23 June 2014
This briefing is intended to summarise the issues usually encountered when taking security in finance transactions involving Guernsey situs intangible assets: it does not deal with taking security over real property in Guernsey, or leases of real property, or methods of taking security other than pursuant to the Law. It is not intended to be an exhaustive summary of Guernsey law relating to security.
In finance transactions, security over Guernsey situs assets is usually taken by way of security agreement under the Security Interests (Guernsey) Law, 1993, as amended (the "Law").
There are fundamental differences between Guernsey law and English law in relation to taking security, for example, a non-Guernsey law debenture will not be effective to create security over Guernsey situs assets. In addition, Guernsey law does not recognise the concept of a floating charge; therefore security is taken over Guernsey assets by different methods, in accordance with the Law.
Creation – basics
- A security agreement under the Law must:
- be in writing;
- be dated;
- identify and be signed by the debtor;
- identify the secured party;
- enable precise identification of the collateral at any time;
- specify the events of default; and
- enable identification of the secured obligations, although a security interest may be created before such obligations come into existence.
- Where more than one security interest is created in the same asset, priority is determined by the order of creation. There may be fundamental issues with seeking to take second ranking security, however.
Creation - specifics
- Security in any intangible moveable property (other than a lease) can be created by conferring title to that property on the secured party by way of assignment pursuant to a security agreement, provided that notice of the assignment is given in accordance with the Law. Security over assets such as limited partnership interests, units in unit trusts, third party bank accounts and shares can be created in this way.
- Security over securities is created where the secured party or its agent has physical possession of the certificates of title to those securities pursuant to a security agreement. Security over shares in a Guernsey company can therefore be created by possession, as well as by assignment (above). A security agreement dealing with shares will usually cover both methods.
- Security over a life policy is created where the secured party or its agent has possession of the policy pursuant to a security agreement, as well as by assignment (above).
- Where the debtor holds a bank account with a secured party bank, a security interest over that bank account is created when the security agreement confers control of that bank account on the secured party. If the bank account is not held with the secured party bank, security over such a bank account would be created by assignment above and/or by set-off.
- Depending on the asset type being secured, consideration should be given to securing not only the asset but any related receivable (for example, loan notes and the right to receive payments under those notes).
Creation - technicalities
Where the person giving security is doing so to secure the obligations of a third party, it is common to create a direct obligation between such person and the secured party by including a limited recourse "technical" guarantee in the security agreement itself and to secure those guarantee obligations. Where a security provider cannot for some reason provide a guarantee, perhaps owing to outstanding negative covenants in facility documents or due to constitutional restrictions, the direct obligation can be created by means of a covenant to pay. The effect of an additional guarantee is that the bank can action a provider of third party security for breach if the secured assets prove to be insufficient or imperfect (for example, by way of an arrest or competing security).
- Where security is created by acquiring title to the collateral by assignment pursuant to a security agreement, the secured party does not need to acquire legal title (for example be written up as a member of a company or in a loan note register) in order for the security to be valid under Guernsey law.
- Where security is created over a bank account by way of control (above), the security may be undermined to the extent that any control over the bank account is given to the debtor.
- Where security is being taken over shares in a company that is regulated by the Guernsey Financial Services Commission, enforcement of that security may involve a change of control of the company for regulatory purposes. It is common, therefore, to approach the Commission for contingent confirmation that it would not object to the change of control on enforcement.
- Where a subsidiary is guaranteeing its parent's obligations by granting security, such guarantee (to the extent that it results in an accounting loss being recognised in the accounts of the guarantor company) may constitute a distribution for the purposes of Guernsey company law, which means that the guarantor company would need to satisfy a statutory solvency test, as well as any other requirements of its constitutional documents relating to the payment of distributions.
- The Law provides that in respect of a security interest created by possession of securities or a life policy or by control of a bank account, the amount due to a secured party shall be paid in priority to any other claims against an insolvent debtor.
- The Law further provides that a debtor's insolvency will not affect the ability of the secured party to realise the collateral, although where the debtor has been declared en désastre, the arresting creditor may apply to the court for an order vesting in him the rights of the secured party to the collateral and directing that it be sold or applied in accordance with the provisions of the Law.
- The Guernsey court may set aside a transaction entered into by a Guernsey company on the application of a liquidator of that company, if that company has given a preference to any person at any time after the commencement of a period of six months (two years if the person given the preference is "connected" to the company) immediately preceding the commencement of winding up proceedings. In some circumstances, the giving of security may be a preference. Please note that this regime is only applicable following the commencement of winding up proceedings - it does not, for example, apply in the case of administration.
- On the occurrence of an event of default under the security agreement, a statutory power of sale or application of the collateral arises. Such power is exercisable without need to apply to court (unless the security agreement requires it) once the secured party has served notice on the debtor specifying the event of default.
- On a sale or application of the collateral the secured party must take all reasonable steps to ensure that the sale/application is made within a reasonable time and for open market value or (if no open market value) for the best price reasonably obtainable.
- The Law specifies the order in which the proceeds of sale or application must be applied.
- A power of sale or application may be exercised in respect of only part of the collateral and the security interest in the remaining collateral will be unaffected.
- Security taken by way of possession (above) involves the secured party taking possession of certificates of title and, usually, undated executed forms of transfer, in order that the secured party can immediately act to have legal title vested in it on enforcement occurring. Constitutional documents (such as articles of association/ incorporation or loan note instruments) should be reviewed by counsel for the secured party and amended to remove any provisions (such as the directors' rights to refuse to register a transfer of shares) that might block immediate enforcement.
- Liquidation, administration and receivership of a Guernsey company does not create an automatic moratorium over the enforcement of security under Guernsey law.
- Security obtained by possession terminates when the secured party ceases to have possession of the collateral, or security by way of control when the secured party ceases to have control of the collateral, or security by assignment where the secured party ceases to have title to the collateral pursuant to the security agreement, for example, on re-assignment.
- A security interest also terminates on discharge of the secured obligations, unless the security agreement provides otherwise.