Bermuda’s Security Framework Provides Certainty

In financing transactions, it is common for companies of a borrowing group to provide some sort of security.

Such security may be over the shares or accounts of companies of the borrowing group, including offshore entities, either by taking legal or equitable security over those shares or accounts.

The safest way to secure an asset is to take possession of it, however practical considerations dictate that the overwhelming majority of loan security is non-possessory.

This gives rise to a potential problem – if a borrower retains the secured asset, what is to stop it, albeit fraudulently, from selling or re-securing the asset to a third party? The problem is alleviated by the creation and registration of security interests -- placing the security document on a public register.

There are four key steps to creating a valid security interest:

Agreement: agreement to create a particular security interest between debtor and creditor (typically by executing a security document); Attachment: ensuring that the security interest binds on specific assets; Perfection: ensuring that the security is valid through execution by the parties; and Registration of priority: ensuring that the security will have priority in Bermuda over any unregistered charges, and over any subsequently registered charges. Part V of the Bermuda Companies Act 1981 (as amended) (Companies Act) provides for the operation of a public register of charges, which functions as a system of registration and priorities amongst registered and unregistered charges.

The original or a certified copy of the security document together with the relevant registration form containing the particulars of the charge are required to be filed with the Bermuda Registrar of Companies. A certificate of registration of charge will subsequently be issued by the Registrar of Companies

Registration is not mandatory and failure to register a charge does not render the security interest void or invalid against the creditors or the liquidator of the company. However, the effect of registration is to confer priority over any charge of a similar type registered subsequently irrespective of the date of creation of such charge -- and over any unregistered charge.

Charges created before 1 July 1983 continue to have the priority they had prior to that date, irrespective of whether they were subsequently registered under the provisions of the Companies Act.

Priority is only established between charges that are capable...