including property held in a securities or commodities account with an intermediary and commodities futures and options contracts. It should be noted that certificated registered securities, insurance policies and other written contracts, though evidenced by a document, are not documentary intangibles, because the document does not embody the right so as to enable it to be transferred by manual delivery.
“Proceeds”
2.8. The Law covers not only original collateral but proceeds (Articles 16 and 24(b)). Proceeds are any identifiable or traceable property in which the grantor of a security interest acquires an interest and which derives directly or indirectly from a dealing with collateral or its proceeds. This includes anything acquired in exchange for or in redemption of intangible movable property, including proceeds of sale, insurance proceeds and proceeds of proceeds. However, the Law applies only to those proceeds that are (a) intangible movable property, (b) derived directly or indirectly from intangible property, and (c) not excluded by Article 8. So if shares given in security are sold by the grantor against payment of a banker’s draft, the security interest attaches to the draft and any resulting proceeds. If the proceeds are then utilised to buy a car which is later sold, giving rise to a receivable, then although the Law does not apply to the security interest in the car it does apply to the later security interest in the proceeds of sale. Excluded are interest, dividends or other income, which are normally considered to belong to the grantor. It is, however, open to the parties to give security over these items as original collateral.
Classification of collateral
2.9. As pointed out above, the primary classification divides collateral into documentary intangibles and non-documentary intangibles. The reason for this is that only documentary intangibles lend themselves to attachment and perfection by possession and have a physical location for the purpose of determining their situation under Article 4(1)(a)(i).
Documentary Intangibles
2.10. Documentary intangibles are themselves of two kinds, negotiable instruments and negotiable investment securities. Broadly the same rules apply to each. However, negotiable instruments remain governed by negotiable instruments law, so that nothing in the Law affects the rights of a holder in due course (Article 37).
Non-documentary Intangibles
2.11. Non-documentary intangibles are divided by the Law into three broad categories, intangibles governed by the rules on control, receivables and other intangibles.
(1) Intangibles governed by the rules on control
2.12. Article 3 deals with the concept of control, discussed below in paragraphs 2.23 et seq. Three classes of intangible are susceptible to perfection by control, which carries with it priority.
First, there are deposit accounts, in which a security interest can be perfected not only by registration but by control (Article 3(3)), carrying with it priority (Article 30).
Second, there are securities accounts with an intermediary, which are for the most part treated by the Law in the same way as it treats deposit accounts. The method of perfection by control is in essence the same (Article 3(3) and (4)), as are the priority rules (Article 30). However, a security interest in securities accounts cannot be perfected by assignment and notice of assignment to the intermediary. In this respect the perfection rules differ from those applicable to deposit accounts. Subject to the agreement between the parties a security interest in a securities account covers all securities from time to time credited to that account. It is open to the parties, however, to create a security interest in particular securities within the account. In neither case does the secured party acquire rights direct against the issuer or a higher-tier intermediary; its rights can be asserted only against the intermediary with which it has a control agreement and its security interest is limited to a proportionate interest (with other account holders having interests in the same class of securities) in whatever securities credited to the securities account are held by the intermediary.
Thirdly, there are non-negotiable investment securities, which are subject to special rules of control varying according to whether they are registered certificated securities or uncertificated securities held in a settlement system (Article 3(5) and (6)).
(2) Receivables
2.13. The primary reason for isolating receivables as a distinct category is that the perfection and priority rules of the Law govern not merely security interests in receivables but also outright assignments of them, e.g. by way of sale under factoring, invoice discounting or securitisation arrangements. The definition of “receivable” in Article 1 is restricted to monetary obligations arising from the supply of goods or services (other than insurance services) and the supply of energy. Specifically excluded are loans, deposit accounts and rights to payment embodied in an instrument or an investment security. Loan participations also fall outside the definition.
2.14. There are three reasons for treating receivables as a distinct category.
First, they are not susceptible to control in the sense used in Article 3 of the Law and therefore must be treated separately from deposit accounts, securities accounts and investment securities.
