AVOIDING THE PITFALLS OF
CROSS-BORDER SECURED LENDING IN
CHINA, LATIN AMERICA AND WESTERN EUROPE
ABA Business Law Section Spring Meeting
New Orleans, LA • Friday April 7, 2017
Moderator:
• Keyvan Nassiry, Partner, Miller Thomson LLP (Montreal)
Panelists:
• Gabriela Sakamoto, Partner, Mayer Brown LLP (Washington DC)
• Axel Dippmann, Partner, CMS Hasche Sigle (Berlin)
• Alex Yong Hao, Partner, JunHe LLP (New York)
• Andrew J. Knight, Partner, Squire Patton Boggs (UK) LLP (London)
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WHAT IS DIFFERENT ABOUT CROSS-BORDER LENDING?
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Familiar US concepts may not be recognized in some countries
Common law vs. civil law jurisdictions
Robustness of foreign secured lending laws
Possible unpredictable enforcement process and timeline
Different cultural priorities
Credibility of foreign judiciary
Different registration regimes: greater due diligence
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WHAT IS DIFFERENT ABOUT CROSS-BORDER LENDING?
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Perfecting liens over future assets
Waiver of prohibition to pledge or assign A/R
Notice to account-debtor may be essential
Domestic protection of unpaid suppliers
Financial assistance restrictions
Withholding tax, stamp duty & notarial fees
Opinion of local counsel
Recognition of US judgments & arbitration awards
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TOPICS TO BE COVERED
• Jurisdictions covered in this presentation:
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Mexico
Germany
China
England & Wales
• Overview of the cross-border lending market
• Taking security and enforcement
• Risk areas for lenders
• Practical considerations: Recommendations and best practices
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Corporate structure of the Borrower and Guarantors
US Holding
Corporation
Mexican
subsidiary
German
subsidiary
Chinese
subsidiary
English
subsidiary
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CROSS-BORDER LOAN STRUCTURE
• Lenders lend to US borrower/parent with non-US subsidiaries
(Mexico, Germany, China and England)
• NY law credit agreement
• US Borrower pledges 100% of equity interest of non-US subsidiaries
• Non-US subsidiaries guarantee loan to US Borrower
• Each Guarantee is supported by pledge of non-US subsidiaries’
property
• All personal property of guarantor is located in home jurisdiction
• Assume no deemed dividend issue (e.g. no accumulated earnings)
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OVERVIEW OF LENDING MARKET
Latin America Generally
• 2016 -- Not a great year
• Region’s economy contracted in 2016, largely due to lower commodity prices.
• Brazil recession; political and corruption scandals.
• “Negative” outlook on sovereign credit ratings of Brazil, Mexico and Colombia.
• 2017 – Expected to be (somewhat) better
• GDP expected to increase.
• Improvement in Brazil.
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OVERVIEW OF LENDING MARKET
Latin America Lending
• In 2016, total Latin American loan volume decreased 23%.
• In first three quarters of 2016, loan volume was down 53% from the same
period in 2015; picked up in fourth quarter.
• Largest three industries for lending are:
• Utilities (19%)
• Materials (16%)
• Energy (14%)
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OVERVIEW OF LENDING MARKET
Top Bookrunners and Arrangers
Bookrunner
1.
Banco Bilbao Vizcaya Argentaria (BBVA)
2.
Mizuho Financial
3.
Sumitomo Mitsui Financial
4.
JPMorgan
5.
Banco Santander
Lead Arranger
1.
Mizuho Financial
2.
Banco Bilbao Vizcaya Argentaria (BBVA)
3.
Banco Santander
4.
JPMorgan
5.
Mitsubishi UFJ Financial Group Inc. (MUFG)
Source: Bloomberg
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OVERVIEW OF LENDING MARKET
Outlook – Mexican Lending
• Wave of sweeping reforms in 2014 in financial, energy and
telecommunication sectors aimed to open markets and increase country’s
competitiveness.
• Peso depreciated by 18% against the US dollar in 2016, but has experienced a
rebound - Expect volatility.
• Mexico still one of the top emerging countries for foreign direct investment,
with the US by far the largest source of foreign investment.
• Still, new US administration has added uncertainty. Many investments, and
many lending transactions, in Mexico have been pulled or are on hold.
