31 January 2019

Significant Royal Court ruling for lenders and creditors in Jersey

A Jersey Royal Court ruling has confirmed that secured claims in the Jersey bankruptcy procedure known as dégrèvement are limited to the maximum amount on the face of the document that creates the charge, plus three years' arrears of interest.

In Jersey law, a dégrèvement is a procedure whereby a creditor may take ownership of a debtor's immovable property such as a house or other buildings. The creditor is then known as the "tenant apres dégrèvement" (Tenant), and becomes liable to pay off secured creditors who rank ahead of them. 

In the matter of the dégrèvement of the immovable property of Mrs Powell [2019] JRC004 (Re Powell), Carey Olsen partner Marcus Pallot successfully argued that the amount that a secured creditor in a dégrèvement could claim as being secured was limited to the maximum amount on the face of the document (Billet) that created the 'registered charge over the property' (Hypothec), plus three years' arrears of interest.

Re Powell concerned how much a Tenant would have to pay, and for what, in order to be confirmed by the Court as the Tenant.

Jersey Home Loans (JHL) and Acorn Finance Limited were secured creditors who ranked ahead of Carey Olsen's client. Their advocates each argued that they could claim very significant costs which could be added to the amount shown on the Billet and be regarded as secured amounts for the purposes of the dégrèvement. It was also suggested that interest could be added to the secured amount which was in addition to the "three years' arrears of interest" set out in the 'Loi 1880 sur la propriete fonciere' (the 1880 Law).

However, the Royal Court agreed with Carey Olsen that the secured claims were limited to the maximum amount on the face of the Billet plus the statutory three years' arrears of interest. The secured creditors could not add on additional amounts beyond what was stated in the Billet, to include additional amounts for costs. The Court stressed that it was important that the Public Registry reflected the interests of secured creditors and allowed those looking at the Public Registry to know what the maximum amounts were that a secured creditor could claim as being secured debts. Allowing secured creditors to secure further unlimited sums such as costs and interest without further registration of another Billet would offend this principle.

It had undoubtedly been the case that both JHL and Acorn Finance had become involved in a difficult case with their debtor which had taken considerable time to resolve and engaged them in multiple prior appearances at Court and a significant level of costs. However, that did not entitle those costs to become additional secured sums. 

"This case is of significant importance for lenders and creditors who are considering lending and/or enforcement," said Advocate Pallot.

"It confirms the advice provided by Carey Olsen to its clients for a considerable time that where for example there is an amortising mortgage, a lender may capitalise outstanding interest, if permitted under the terms of the lending, and add it to the capital amount outstanding. If the two, when added together, come to less than or equal to the maximum amount that has been registered on the Billet then all of that will be secured. If there is an amount in excess of the amount registered then that excess amount should still be due and owing, but it will be unsecured."

Re Powell also confirmed that the 1880 Law provides that in any dégrèvement a secured creditor can add on a maximum amount of three years' arrears of interest to the amount shown on the Billet, subject to the general rule that such interest must be reasonable.