Secondly, for the reasons given in paragraph 6.3, the perfection and priority rules of the Law extend to the sale or other outright disposition of receivables, as typified by factoring and invoice discounting arrangements, but these reasons are not applicable to the sale of debts arising from loans.
Thirdly, in order to maintain the free movement of receivables in the stream of trade, Article 39 overrides contractual prohibitions against assignment, but the same policy reasons do not apply to no-assignment clauses in loan agreements or to the securitisation of loan obligations.
(3) Other intangibles
2.15. This category embraces all other non-documentary intangibles not excluded by Article 8 or Article 9. Into this residual category fall rights to repayment under loan agreements, loan participations and other contract rights. Security interests in these can be perfected only by registration and fall outside Part 6 dealing with assignments of receivables.
Territorial scope
2.16. Article 4 describes the territorial scope of the Law. The key idea is to confine the Law to intangible movable property situated in Jersey. This is straightforward for documentary intangibles, the situs of which is the location of the negotiable instrument or negotiable investment security at the time of making of the security agreement. However, considerable difficulties can arise from ascribing an artificial situs to non-documentary intangibles. Accordingly Article 4 does not seek to do this but in the interests of greater certainty selects a more appropriate link to Jersey. So the Law applies to a security interest in:
(1) directly held non-negotiable investment securities listed on a register maintained in Jersey or by a Jersey company or by a Jersey individual;
(2) investment securities held through an account with an intermediary where the account is maintained in Jersey;
(3) deposit accounts maintained in Jersey; and
(4) any other intangibles (for example, receivables or ordinary contract rights) where the account debtor or other person owing the obligation is a Jersey. company or a Jersey individual.
Choice of law to govern intangible property situated outside Jersey
2.17. Article 5 allows the parties to a security agreement over intangible property to apply the Law, in their relations with each other, to a security interest which falls outside Article 4 but would otherwise be within the Law. This gives the parties the ability to enjoy the advantages of the Law for a security interest over foreign intangible movables, for example, without there being the requisite connection to Jersey, though only in their relations with each other, so that the rights of third parties are not affected.
Impact on security interest created under a foreign law
2.18. The starting point is that, despite Article 4, this Law does not affect any right acquired in relation to intangible property under the law of a foreign jurisdiction while that property is situated within that jurisdiction, and Article 13 makes it clear that a Jersey company or individual is deemed to have capacity to give security governed by foreign law over assets situated outside Jersey. This reflects the widely adopted principle that any dealing in movable property is governed by the law of its situation (lex situs, lex rei sitae) at the time of the dealing.
2.19. An unperfected security interest is vulnerable to subordination to a subsequent security interest and to invalidity against a subsequent purchaser or the Viscount or a liquidator or administrator (see paragraph 9.1). As stated earlier, a Jersey grantor giving security over property situated outside Jersey is deemed to have had capacity to give it under the law of Jersey (Article 13(2)). This re-enacts Article 12 of the Security Interests (Jersey) Law 1983.
2.20. Once the property in respect of which rights have been created under foreign law moves to Jersey it attracts all the incidents of the new Law, so that, for example, as previously stated a security interest created under English law as a floating charge becomes recharacterised as a fixed security interest under the Law.
2.21. In other words, the fact that a security interest created under English law is expressed as a floating charge does not by itself postpone attachment in the absence of agreement to that effect. Despite this the grantor is entitled to deal in the collateral from time to time if that is in accordance with the security agreement. Such dealing is not incompatible with a fixed security interest for the purpose of the Law.
Aspects of security
2.22. The draft Law deals with the attachment, perfection and priority of security interests, together with enforcement rights and the registration system. Attachment denotes the creation of a security interest so as to be enforceable against a grantor and a restricted category of third parties (see paragraph 3.1). Perfection denotes the further step required to give the security interest protection against other (most) third parties, including a trustee or liquidator. Typically this involves an act which gives third parties notice of the existence of the interest, such as possession of a negotiable instrument or certificate embodying a negotiable investment security or registration in a public register or which gives the secured creditor control over the intangible (see paragraph 2.23). Perfection, though necessary to preserve priority, does not guarantee priority, which is determined by priority rules dealing with the ranking of competing interests.