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OVERVIEW OF LENDING MARKET
Top Mexican Banks (by total assets)
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BBVA Bancomer
Santander Mexico
Banamex
Banorte
HSBC Mexico
Inbursa
Scotiabank Mexico
• These seven banks have 78% of market share by total assets. Most are owned by foreign banks
(e.g. Banamax is owned by Citicorp).
• Mexico is an important profit center, and lending market, for international banks.
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OVERVIEW OF THE LENDING MARKET
a) Overview of main trends and major lenders
• Outlook for the German economy is positive and growth expectations have
been revised upwards.
• Active Schuldschein (promissory note) market.
• Pricing rises to reflect increased regulatory cost.
• US banks active in Germany:
• Investment banking (market share 2015): JP Morgan (10.7%), Goldman Sachs (7.1%),
Citibank (5.4%), Bank of America (4.3%)
• Bookrunners Syndicated Loans (March 2017): JP Morgan (10.9%), Citibank (10.9%), Bank
of America (4.3%)
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OVERVIEW OF THE LENDING MARKET
b) General country risks
• Europe's anchor of stability.
• European risks: Brexit, French elections on April 23, 2017, Italy
• German federal elections on September 24, 2017.
• Germany has a strong civil-law tradition.
• The principle of the separation of powers functions well in theory and
practice. The judiciary is independent.
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OVERVIEW OF THE LENDING MARKET
c) Upcoming developments in the lending market
• Bail-in clauses
• EU Directive 2014/59 (Bank Resolution and Recovery Directive or "BRRD") includes the
ability of a regulator to write-down and/or convert into equity a failing institution's
liabilities.
• Since January 1, 2016 Article 55 of the BRRD requires EEA financial institutions to include
a bail-in clause in almost every document to which they are a party and which is
governed by the law of a non-EEA country (e.g. US- or Canadian law document).
• US-style Leveraged Lending Guidance comes to Europe.
• Brexit will influence the loan market and loan documentation of UK banks or deals with
UK obligors.
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OVERVIEW OF THE LENDING MARKET
a) Overview of the main trends and major lenders
• Generally, China significantly eases the restrictions formerly imposed on
lenders, borrowers and commercial banks.
• Key development for lending market:
• Recognition of the legality of intercompany lending;
• Removal of the long-held maximum loan-to-deposit ratio of 75% for commercial banks;
• Interest liberalization and removal of the upper limit of the floating deposit interest
rates;
• Streamlining foreign debt administration, foreign direct investment and outbound
investment.
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OVERVIEW OF THE LENDING MARKET
• Major Lenders
• The four largest Chinese commercial banks are dominant in China
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The Bank of China
Industrial and Commercial Bank of China
China Construction Bank
Agricultural Bank of China
• Other Chinese banks:
• China Merchants Bank
• China Minsheng Bank
• Industrial Bank
• Active foreign players (subject to additional regulations):
• HSBC
• Standard Chartered
• Citibank
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OVERVIEW OF THE LENDING MARKET
• Recent Foreign Exchange Control
• Notice on Matters relating to the Macro-prudential Management Policy of Overall Crossborder Financing. (May 19, 2014)
• Streamline the approved proceeding formerly required
• Notice of the People's Bank of China on Macro Prudential Administration of Cross-Border
Financing. (January 11, 2017)
• Ease restrictions of banks and companies to do cross-border finance
• Notice to Further Promote the Reform on Foreign Exchange Administration and Improve
the Verification of Authenticity and Compliance. (January 26, 2017)
• Use of proceeds
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OVERVIEW OF THE LENDING MARKET
b) General country risks
• Frequent change in regulations issued by administrative departments
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• Especially recent foreign exchange control
Separate security required for each asset class
Over-collateralization
Security over future assets
Various authorities involved
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OVERVIEW OF THE LENDING MARKET
c) Upcoming developments in the lending market
• China’s foreign exchange control policy needs attention
• China’s effort to draw foreign direct investment
• Asian market will be active in 2017
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OVERVIEW OF THE LENDING MARKET
a) Main trends
• Debt finance levels remain steady – overall availability to the corporate sector
was broadly unchanged during 2016 despite Brexit vote, though SME demand
for credit was materially down n Q4 (expected to uptick in Q1 2017).
• Losses given default on loans were unchanged during 2016 for all sizes of
business borrowers.
• UK and foreign banks continue to be the major lenders, but alternative
lenders (non-bank lenders) have become a significant force.
