Enforcing Guernsey security interests
03 August 2021
Guernsey security enforcement (excluding security over real property) can only be carried out in accordance with the Security Interests (Guernsey) Law, 1993 (the "Law").
Bedell Cristin have in reality assisted a number of secured parties in enforcing their Guernsey security and, while the statutory process is relatively straightforward, there are a number of items which can complicate matters, especially in pre-insolvency or hostile circumstances. We can assist with the practical steps required to enforce security interests effectively and in a timely manner.
How to enforce Guernsey security
In summary, Guernsey security is enforced by exercising a power of sale or application of the collateral. The power of sale or application arises upon the occurrence of an event of default under the security interest agreement, but these powers can only be exercised after notice of the event of default complained of has been provided to the grantor of the security. Once notice has been served, there is no requirement for the secured party to allow the grantor of security time to remedy the default (unless the security interest agreement provides for this) and, unless specified otherwise in the security interest agreement, there is no requirement to involve the court.
The Law requires that the secured party exercises the power of sale or application within a reasonable time and for a price corresponding to the open market value of the collateral at the time of sale, or where there is no open market value, the best price reasonably obtainable.
In anticipation of enforcing a Guernsey security interest, a secured party can take certain steps to ensure the process moves smoothly. Using the example of a Guernsey security interest over shares:
- check you have:
a. the fully signed security interest agreement together with the related notice of assignment and acknowledgement; and
b. the original share certificate(s) and signed but undated share transfer forms relating to the collateral;
- ensure the constitutional documents do not contain restrictions on enforcing the security interest;
- organise any necessary client due diligence information in respect of the prospective transferee;
- check if the transfer of shares would require regulatory consent (such as the consent of the Guernsey Financial Services Commission);
- consider whether a valuation is necessary to ensure that the open market value of the property or best price available is obtained; and
- to the extent the Guernsey enforcement forms part of a foreign law enforcement process, prepare a steps plan to co-ordinate the various timings of other enforcement steps.
Dealing with a hostile board
Even if the articles of incorporation of the company whose shares are secured are 'security friendly', a hostile board may simply refuse to facilitate the transfer of the shares on enforcement. To circumvent this, a secured party may wish to take control of the board. From a Guernsey law perspective (subject to any restrictions there may be in the finance documents) this could be done as a preliminary step, by a shareholder passing an ordinary resolution (passed by simple majority) to remove / appoint directors. This would only succeed if the secured party controlled the shareholder board, in order to pass the shareholder's resolution.
The English common law 'Duomatic principle' of informal unanimous shareholder consent has not been applied directly by the Guernsey court, but we note that the Jersey court has upheld this principle. It is likely that a Guernsey court would uphold a written resolution signed by the shareholder, even if the formalities for passing such a resolution under the Companies (Guernsey) Law, 2008 were not complied with, in application of the principle in Re Duomatic Ltd  2 Ch 365.
Where directors are removed or appointed, it is important that they (and other interested parties) are given appropriate notice.
Any further assurance and power of attorney provisions in the security interest agreement also may be of assistance. Further assurance provisions may enable the secured party to take any action necessary for perfecting, maintaining or enforcing its security interest or vesting or selling the collateral. Power of attorney provisions may enable the secured party (as attorney) to step in and carry out the obligor's obligations, should the obligor fail to do so on the date it was obliged to.
Security over shares in an insolvent company
If the target company is in liquidation proceedings, its shares cannot be transferred without the consent of the liquidator.
In line with Guernsey's position as a leading jurisdiction for the establishment of asset-holding structures and investment funds, the Law provides a creditor-friendly regime for creating and enforcing security over intangible assets.
Bedell Cristin has significant experience with the process involved and can assist with swift and effective enforcement.
If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.