The concept of control
2.23. An important feature of the new Law is the concept of control of collateral. This provides in relation to non-documentary intangibles the equivalent of what is provided by possession as regards documentary intangibles. Control is an alternative to possession as an ingredient of attachment (Article 18(1)) and as a method of perfection (Article 22(3)), and in relation to investment securities and deposit accounts control confers priority as against a secured party who does not have control (Article 30(2)). In essence it consists of an arrangement by which the secured party is able to have recourse to the collateral without further assent or assistance from the grantor.
When a secured party has control
2.24. Article 3 sets out the conditions in which a secured party has control. Since a security interest in documentary intangibles attaches and is perfected by possession, Article 3 is confined to non-documentary intangibles, and more specifically to such of these as are susceptible to control, namely deposit accounts, securities accounts and non-negotiable investment securities. The concept of control therefore has no application to receivables or other ordinary debts or contract rights, for the reason stated in paragraph 2.25. What constitutes control of collateral within the scope of Article 3 depends on the character of the intangible in question, but in every case control depends upon the relevant security agreement being in writing (Article 3), “writing” being defined by Article 1.
Deposit account
2.25. Article 3 provides four methods of obtaining control of a deposit account. The first is where this is transferred into the name of the secured party with the written agreement of the grantor and the bank or other institution with which the deposit is held. This is a novation and is the strongest form of control, giving the secured party the protection against third party claims provided by Article 38.
Securities account with an intermediary
2.26. Where the collateral consists of a securities account held with an intermediary the methods of control are the same as for a deposit account except that control by assignment and notice of assignment is not an available method of control. This is because the secured party does not have the same ability to deal with the account as a secured party who holds the intermediary’s agreement to act on that party’s instructions. For the same reasons a security interest in a securities account cannot be perfected by assignment and notice of assignment. Control can be taken over the securities account as such, thus covering all securities from time to time credited to the account, or over specific securities within the account.
Certificated registered investment security
2.27. A secured party has control of a certificated registered investment security if registered as holder with the issuer or in possession of the certificate and a written form of transfer signed by the grantor in favour of the secured party or in blank (as previously mentioned, if the investment security is a negotiable security mere possession of the certificate suffices without any transfer instrument).
Uncertificated registered investment security
2.28. Where the investment security is not represented by a certificate and is held in a settlement system, such as the CREST system operated by Euroclear UK & Ireland, any one of four methods of control is available as set out in the law.
3 ATTACHMENT AND PERFECTION
Attachment of security interest
3.1. Article 18 deals with the elements necessary for the attachment of a security interest - in other words, the formalities for the creation of the security interest so as to make it enforceable against the grantor (Article 17). However, where the security interest has attached it is enforceable not only against the grantor but against third parties except so far as the Law otherwise provides (Article 15(3)). In most cases a security interest will be unenforceable against third parties unless it has not only attached but been perfected as described below.
3.2. There are three requirements for attachment: the secured party must have furnished value; the grantor must have rights in the collateral, though not necessarily full ownership; and either the secured party must have possession or control of the collateral or the security agreement must be in writing signed by or on behalf of the grantor and contain a description of the collateral sufficient to identify it (Article 18(1)(c)(ii)). The word “value” has been used as a neutral term to avoid the complexities associated with both cause (civil law) and consideration (common law). It is worth noting that value includes an antecedent debt or liability, and that “writing” and “signed” are defined to include electronic documents and signatures. Where the secured party has possession there is no need for the security agreement to be in writing. Possession is, of course, possible only in the case of documentary intangibles, that is, negotiable instruments and negotiable securities Where the secured party has control, this presupposes that (except where the collateral consists of securities held with an intermediary or a bank deposit account and the security interest is in favour of the intermediary or bank itself) there is a written agreement of some kind, though the writing need not be a signed writing and the agreement is not necessarily the security agreement.