• Alternative lenders were increasingly active across Europe, but amounts lent
by them specifically in the UK fell in 2016, largely due to a downtick in M&A
activity.
• Increasing use of unitranche in leveraged finance – partly driven by the
alternative lenders.
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OVERVIEW OF THE LENDING MARKET
b) Country risks
• Brexit!
• Populism on the increase – on the upside, the UK’s big shock has happened
whereas elections forthcoming in other EU countries have yet to play out.
• Domestic politics are stable with a majority conservative government in situ
and other political parties all suffering internal issues to some degree – not
really clear what the effective ‘opposition’ is at present.
• English law and English courts are still one of the world’s ‘gold standards’.
• Independent judiciary.
• Common law tradition continues to offer liberalised, flexible support for an
open market economy.
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OVERVIEW OF THE LENDING MARKET
c) Regulatory
• Corporate lending per se does not require a bank licence in the UK; neither
does taking guarantees or security:
• Lending/security regulatory constraints are focused on consumer-related debt, e.g.
consumer credit, retail mortgages
• Brexit is not expected to change this, notwithstanding the EU ‘passporting issue’.
• EU Bail-in powers (regulators’ powers as regards distressed financial
institutions in their jurisdictions, including powers to write-down an
institution's liabilities or convert them to equity) are likely to survive Brexit, at
least in the immediate term
• Most other EU regulatory rules likely to apply on Brexit +1 due to the
anticipated nature of the “great repeal bill”).
• There are no exchange controls.
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OVERVIEW OF THE LENDING MARKET
d) Upcoming developments
• Little expected – or at least apparent – pending Brexit.
• Ultimately Brexit will require consequential amendments to loan market
standard documents (e.g. LMA) and relevant bodies continue to assess the
likely changes. Examples include increased costs (references to Basel 3/CRD
4); and COMI (though no impact on the UNCITRAL Model Law).
• Small Business, Enterprise and Employment Act 2015: anticipated invalidation
of terms prohibiting or restricting the assignment of receivables arising under
certain types of contract – intended to facilitate rising of finance on accounts
receivable.
• 6 April 2017 – new Insolvency Rules (the procedural rules applicable to UK
insolvencies) came into force.
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SECURITY AND ENFORCEMENT
• Guarantee
• An aval is a personal guarantee granted by a third party and is a promise to
pay a negotiable instrument in case of default by the obligor.
• Under an aval, a guarantor is considered jointly and severally liable with the
obligor and the creditor may collect payment directly without exercising rights
against the obligor.
• Consider both NY law guarantee and aval to ensure ease and flexibility of
enforcement.
• Aval may provide expedited remedies. Can be enforced directly without having to obtain
foreign judgment.
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OVERVIEW OF LEGISLATION
Overview of Secured Transaction Legislation
• Many of the security instruments in Mexico are relatively new, arising out of
changes in secured transactions law since 2000
• No comprehensive law covering securing transactions and no single concept
of a “security interest” in personal property but rather a number of different
instruments and mechanisms.
• Commercial Code
• General Law of Credit Instruments and Transactions (Ley General de Titulos y
Operaciones de Credito)
• Civil Codes of Mexican States
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OVERVIEW OF LEGISLATION
Overview of Secured Transaction Legislation (cont.)
• In 2000, amendments to Commercial Code and General Law of Credit Instruments
created the mechanisms of the “guaranty trust” and “nonpossessory pledge”.
• Prior to these reforms, security interests could only be created by listing specific items of
collateral, e.g. specific accounts receivable.
• Permitted pledge of property not yet in existence and subsequently acquired property.
• In 2009, establishment of central electronic registry for most types of personal
property security interests.
• In 2014, reforms aimed at strengthening legal framework for secured loans and
enforcement of collateral
• Allowed extra-judicial enforcement for certain collateral.
• Clarified and codified measures for enforcement of collateral, increasing efficiency and
certainty in collection of collateral.
• Enhanced role, and thus use, of electronic registry.
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Types of Security
• General considerations:
• Which structure or security vehicle should be used requires analysis on a
case-by-case basis.
• Take into account assets being secured, size of financing. Certain security
vehicles may come with significantly higher costs.
• Cost-benefit analysis is important. Thus importance of having competent local
counsel.
• Security interests must be created in writing and, except in limited
circumstances, will need to be notarized.
• Single national registry for personal property collateral (Registro Único de
Garantias Mobiliarias (RUG)), but special rules and registries exist for
specialized collateral.
