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12 August 2020
Guernsey entities continue to be popular in asset-holding structures and, accordingly, lenders are regularly asked to implement financing arrangements involving Guernsey entities. This article provides an overview of the mechanism under Guernsey law for the creation and enforcement of security over certain Guernsey-situated assets, such as the shares in a Guernsey company, certain contract rights and monies in a Guernsey bank account.(1)
Where security is being taken over Guernsey-situated assets, it is recommended that this is created using a security agreement governed by Guernsey law. For intangible moveable property (eg, shares in a Guernsey company, contract rights or monies in a Guernsey bank account), this means complying with the Security Interests (Guernsey) Law 1993 (the Security Law).
For the purposes of the Security Law, a security interest agreement must contain provisions regarding the collateral sufficient to enable its precise identification at any time. As such, the Guernsey security regime does not lend itself to taking security over a fluctuating pool of assets, nor does Guernsey law readily recognise the concept of a floating charge. Therefore, it is possible to secure future intangible moveables situated in Guernsey only where such assets can be precisely identified and described in the security agreement.
Guernsey law does not restrict a Guernsey entity's creation of foreign law security over non-Guernsey-situs assets.
Depending on the type of assets to be secured, the Security Law provides for the creation of security by:
Security in Guernsey in respect of any intangible moveable property (other than a lease) should be created pursuant to the Security Law, which sets out the formalities for a Guernsey security agreement, including that the agreement must, among other things:
A security interest over the shares in a Guernsey company may be created pursuant to the Security Law by:
In respect of security by way of possession, security is created on the secured party (or someone on its behalf other than the debtor or someone on behalf of the debtor) having possession of the original share certificates in relation to the shares, pursuant to a security interest agreement. The secured party (or someone on its behalf other than the debtor or someone on behalf of the debtor) must have and retain possession of the original share certificates for so long as the secured liabilities under the corresponding loan agreement are outstanding. If possession of the original share certificates is lost, the security may terminate.
To create security by way of assignment, express written notice of that assignment must be given by or on behalf of the secured party to the person from whom the person assigning the rights would have been entitled to claim the collateral (ie, the company whose shares are being secured). Such express notice must satisfy the requirements set out in the Security Law. Until such express notice has been given, there will not be an effective assignment of title to the shares and security by assignment will not be created.
A security interest in rights under a contract (other than a lease) is created where the secured party (or some person on its behalf) has title to such rights pursuant to a security agreement and that title was acquired by way of assignment. As noted above, the creation of security by way of assignment requires express written notice to be served on the relevant counterparty. This is particularly useful to create a security interest in respect of intercompany loans.
Where the secured party is also the account bank (and where the grantor of the security is also the bank account holder), security over the relevant bank account is created where the secured party has control of the account pursuant to a security agreement.
Where the account bank and the secured party are different entities, security over the relevant bank account is created where the secured party (or someone on its behalf) has title to the account and that title was acquired by way of assignment. As noted above, the creation of security by way of assignment requires express written notice to be given to the account bank.
Statutory power of sale or application
If an event of default (as defined in the security agreement) occurs and notice is given to the debtor specifying the event of default, the statutory power of sale or application arises in respect of the relevant collateral.
Exercise of power of sale or application
Where the power of sale or application is exercised, while there is no requirement for the relevant secured assets being sold to be sold on the open market (ie, by way of public auction), the secured party must take all reasonable steps to ensure that the sale is made within a reasonable time and for a price corresponding to the value on the open market at the time of the sale of the assets or, where there is no open market value, the best price reasonably obtainable. Any power of application must be exercised on the same basis and any proceeds of such application are applied in the same way as the proceeds of any sale (see below).
Application of proceeds
The Security Law sets out the order in which the proceeds of a sale or application must be applied, with the payment of costs and expenses of the sale ranking in priority to the application of other proceeds.
Enforcement in practice
In practice, enforcement of security typically involves:
For further information on this topic please contact Christopher Jones or Matthew Macfarlane at Ogier by telephone (+441481 721 672) or email (email@example.com or firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
(1) Many aspects of Guernsey law are similar to English law and, as such, will be familiar to lenders in the United Kingdom. However, there are material differences between Guernsey and UK law in relation to the creation and enforcement of security over Guernsey-situated assets. This article provides a high-level summary of such differences and the issues relevant to finance providers in respect of financing arrangements involving Guernsey entities.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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