3.3. The identification requirements, set out in Article 18(2), are very flexible; for example, they enable security to be taken over all or any category of the grantor’s present and future collateral. Moreover, a security interest in future collateral attaches when the collateral is acquired, without the need for a new act of transfer (see Article 19(2)). It is not necessary that the future collateral be identified at the time of the security agreement; it suffices that after acquisition it is identifiable as falling within the scope of the security agreement. So a security interest over all the grantor’s after-acquired investment property would be a sufficient description.
3.4. There is an automatic attachment in favour of a securities intermediary who credits its customer’s securities account with securities bought for the customer by the intermediary to secure the price advanced by the intermediary on the customer’s behalf (Article 20(1)). Such a security interest is given in order to provide the intermediary with an assurance that funds expended on its customer’s behalf will be able to be recouped from the purchased securities if the customer fails to reimburse the intermediary. Similarly the securities intermediary in such a case has control of the collateral (Article 3(4)(c)), and its attached interest is automatically perfected at the same time (see Article 22(2)).
Perfection of the security interest
3.5. The purpose of perfection is, first, to protect the secured creditor’s priority against subsequent secured creditors and an outright acquirer for value and, secondly, to avoid invalidation on the grantor’s insolvency. An unperfected security interest is subordinate to a subsequent perfected security interest; a person acquiring for value takes free of an unperfected security interest unless a party to the transaction creating or providing for it; and a security interest not perfected before the commencement of the grantor’s bankruptcy is void against the Viscount or a liquidator, or an administrator appointed by the court (Article 59(1)).
3.6. The first requirement for perfection is that the security interest has attached. The mode of perfection depends on the nature of the collateral and various rules are set out in the draft law.
3.7. A security interest in proceeds of collateral is a continuously perfected security interest if (a) the category of proceeds is described (eg “proceeds of the debtor’s receivables”); (b) the proceeds are of a kind falling within the description of the original collateral, as where the original collateral consists of investment securities which are sold and the proceeds reinvested in other securities.
3.8. Where a security interest perfected in one way is later perfected in another way without an interval the security interest is continuously perfected (Article 23).
3.9. The steps to perfection can be taken in any order (Article 21(2)), so that an intending secured creditor can register before the security agreement has been concluded and other ingredients of perfection fulfilled and perfection will go back to the time of registration. Security interests in proceeds and in negotiable instruments and negotiable securities returned to the grantor enjoy a period of temporary automatic perfection (Articles 26 and 27), on the expiry of which they need to perfected in the ordinary way.
3.10. Article 28 provides for the temporary automatic perfection of a security interest created and perfected under the law of another jurisdiction over collateral then situated in that jurisdiction but subsequently removed to Jersey. If the security interest is perfected within 30 days it is treated as perfected as from the time of perfection under the law of the other jurisdiction (Article 28(2)(c)), otherwise it is perfected under this Law only when the necessary perfection steps have been taken. If the security interest had not been perfected under the foreign law it may be perfected under this Law and its perfection starts from that time (Article 28(3)).
4. PRIORITIES
Basic priority rules
4.1. The priority rules in Part 4 apply alike to original collateral and proceeds. Article 29 lays down the residual priority rules, applicable where none of the specific rules which follow applies.
4.2 These residual rules are that a perfected security interest has priority over an unperfected security interest; where both interests are unperfected priority is determined by the order of attachment; and as between two or more perfected security interests priority goes to the security interest in relation to which any of the following events first occurred:
(a) a financing statement was registered;
(b) the secured party took possession or control of the collateral; or
(c) the security interest was temporarily perfected under the Law.
Special priority rules
Investment securities and deposit accounts
4.3. Under the special priority rules embodied in Article 30, the priority of conflicting security interests in the same certificated investment security, the same securities account or the same deposit account is determined by possession or control and, as between two interests perfected by control, by the order of control.
4.4. Possession is, of course, restricted to negotiable investment securities, and only one party, or parties jointly, can hold possession at any one time. The special priority rules do not themselves cover negotiable instruments held by way of security; instead, protection is given under the law applicable to negotiable instruments to a holder in due course (Article 37), which includes a pledgee who satisfies the requirements of such a holder.
