If a Jersey law governed security interest agreement over Jersey situs intangible moveable property (SIA) was entered into on or after 2 January 2014, the process for enforcing the SIA will fall under the 2012 Law. The 2012 Law details when a power of enforcement becomes exercisable, the process of enforcement, the duties of the secured party and the distribution of the proceeds of sale.
If a Jersey law governed security interest agreement was entered into prior to 2 January 2014, the process for enforcement will fall under the remit of the Security Interests (Jersey) Law 1983 (1983 Law). Please get in touch with us if you need assistance in connection with the enforcement process under the 1983 Law. This article looks only at the enforcement process under the 2012 Law and this note assumes that security interests have been validly created under the 2012 Law via a Jersey law security interest agreement between the secured party and the security provider.
Unlike in England and Wales, Jersey does not have a concept of administration or receivership and so enforcement steps in Jersey are generally taken by the secured party and that secured party is highly involved in the enforcement process.
When is the power of enforcement exercisable?
The secured party’s power of enforcement shall become exercisable when: (a) an event of default has occurred; and (b) the secured party has served notice specifying the event of default. Under the 2012 Law, a court order is not required in order to exercise the power of enforcement.
The secured party must give 14 days’ written notice of the event of default to: (a) the grantor under the SIA (unless the parties have agreed to shorten or dispense with the notice period); and (b) any person who, at least 21 days prior to the proposed enforcement action, has registered a security interest (by filing a financing statement on Jersey’s Security Interests Register) or given the secured party notice of their interest in the collateral detailed in the SIA.
However, there are exceptions to the above, 14 days’ notice will not be required when:
- the grantor has waived this requirement, accordingly, the right to enforce will be exercisable immediately after notice has been given to the grantor;
- the collateral is a quoted investment security (i.e. a security that is listed on a securities exchange);
- the secured party believes on reasonable grounds that the collateral will decline substantially in value if it is not disposed of within 14 days of the event of default; or
- the Royal Court of Jersey orders, upon an ex parte application, that no notice is needed.
What enforcement rights are available to the secured party?
Once notice of the event of default has been served, the secured party must decide how to deal with the collateral or any proceeds from the collateral. The secured party has the following options:
- appropriate the collateral or proceeds
- sell the collateral or proceeds
- take any of the following ancillary actions – take control or possession of the collateral or proceeds; exercise any rights of the grantor in relation to the collateral or proceeds; and instruct any person who owes an obligation in respect of the collateral or proceeds (such as an account bank or an issuer of encumbered securities) to carry out the obligation for the benefit of the secured party
- apply any remedy that the SIA may provide for, to the extent that such remedy is not in conflict with the 2012 Law
The secured party may do more than one of the things set out above to the extent that those things are not in conflict. The 2012 Law does not prevent the secured party from taking such other action in respect of the collateral as is permitted by the SIA and is not in conflict with the 2012 Law, whether before or after the power of enforcement becomes exercisable.
The possible methods of sale of the collateral under the 2012 Law include sale by way of auction, public tender, private sale or another method. It is also possible for a secured party to buy collateral itself (or use a special purpose vehicle or an affiliated entity for this purpose).
Has the secured party discharged its duties under the 2012 Law?
The Law imposes certain duties on the secured party when appropriating or selling collateral, these must be carefully considered to ensure that the secured party’s obligations are discharged in full.
The secured party owes a duty to:
- take all commercially reasonable steps to determine the fair market value of the collateral as at the time of appropriation or sale;
- act in other respects in a commercially reasonable manner; and
- in relation to sale only, enter into any agreement relating to the sale on commercially reasonable terms.
Each duty is owed to the grantor and to anyone who has a registered security interest or other notified interest (not less than 21 days before the sale).
There is no guidance in the 2012 Law on what would constitute “fair market value” or the steps that would be considered “commercially reasonable”. However, in 2019 the Royal Court stated that when enforcing security, the duty is essentially one of: (a) valuation; and (b) then realising that valuation, and that a secured party is not required to take additional steps to enhance the value of collateral.
Accordingly, collateral should be assessed on its own merits when determining what the appropriate valuation and sale process should be for that asset. Please let us know if you would like assistance in ensuring that any valuation is not called into question and that no damages are applied against the secured party for failing to comply with such duties.
In addition, the secured party must consider any other issues that may impinge on a successful enforcement, such as any regulatory and anti-money laundering requirements faced by the service providers to the grantor or the secured assets triggered by appropriation or sale, gathering in share certificates and transfer forms and managing the position of non-compliant directors where the collateral is securities. These will be fact specific and we will be pleased to give guidance on how to steer through difficulties.
Is there a surplus to be distributed?
Within 14 days from the date of the sale or appropriation of the collateral, the secured party is required to prepare and deliver to the grantor (and those entitled to receive notice as detailed above) a statement of account showing the gross proceeds realised on enforcement and reasonable costs and expenses incurred by the secured party. The statement must also detail if there is a surplus owed by, or a debt owed to, the secured party. Where there is a surplus, then this must be distributed to the grantor in accordance with the 2012 Law.
For more information, please contact your usual Appleby contact or any of the below.