Collas Crill explains...taking security over a Jersey bank account

26 November 2019

This guide is one in a series of 'Collas Crill explains...' in which we examine areas of Jersey law that frequently arise in practice. Further guides will be released weekly, click here to subscribe to receive the rest of the guides in this series to your inbox.

Jersey is a popular place to establish an asset holding company because its companies legislation is modern, flexible and modelled on English companies legislation. 

Where a Jersey company borrows money or participates in a group financing, the lender's security package will frequently involve taking security over a Jersey bank account. 

This guide looks at the key things you need to know about taking security over a Jersey bank account. 

Words in bold text are defined at the end of this guide. 

Preliminary steps

A security taker should take the following preliminary steps before taking security over a secured account

  • Review the terms and conditions for the secured account to determine whether there are any terms that will adversely impact on its security interest over the secured account (eg any prohibition on the creation of security, right of set off or combination or lien) that need to be disapplied. 

  • Agree a form of security notice and security acknowledgement with the account bank. Some Jersey banks have their own forms of notice and acknowledgement which they require be used. 

  • If the security giver is a Jersey company, carry out:

    • a companies registry search; and

    • an insolvency search,

      to make sure there is no evidence it is insolvent or subject to any insolvency proceedings. 
  • Search the security interests register to find out whether a financing statement has been registered for an existing security interest over the secured account. This search will not, however, reveal any security interest created under the Security Interests (Jersey) Law 1983 (the predecessor to the Law). 

Security basics

The Law sets out a statutory framework for creating security interests over Jersey intangible movable assets, like a secured account

Under the Law, a security interest is any interest in a secured account created under an agreement which secures the payment or performance of an obligation. 

The key features of the Law relevant to creating a security interest over a secured account are as follows. 

  • Agreement: a security interest over a secured account may only be created by agreement between the security giver and security taker.

  • Account held with security taker:  

    • When a customer deposits money into a bank account, the deposit represents a debt owed by the bank to the customer. In some jurisdictions, there are restrictions on the ability of a bank to take security over a bank account held by it (since the bank would be taking security over its own debt obligation) which is undesirable in the context of a financing transaction. 

    • To avoid this issue, the Law allows a security taker to take security over a deposit account held by the security giver with the security taker.

  • Attachment:  

    • Attachment is the process by which a security interest creates a proprietary right in a secured account.

    • Once a security interest attaches to a secured account, it becomes enforceable against the security giver.

    • The general position is that a security interest attaches to a secured account at the time all of the following conditions are satisfied:

      • value has been given in respect of the security agreement;

      • the security giver has rights in the secured account or the power to grant rights in the secured account to the security taker; and

      • the security taker has control of the secured account and/or the security agreement contains a description of the secured account that is sufficient to allow it to be identified. 

    • If the security giver retains the ability to deal with a secured account, this does not affect the attachment of a security interest to that secured account.

  • Perfection:  

    • Perfection is the process by which a security interest over a secured account becomes effective against third parties subject to the priority rules.

    • A security interest over a secured account is perfected when it has attached and any step required under the Law for it to be perfected has been taken.

    • A security interest over a secured account can be perfected by:

      • control: the security taker having control of the secured account and it will have control where:

        • the secured account is transferred into the name of the security taker with the written consent of the security giver and account bank;

        • the security giver, security taker and account bank agree in writing that the account bank will comply with the directions of the security taker regarding the transfer of funds in the secured account;

        • the secured account is assigned by way of security to the security taker in writing and the account bank is given written notice of the assignment; or

        • the secured account is held with the security taker; or

      • registration: the security taker registering a financing statement for that security interest on the security interests register

  • A security interest over a secured account must remain continuously perfected to remain enforceable against third parties.

Security deliverables

The security giver will normally be required by the security agreement or (where relevant) the credit agreement to deliver the following documents to the security taker:

  • a security notice to the account bank from the security giver and security taker;

  • a security acknowledgement from the account bank; and

  • a consent to filing a financing statement. 

Where the account bank's terms and conditions have terms that adversely impact on the security taker's security interest over the secured account, these will normally be disapplied in the security acknowledgement. Therefore, it is vital that each of the security notice and security acknowledgment are agreed in advance and signed on the same day as the security agreement. 

Registration

The Law establishes the security interests register which records details of security interests created over Jersey intangible movable property.  It is kept by the Jersey registrar of companies and can be searched online by anyone. 

The security taker may register details of (or any changes to) the security interest created over a secured account by registering a financing statement.  The financing statement will record in the security interests register details of the security taker, the security giver and the secured account

The maximum period for which a financing statement can be registered is 99 years and this is the period for which a finance statement is typically registered. 