4.5. It may occasionally happen that in the case of investments held with an intermediary, separate agreements are entered into by the intermediary with different secured parties to act in accordance with their instructions in relation to the same securities held for the same grantor, in which case priority is governed by the order in which the agreements were made. Conflicting security interests granted by an intermediary where neither party has control rank equally. In all other cases the residual rules apply.
Purchase-money security interests
4.6. A special priority is given to purchase-money security interests and certain other interests. A purchase-money security interest is in essence a security interest taken to secure repayment of an advance of the purchase price of the collateral to the grantor, together with interest and credit charges. However, the purchase-money security interest must be perfected not later than 30 days after attachment (Article 34).
Subordination agreements
4.7. Priorities may be varied by a subordination agreement between the holders of the competing interests (Article 32). The subordination may be contained in the security agreement or any other agreement. But to protect a transferee of the subordinated security interest from being led into thinking that it is still the senior security interest it is necessary to put the transferee on notice of the subordination in some way in order for him to be bound by it. Article 32(3) provides three means by which notice may be given.
Priority where security interest transferred
4.8. A security interest that is transferred has the same priority as it had immediately before the transfer (Article 31(1)). In other words, the transferee steps into the shoes of the transferor. There is, however, one qualification. The transferee of a subordinated security interest is not bound by the subordination except in the cases mentioned in Article 32(3) (see paragraph 4.7).
Registration of transfer; priority where more than one transfer
4.9. Transfer of a security interest perfected by registration may be registered by filing a financing change statement (Article 69(1)). Where the transferred security interest was not perfected by registration, a financing statement can be filed showing the transferee as the secured party (Article 70(1)). Registration of a transfer, or showing the transferee as the secured party, is not necessary to preserve the priority of the security interest, because, as stated above, a security interest that is transferred has the same priority as it had before transfer.
Future advances
4.10. A security interest has the same priority as regards all advances, whether existing or future advances, whether made pursuant to a contractual obligation or voluntarily (Article 33(3)) and whether made with or without notice of a subsequent security interest.
5 PERSONS TAKING FREE OF SECURITY INTEREST
5.1. The priority rules previously discussed deal with competing security interests in the same security. Part 5 of the Law includes some parties whose interests do not only rank in priority to an earlier security interest but extinguish it altogether.
Freedom from unperfected security interest
5.2. One who acquires the collateral for value takes free of an unperfected security interest unless it was created or provided for by a transaction to which the person acquiring the collateral was a party (Article 35).
Protection of creditor receiving payment
5.3. A creditor receiving payment through an obligor-initiated payment takes free of any security interest, perfected or unperfected, in the funds paid, any intangible that was the source of payment and any negotiable instrument used to effect the payment, whether or not the creditor knew of the security interest, unless acting in collusion with the grantor to defeat the rights of the holder of the security interest (Article 36).
Preservation of rights of holder in due course
5.4. The rights of a holder in due course of a negotiable instrument are preserved (Article 37). Under the applicable negotiable instruments law such a holder takes free from any defect in the title of his transferor and thus from any security interest given over the instrument and perfected by registration.
Protection of purchaser of investment security
5.5. A person giving value for a certificated investment security and taking possession of the certificate takes free even of a perfected security interest of which he knows unless he also knows that the disposition to him was in breach of the security agreement.
6 ASSIGNMENTS OF RECEIVABLES
Sphere of application
6.1. The Law applies to an assignment of a receivable payable by a Jersey company or a Jersey individual (Article 4(b)), other than an assignment excluded by Article 9(d), (f), (g) or (h) (see paragraph 2.21). By “assignment” is meant a sale or other transfer for value otherwise than by way of security, in other words, an outright assignment. An assignment by way of security is dealt with simply as a particular form of security interest created by agreement, and is therefore governed by the rules already described. Receivables are narrowly defined (see Article 1 and paragraph 2.13) and do not, for example, extend to debts repayable under loan agreements, so that an outright assignment of loan debts, or indeed of any intangible falling outside the definition of a receivable, is not covered by the Law at all.
