Jersey's new bankruptcy law provides greater certainty to parties of structured finance transactions that will help the island maintain its position as one of the top European jurisdictions for capital markets structuring.
Transactions structured in Jersey typically contain agreements to not take action in having another party to the transaction declared insolvent (a so-called "non-petition agreement"). The agreements allow a number of ancillary mechanisms and arrangements designed to implement the close-out netting. The parties to these transactions invariably seek legal opinions to confirm that all agreements containing such provisions would be enforced by the Jersey courts in the event of the insolvency of any of the parties - which typically translates to several pages of technical jargon. "Before August 2005 Jersey did not have any legislation which directly confirmed the enforceability of such matters," explained Ian James, chairman of Mourant and structured finance specialist, in a commentary on the new law.
"As the Jersey courts have never been asked to rule on the enforceability of an agreement which included provisions of this type in the event of insolvency, there was a degree of uncertainty which was reflected in qualifications to legal opinions issued by Jersey lawyers.
In its new bankruptcy law, Jersey outlines netting provisions, contractual provisions and non-petition provisions. This law puts beyond any doubt that where a Jersey-based company, or the Jersey branch of a foreign incorporated company, is a party to a transaction, the Jersey courts will enforce all provisions relating to set-off, close-out netting, contractual subordination and non petition, together with all ancillary mechanisms and arrangements contained in an agreement, even in the event of the insolvency of a party to the agreement.
The law expressly confirms that it is binding on any liquidator of a transaction party, and that the Jersey court will enforce these provisions against any of the parties to the transaction, including guarantors, as well as against the creditors of any of the parties.
In essence the law brings absolute certainty in three areas where there has been a level of uncertainty - netting provision had been the area of most concern - and cuts out the extra legal work that was previously required. "What we can't tell is how much business [Jersey lost] by having these uncertainties but by implementing these provisions it reassures investment banks that there is absolute certainty in areas where before you ended up with a slight question mark," added Robert Heckling at Mourant.
Heckling added that Jersey has got the law right by modeling its new provisions after the best laws around the world. The law contains a number of marked advantages for transaction arrangers compared with the equivalent legislation in other well-regarded jurisdictions.
For instance, Heckling noted that the Jersey law does not require the agreements to be between particular types of counterparties (for example, a bank or securities clearing house) or to relate to particular types of transaction (for example, specified types of financial contracts) in order to be enforced.
The law is not limited to bilateral agreements and it expressly confirms that the provisions to be enforced can form part of a series of inter-related agreements between the same parties, as well as agreements made between different branches of the same entity. A clearing-house system is not necessary. The only situation in which provisions of this type will not be enforced is in the case of fraud or misrepresentation.
"With this law Jersey reaffirms its position as a global leader in structured finance legislation," said James. "New and existing institutional clients of Jersey's many experienced professional advisers will regard it as another reason to favor Jersey over the less mature jurisdictions seeking a share of the structured finance market."
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