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Types of Security (cont’d)
• Mortgage
• In the case of real property, registered with public register of property in state
where assets located (Registro Publico de la Propiedad).
• Must be registered in order for security interest to be valid against third
parties.
• Judicial foreclosure – public sale of secured assets through the Mexican
courts.
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Types of Security (cont’d)
• Industrial Mortgage
• Floating lien over an entire business enterprise, including real estate,
receivables, inventory, other personal property (in US terms, an “all assets
lien”)
• Can only be granted to Mexican banks, not foreign banks.
• Must be registered in appropriate public register office.
• Title insurance available.
• Requires judicial enforcement.
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Possessory Pledge vs. Non-Possessory Pledge
• Possessory Pledge (Prenda con Transmisión de Posesión)
• Must be specific moveable property and property has to be specifically
identified.
• Perfection requirements depend on assets pledged, but generally assets must
be delivered to lender (or agent) for perfection.
• Pledges on moveable assets that have a registry must be recorded (i.e. shareholders
registry book, intellectual property).
• Good for shares or other instruments.
• Requires judicial enforcement.
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Possessory Pledge vs. Non-Possessory Pledge (cont’d)
• Non-Possessory Pledge (Prenda sin Transmisión de Posesión)
• Can be constituted as floating lien on all present and future moveable
tangible or intangible property, identified generally.
• Guarantor may continue to use collateral, including sale of inventory in its
business.
• Must be recorded before Registro Único de Garantias Mobiliarias (RUG).
• Parties can elect non-judicial enforcement.
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Guarantee Trust (Fideicomiso)
• One of the most popular and flexible security vehicles available under Mexican
law. Commonly used in cross-border financing in Mexico.
• Title to collateral (any kind of real or personal property) transferred to trustee.
• Obligor generally retains the right to make use of trust assets use and receive proceeds
thereof (so usually not considered transfer for tax purposes).
• Mexican law allows for the creation of security trusts to secure simultaneously or
successively different obligations of the obligor with one or more creditors.
• In addition, the grantor of the trust may designate one or more beneficiaries to receive the
benefits of the trust simultaneously or successively. The proceeds derived from the
foreclosure will be allocated to the beneficiaries in the priority of their designation as
beneficiaries under the trust.
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Guarantee Trust (Fideicomiso) (cont’d)
• Requires Mexican financial institution to serve as trustee, which
means higher costs.
• Two big advantages:
• Bankruptcy remote
• Parties can elect non-judicial enforcement.
• If a default occurs the lender (beneficiary of the trust) can foreclose over the trust assets.
• Trustee should take care to establish compliance with due process. Should give debtor
due notice of start of enforcement and opportunity to cure.
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Guarantee Trust (Fideicomiso) (cont’d)
• With respect to a guarantee trust over real property, the trust must
be recorded with the Public Registry of Property of the jurisdiction of
the place where the assets are located.
• With respect to personal property or contractual rights, perfection
requires vary on the underlying assets.
• Guarantee trusts over receivables require notice to debtors unless consent is
granted by other means.
• If the trust assets contain shares or securities, endorsement in favor of
trustee required.
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Registro Único de Garantias Mobiliarias (RUG)
• In 2009, amendments to the Mexican Commercial Code established the RUG, a
central electronic registry for most types of personal property security interests.
• Can be electronically searched.
• At first, the RUG was of little practical utility because guaranty trusts, industrial
mortgages and other kinds of secured interests were not required to be recorded.
• In June 2014, amendments to the Mexican Commercial Code enhanced the role
of RUG in Mexican secured transactions. Now all ordinary commercial pledges
and guaranty trusts need to be registered.
• Greater assurances for secured creditors in search.
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Workouts and Insolvency
• Concurso Mercantil. Obligor will have up to one year to develop a
consensual plan with creditors subject to court approval.
• Liquidation, if reorganization isn’t attempted or achieved.
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RISKS FOR LENDERS
• Financial Assistance
• Guarantees issued by a company to support parent’s obligations would be
generally valid under Mexican law. Common in cross-border financing for
Mexican subsidiaries to give upstream guarantees.
• Make sure that Mexican subsidiary allows for guarantee to be provided.
• Corporate benefit or fair consideration and arm’s length terms are issues to
consider for tax reasons and for insolvency scenarios.
• Beware preferences:
• Transactions entered into within a “suspicious period” of 270 days before date on which
insolvency proceedings (concurso mercantil) is declared.