6.2. Whilst most of the provisions of the Law are confined to the grant of security interests, including the assignment of receivables by way of security, the Law also provides that an outright assignment of receivables may be perfected by registration (Article 21(3)) and deals with priorities as between competing outright assignments and between an outright assignment and a security interest (Article 29).[4]
6.3. The Law does not deal with the formalities for an outright assignment of receivables and thus does not include any equivalent of attachment for these except to provide a rule in relation to after-acquired property (Article 19(3)). That is left to the general law. The Law is confined to questions of perfection and priority, the effect of restrictions on assignment, the duty of the debtor to the assignee and the defences and rights of set-off the debtor can assert against the assignee.
Perfection of assignment
6.4. Registration provides the sole method of perfecting an outright assignment of a receivable (Article 21(3)). It is, however, simple and convenient. A single registration can cover not only existing but future assignments. Through registration the assignee can secure priority over subsequently registered assignments and unregistered assignments. Article 23, dealing with continuous perfection of security interests perfected in more than one way, therefore has no application to outright assignments of receivables.
Priorities
6.5. The priority rules governing outright assignments of receivables fall within the residual priority rules contained in Article 29. A perfected assignment of a receivable has priority over an unperfected assignment of the same receivable or an unperfected security interest in the same receivable (Article 29(1)(b)). Conversely a perfected security interest in a receivable has priority over an unperfected assignment of the same receivable (Article 29(1)(c)). Where there are two or more perfected assignments, priority generally goes according to the order of registration of the financing statement (Article 29(1)(e)). This is not necessarily the same as the order of perfection, because a financing statement registered prior to the assignment gives priority to the assignment when concluded over an intervening assignment in favour of another creditor (see paragraph 4.2).
Overriding of restrictions on assignment
6.6. Part 6 of the Law deals with the assignment of receivables, Articles 39 and 41 of which (but not Article 40) apply not only to outright assignments but to assignments by way of security, which would ordinarily fall outside the definition of assignment used in the Law. The effect of Article 39 is that where a contract contains a provision prohibiting or restricting assignment such a provision is ineffective against the assignee, so that the assignment is valid and simply exposes the assignor to a claim for damages for breach of contract. The purpose of this provision is to remove what would otherwise be a serious impediment to receivables financing.
The account debtor’s duty to pay
6.7. Article 40, which is concerned with the account debtor’s duty to pay the assignee, is confined to absolute assignments, where in principle the assignee has the right to collect from the account debtor immediately the assigned accounts have become due. The assignee’s right to collect accounts assigned by way of security is typically exercisable only on default by the assignor and is thus controlled by the default provisions relating to security interests generally and contained in Article 43(2).
6.8. The account debtor is obliged to pay the assignee only after receipt of notice in writing by or with the authority of the assignor identifying the account assigned and requiring the account debtor to pay the assignee.
Defences and rights of set-off
6.9. Under Article 41 the account debtor is entitled to assert against the assignee (including an assignee by way of security) any defences he would have had against the assignor, whether arising before or after receipt of notice of assignment and is also entitled to assert against the assignee rights of set-off in respect of cross-claims arising before receipt of the notice of assignment or closely connected to the claim.
7 ENFORCEMENT OF SECURITY INTERESTS
Default remedies generally
7.1. Under the 1983 Act the creditor’s only remedy for default is sale. Part 7 of the new Law provides a range of default remedies, “default” covering not only failure to pay or perform under the security agreement but the occurrence of an event which by the terms of the security agreement gives the secured party the right to enforce the security (Article 1), for example, the obligor’s insolvency. The primary remedies are appropriation and sale of the collateral (Article 43(2)(a) and (b)). These are buttressed by various ancillary remedies (Article 43(2)(c)).
Appropriation
7.2. On default the secured party may appropriate the collateral or proceeds, that is, apply the collateral or proceeds in specie in or towards satisfaction of the secured obligations. The effect is that ownership of the appropriated collateral or proceeds vests in the secured party free from junior security interests (Article 47). The secured party is, however, under a duty to give not less than 14 days’ prior notice to interested persons (Article 44(1)) and take all commercially reasonable steps to determine the fair market value of the collateral and act in other respects in a commercially reasonable manner in relation to the appropriation (Article 46(1)).
