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In: Accounting

Discuss generally the laws governing attachment and perfection of security interests, with emphasis on the goals...

Discuss generally the laws governing attachment and perfection of security interests, with emphasis on the goals of the law.

Why is it important to establish priority of claims?

What is the benefit of public filing and recording of these interests?

Solutions

Expert Solution

Attachment and perfection

The new law distinguishes between attachment, which is the creation of a security interest enforceable against the grantor, and perfection, which ensures that the security interest is binding on third parties and insolvency officials.

Perfection is key to priority and enforceability. If a security interest is not perfected:

  • it is void as against the viscount (a Jersey court official) or liquidator on the insolvency of the grantor;
  • it will rank after all perfected security interests;
  • the ability to enforce the security interest against proceeds may be lost; and
  • a person who acquires the collateral for value will take it free of the security interest, unless such security interest was created or provided for by a transaction to which that person was a party.

Attachment

Under the new law, the general rule is that a security interest attaches to collateral under a security agreement in the following cases:

  • Value is given in respect of the security agreement. In this context, 'value' means money or money's worth sufficient to support an onerous contract. Value need not be provided by the grantor of the security interest.
  • The grantor has proprietary rights in, or the power to grant such rights in, the collateral.
  • Either the secured party (or someone on its behalf other than the grantor) has possession or control of the collateral or the security agreement contains a description of the collateral sufficient to enable it to be identified.
  • Perfection

    Perfection of security by way of possession or control will occur at the same time that the security attaches. Registration is not required for perfection in these circumstances.

    All other security interests (subject to certain exclusions) are perfected by registration of a financing statement in the Jersey Security Interests Register, Registration can be used to perfect a security interest in any type of collateral, but will be of particular importance in respect of collateral that cannot be secured by way of possession or control.

    In order to perfect security by registration, a financing statement will need to be filed. This will set out, among other things, the name and details of the grantor and the secured party, a description of the collateral and the period of registration. Care should be taken to ensure that the details in the financing statement are accurate. A financing statement that has a defect, irregularity, omission or error that is "seriously misleading" may be invalid. In particular, a secured party should obtain copies of official identification documents to ensure that the grantor's name is correctly inputted.

  • b)priority claim

    An unsecured claim that is entitled to be paid ahead of other unsecured claims that are not entitled to priority status. Priority refers to the order in which these unsecured claims are to be paid.proof of claim A written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money.

  • c)Filing a financing statement22 is an alternative means to perfect a security interest and to publicize the transfer of possession.' The public-noticefiling system serves as a medium for the secured creditor to communicate information about the existence of prior credit to the debtor and the principal lender's intent to "monitor" and "counsel" the debtor. It thereby reduces expenses for investigations and policing efforts on the part of subsequent creditors using the recording system.' This is especially true for the assetbased security interests, since the creditor would otherwise have to employ expensive inquiries regarding specific assets. The public-notice-filing system is generally considered to be a vehicle of information about prior credit whose worth depends on its efficiency when compared to the system of private disclosure.the public-notice-filing system to be "principally for the benefit of those creditors who are subject to the limitations of the first-intime principle,"' others see it as the necessary means to operate the Article 9 first-in-time priority rule, which is a "pure race" filing system.


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