• “Suspicious period” can be extended further back.
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RISKS FOR LENDERS
• Priority Claims:
• Wages and workers compensation for the year before insolvency decision.
• Expenses incurred in administration of estate and resulting from judicial or
non-judicial procedures for the benefit of the estate.
• Fees of the bankruptcy auditor, conciliator and receiver.
• Employee or tax claims (other than wages).
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RECOMMENDATIONS AND BEST PRACTICES
• Local counsel
• Mexican legal market is sophisticated.
• Find counsel that is experienced in assets/property involved in your
transaction. Some firms have more experience, for example, with guarantee
trust structures, or receivables financing, or energy sector financing.
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RECOMMENDATIONS AND BEST PRACTICES (cont’d)
• Due diligence
• Always review power of attorneys to ensure due authorization of signatories.
• Costs/timeline
• Registration, recording fees and notarial fees vary and registration duties in
some states are based on value of secured assets. Costs can be material.
• Ongoing perfection requirement for non-tangible assets.
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
a) Choice of law: US/Canadian law guaranty vs. local law guaranty
• Two kinds of guaranties: (abstract) guaranty (Garantie) and (accessory) surety
bonds (Bürgschaft).
• Guaranties are independent and abstract from the claims they secure, surety
bonds are accessory to the secured claims. In domestic transactions surety
bonds prevail, in international transactions guaranties prevail.
• Usually "absolute suretyship" required.
• A German court may hold that an obligation of a surety to pay "on first
demand" constitutes a simple obligation to pay but not a waiver of any
defenses.
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
a) Choice of law: US/Canadian law guaranty vs. local law guaranty
• US law/Canadian law guaranty vs. German law guaranty/surety? Choose your
favorite! But note: German financial assistance rules (see below) apply,
irrespective of the law chosen.
• In Germany, the recognition and enforcement of final and conclusive judgments by a
competent US or Canadian court will be generally recognized and enforced in Germany
provided that, inter alia, this is not contrary to German public policy (ordre public) and
reciprocity is ensured
• punitive damages violate German ordre public
• reciprocity mainly ensured in US and Canada for monetary judgements.
• The enforcement of awards of arbitral tribunals situated in the US or Canada is subject to
the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June
10, 1958. For the US, the Treaty of Friendship, Commerce and Navigation between the
United States of America and the Federal Republic of Germany of July 14, 1956 also
applies.
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
b) Overview of legislation applicable to creation of personal property
security
• German Civil Code (Bürgerliches Gesetzbuch, BGB) and judicature.
• Special laws for collateral on aircrafts and vessels.
c) Common form of security and security instrument(s) available
• Under German law, a separate security agreement generally is required for
each class of assets.
• No blanket security interest on any existing or future personal property.
• Specific description of the assets being subject to security required. Vague or
broad descriptions of the collateral not sufficient. However, 'cover-all-clauses'
such as "all inventory or equipment" located in a certain area, can be used.
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
c) Common form of security and security instrument(s) available
• Pledge over
• (current and future) shares
• Often the articles of association of German limited liability companies (GmbH) require
consent of the shareholders / the pledged company for the pledge to be valid.
• For a pledge of the interests in German limited partnerships (KG and GmbH & Co. KG) consent
of all partners is required for the pledge to be valid.
• (current and future) bank accounts
• Banks’ general terms and conditions usually provide for a pledge in favor of the bank on the
bank accounts held with them. Waiver should be requested.
• (current and future) IP rights
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
c) Common form of security and security instrument(s) available
• Security assignment of
• (current and future) receivables
• (current and future) IP rights
• Security transfer of (current and future) movable tangible assets (inventory,
equipment)
• (Abstract) land charges and (accessory) mortgages over immovable assets (i.e.
mainly real estate).
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
d) Description of local law formalities (execution, notarization,
registration, etc.)
• Registration/Notification/Filing
• Land charges/mortgages must be registered with land registry
• Bank account pledge to be notified to account bank
• Pledge of shares usually notified to pledged company (legally required only if dividend
claims are pledged as well)
• All other forms of security do legally not have to be registered, filed or notified.
• Germany does not have a central register to file collateral (exception: land registry
for land charges/mortgages on real estate)
• Security assignment of important receivables often notified to third-party debtor. If
not notified, assignment remains valid but third-party debtor may still pay assignor.