Sale
7.3. A secured party may sell by auction, public tender, private sale or another method. Prior notice to interested parties is required (Article 44(2)) but is not required where the collateral consists of a quoted investment security or in other cases within Article 44(3) and can be dispensed with by agreement in writing between interested parties (Article 44(4)). A secured party must take all commercially reasonable steps to obtain fair market value for the collateral at the time of sale, to act in other respects in a commercially reasonable manner in relation to the sale and enter into any agreement in relation to the sale on commercially reasonable terms (Article 46(2)).
Distribution of surplus
7.4. Any surplus (as determined by Article 51) resulting from appropriation or sale is payable, first, to junior secured parties who have registered a financing statement, then to any other person (other than the grantor) who has given the secured party notice of an interest in the collateral and, finally, the grantor (Article 49(1)). Alternatively the surplus may be paid into court (Article 50).
Ancillary remedies
7.5. The primary are buttressed by various ancillary remedies exercisable in relation to the collateral or its proceeds including taking control or possession of the collateral or proceeds (Article 43(2)(c).
Grantor’s right to redeem
7.6. The grantor can redeem the collateral at any time before appropriation or entry by the secured party into a contract of sale or other irrevocable step in relation to the collateral (see paragraphs 7.2 – 7.3). The grantor also has a qualified right to reinstate the security agreement.
8 REGISTRATION
Nature and contents of the register
8.1. The register will be a public register searchable on-line (see paragraph 8.2). It will contain financing statements, financing change statements and such other matter as is required by the Law to be entered or registered (Article 62).
The registration system
8.2. The registration system will be wholly automated, so that registrations may be effected, searches made and search certificates issued on-line without the need for human intervention at the Registry end (Article 79). Experience with registration systems in the United States, Canada and New Zealand shows that a highly efficient system can be operated at low cost. The Commission is charged with developing the register on behalf of the Economic Development Department and £150,000 has been allocated to its development. The ongoing running costs will be met from an appropriate fee mechanism.
Notice-filing
8.3. The registration system will be based on the concept of notice-filing as opposed to transaction-filing.
Assignments, transfers and subordinations
8.4. Assignments of receivables, whether absolute or by way of security, will also fall within the registration system,[5] as will transfers of security interests and further assignments of receivables.
Other aspects of registration
8.5. The registration data, and thus the contents of the financing statement or financing change statement, will be such, and in such form, as may be prescribed by the Minister by Order or in the absence of any such Order, or to the extent that it is silent on any matter, such details as the registrar may reasonably require or permit (Article 62). A discharge or amendment of a registration can be recorded by registering a financing change statement (Article 74(1)) and the grantor can make a written demand for the secured party to register a financing statement where all of the secured obligations have been performed or in any of the other cases mentioned in Article 75. The public will be entitled to make searches of the register and obtain written reports setting out the information in the register relevant to those searches (Article 83).
Errors
8.6. Under Article 66(1) an omission, error or irregularity in a registration will not invalidate the registration unless the omission, error or irregularity is seriously misleading. However, this is an objective test; it is not necessary to prove that anyone has actually been misled (Article 66(3)).
Duration of registration
8.7. Registration lasts for the period, if any, specified in the financing statement or until discharge or removal of the registration or the expiry of 10 years beginning with the date of registration, whichever first occurs (Article 67). But registration may be renewed by registering a financing change statement at any time while the earlier registration is effective (Article 68).
Registration not constructive notice
8.8. Article 14(1) provides that registration of a financing statement or financing change statement is not to constitute constructive notice of the existence of the statement or its contents. This rule is necessary in order to prevent a creditor perfecting its security interest by control from being affected by a registration, given that perfection by control would give priority over a security interest previously perfected by registration.
9 EFFECT OF GRANTOR’S BANKRUPTCY
Protection of perfected security interest
9.1. In general, only a security interest, or an assignment of a receivable, remaining unperfected at the time of the grantor’s bankruptcy is void against the Viscount or a liquidator and creditors (Article 59).