The Law does not require a security taker to register a financing statement.   If the security taker does not register a financing statement, this will not invalidate a perfected security interest. 

A security taker will normally want to register a financing statement relating to the security interest created over a secured account because:

  • it ensures that the security interest remains continuously perfected; and

  • it puts anyone who searches the security interests register on actual notice of its security interest over the secured account

Priority

The Law sets out the following priority rules that apply to a security interest created over a secured account.

  • A perfected security interest has priority over an unperfected security interest over the secured account

  • Where there is more than one perfected security interest over the secured account, the security interest for which any of the following actions was first taken has priority:

    • a financing statement was registered;

    • the security taker took control of the secured account; and

    • the security interest was temporarily perfected under the Law.

  • Where competing security interests over the secured account are perfected by attachment, priority is determined by the order of attachment.

  • A security interest over the secured account in respect of which the security taker has control has priority over a competing security interest in respect of which the other security taker does not have control.

  • Where security takers with competing security interests over the secured account have control over the secured account, priority is determined by the order in which control was acquired.

  • A security interest over the secured account in respect of which the security taker is the account bank has priority over a competing security interest in the secured account held by another security taker.

  • A security interest over the secured account in respect of which the security taker has control due to the secured account being transferred into the security taker's name has priority over a competing security interest in the secured account held by the account bank.

Enforcement

Remedies

If a security interest over a secured account becomes enforceable, the security taker may:

  • sell the secured account (including to itself) by auction, public tender or private sale;

  • appropriate the secured account;

  • take control of the secured account;

  • exercise any of the security giver's rights in the secured account; or

  • instruct any person who has an obligation in relation to the secured account to perform that obligation for the benefit of the security taker

The Law allows the security agreement to include any other remedy as long as it does not conflict with the Law

In practice, the security taker will enforce its security interest over a secured account by appropriating it. 

Process

The Law allows the security taker to enforce its security interest if:

  • an event of default under the security agreement occurs; and

  • it gives a notice to the security giver specifying the event of default. 

If the security taker wants to appropriate a secured account, it must first give at least 14 days' written notice to the security giver and any interested party

The security taker does not need to give notice if:

  • the security giver or interested party agrees in writing to waive notice (which the security giver normally does in the security agreement); or

  • the security taker exercises a remedy other than appropriation.

Within 14 days of appropriating a secured account, the security taker must give to the security giver and other parties with an interest in the secured account a statement of account which shows (among other things) the net value of the secured account.

If any surplus remains after the enforcement costs and secured obligations and have been paid, the surplus must be applied among the relevant parties in the order of priority stated in the Law

Effect on other security interests

If the security taker appropriates a secured account, any security interest that ranks after its security interest is automatically extinguished. 

Duties

The security taker has the following duties to the security giver and any interested party on enforcing its security interest. 

  • Where it appropriates the secured account, it must take all commercially reasonable steps to determine the fair market value of the secured account as at the time of appropriation.  

  • It must act in other respects in a commercially reasonable manner in relation to the appropriation.

Insolvency of security giver

The Law states that the power of the security taker to appropriate or otherwise act in relation to a secured account is not affected by:

  • the security giver becoming insolvent; or

  • its property becoming subject to insolvency proceedings in Jersey or elsewhere,

as long as the security interest was perfected before the security giver became insolvent. 

Terms used

account bank means the Jersey bank or other deposit taking institution at which the secured account is held.

interested party means any person who:

  • 21 days before a secured account is appropriated, has registered a financing statement for a security interest over the secured account; or
  • not less than 21 days before the secured account is appropriated, has given the security taker notice of an interest in the secured account

Law means the Security Interests (Jersey) Law 2012. 

secured account means a Jersey bank account of the security giver over which it creates a security interest.

security giver means the person who creates a security interest over a secured account

security interests register means the register of security interests kept by the Jersey registrar of companies under the Law

security taker means the person in whose favour a security interest is created over a secured account

About Collas Crill

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About this guide

This guide is one of a series of 'Collas Crill explains...' and gives a general overview of this topic. It is not legal advice and you may not rely on it. If you would like legal advice on this topic, please get in touch with one of the authors or your usual Collas Crill contacts.

 

This note is a summary of the subject and is provided for information only. It does not purport to give specific legal advice, and before acting, further advice should always be sought. Whilst every care has been taken in producing this note neither the author nor Collas Crill shall be liable for any errors, misprint or misinterpretation of any of the matters set out in it. All copyright in this material belongs to Collas Crill.