9.2. The repeal of the Security Interests (Jersey) Law 1983 except as to agreements governed by prior law means that the enforcement of a security interest in movable property en désastre and the application of the proceeds of any realisation of that property by the secured party cease to be controlled by Article 6 of the 1983 Law and instead become governed by Part 7 of this Law. The effect is that instead of application to the Court by the Viscount for a vesting order and order for sale, any realisation will be effected by the secured party and the proceeds distributed as provided by Part 7, though the Court may on the application of the secured party make any of the orders specified in Article 52 for the purpose of facilitating realisation of the collateral.
10 COMMENCEMENT, REPEAL AND TRANSITIONAL PROVISIONS
Commencement
10.1. The Law comes into force on such day or days as the States may by Act appoint (Article 96(2)). Different days may be appointed for different Parts or Articles of the Law. Regulations may be made of a saving or transitional nature and these may amend Schedule 2.
Repeal and amendments
10.2. The Law repeals the Security Interests (Jersey) Law 1983 in its entirety except as regards unamended continuing security interests (see paragraphs 10.3 – 10.4). The 1983 Law is itself amended so as to be limited to cases which under Schedule 2 to the new Law are to be governed by prior law (Schedule 1, paragraph 1). There are also amendments to the Bankruptcy (Désastre) (Jersey) Law 1990 so as to remove restrictions on the exercise of default remedies by a secured creditor after the grantor has become bankrupt. This reflects the fact that to the extent of the security interest the collateral does not form part of the grantor’s estate.
Application to security interests created prior to the Law
10.3. In general the Law does not apply to continuing security interests, that is, security interests (a) created in accordance with the 1983 Law on or after 5 April 1983 and before Part 3 of the new Law comes into force, and (b) still in force when Part 3 comes into force (Schedule 2, paragraph 1). These continuing interests remain governed by prior law, including in particular the 1983 Law (Schedule 2, paragraph 2). However, to this general rule there are certain exceptions.
Priority of unamended security interests to which prior law applies
10.4. An unamended continuing security interest, to which the prior law applies, has priority over any security interest created by the new Law unless the holder of the earlier security interest otherwise agrees (Schedule 2, paragraph 3(1)).
Deemed perfection of amended continuing security interest
10.5. Where a continuing security interest is amended after Part 3 of the Law has come into force, so that it becomes governed by the new Law instead of by the prior law, and the continuing security interest had been perfected by possession or control in such a way as would constitute perfection under the new Law, it shall be taken to be perfected under the new Law as from the time of amendment of the security interest without the need to take any further perfection steps (Schedule 2, paragraph 4(2)).
Priority of amended continuing security interest
10.6. An amended continuing security interest will be subordinate to an unamended continuing security interest (see paragraph 10.4) but in other respects its priority will be determined by the priority rules set down in Part 4 of the Law as if it were a new security interest created on the day it was amended.
Recommendation
11.1. It is recommended that the Minister for Economic Development approve the Security Interests (Jersey) Law 201- for lodging and debate by the States at the earliest opportunity.
Financial and manpower implications
11.2. There are no financial or manpower implications for the States save for those mentioned in paragraph 8.2 above, namely, the associated costs of developing a modern security interests register. This work is being carried out by the Jersey Financial Services Commission on behalf of the Economic Development Department and is expected to cost in the region of £150,000. The annual costs of running the register will be met through an appropriate fee mechanism.
11.3. Any costs of the Royal Court associated with dealing with any applications made under the Law will be off-set by the charging of court fees.
European Convention on Human Rights
11.3. Article 16 of the Human Rights (Jersey) Law 2000 requires the Minister in charge of a Projet de Loi to make a statement about the compatibility of the provisions of the Projet with the Convention rights (as defined by Article 1 of the Law). The Attorney General has confirmed that the Law is human rights Act compliant and the Minister will be making a statement accordingly.
Director, Finance Industry Development
21 May 2011
gov.je