Assignment of tax refund claims must be notified to tax authority on the prescribed
form
• Assignment/pledge of IP rights often not registered
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
d) Description of local law formalities (execution, notarization,
registration, etc.)
• Form
• Suretyship and pledge/assignment of community trademarks requires written form
• Pledge of shares in a limited liability company (but e.g. not in a stock corporation)
requires notarization
• Land charge/mortgage on real estate requires notarial certification, in some
circumstances notarization
• All other security can be agreed on orally – but in practice security is agreed in writing
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
e) Conflict-of-law rules applicable to collateral (i.e. inventory, A/R,
equipment, IP, investment property)
• German law mandatorily required for security on:
• shares in German companies
• tangible assets located in Germany (inventory, equipment, real estate)
• German-law IP rights and the German part of international trademarks and European
patents
• Security on community trademarks, community designs, community plant varieties protection
rights and – in future – European patents with unitary effect can be taken under the laws of
any EU Member State
• Security on German-law receivables or German bank accounts may
(theoretically) be taken under foreign law. However, some legal uncertainties
in this area which is why in practice German-law security is taken.
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
f) Overview of legislation applicable to enforcement of security, and
insolvency
• The enforcement of the German security usually requires (i) a payment
default; and (ii) adequate (usually at least one week) notice of the intention to
enforce the security (unless such notice would endanger the realization of the
security).
• Enforcement of guaranties and suretyships
• The enforcement of guaranties and suretyships may be initiated by an executing
authority provided that an enforceable title (court decision) is available. If the
guarantor/surety is subject to an insolvency proceeding, it is likely that the
guaranty/surety cannot be recovered in full.
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
f) Overview of legislation applicable to enforcement of security, and
insolvency
• Enforcement of Share Pledges
• Share pledges over non-listed companies can only be enforced in a public auction unless
the pledgor agrees to a private sale. Such an agreement is only valid if made after the
secured claims have become due and payable.
• Enforcement of Security Assignment of Receivables
• Outside insolvency proceedings: receivables are simply realized by collecting the
receivables after the assignor's authorization to collect the receivables has been revoked.
• Inside insolvency proceedings: receivables from security assignments will become part of
the insolvency assets, i.e. insolvency administrator collects them and surrenders
proceeds to creditor (after deduction of certain contributory charges of around 9 % plus
applicable sales tax or more, if higher costs are proven by the insolvency administrator).
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
f) Overview of legislation applicable to enforcement of security, and
insolvency
• Enforcement of Security Transfer
• Outside insolvency proceedings: a security transfer of equipment and inventory can be
enforced by simply taking possession of the assets and selling them at a public auction or
a private sale (if debtor refuses to deliver the assets to the lender, the lender must
initiate court proceedings; self-help is not permitted). The lender is obligated under
German law to sell at market value.
• Inside insolvency proceedings: the transferred equipment and inventory will become
part of the insolvency assets, i.e. insolvency administrator will realize them and
surrender the proceeds to creditor (after deduction of certain contributory charges plus
applicable sales tax – see above).
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LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
f) Overview of legislation applicable to enforcement of security, and
insolvency
• Enforcement of Security over IP Rights
• Outside insolvency proceedings: IP rights realized by sale or licensing.
• Inside insolvency proceedings: disputed whether or not insolvency administrator has the
right to realize the IP rights. Probably depending on whether an IP right is effectively
used in the business of the insolvent debtor.
• Enforcement of Bank Account Pledges
• In- and outside insolvency proceedings the pledgee is entitled to satisfy itself by way of
collecting the pledged bank account receivable.
• Enforcement of Land Charges and Mortgages
• Land charges and mortgages are enforced by way of a forced auction (which is the more
important form of enforcing land charges and mortgages) and/or forced administration
by which the proceeds from the property can be collected by the chargee in- and outside
insolvency proceedings.
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RISK AREAS FOR LENDERS.
a) Financial assistance restrictions
• Any joint liability, guaranty, surety or other security granted by a German
limited liability company to secure debts to its shareholders or affiliates of
such shareholders (other than own subsidiaries of the GmbH) or the
realization thereof can constitute a forbidden repayment of share capital
(Section 30 para. 1 GmbHG) if not made from the company's free assets (i.e.
capital reserves and profits).
• The same principle applies with respect to the registered share capital of the general
partner of a limited partnership in form of a GmbH & Co. KG
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RISK AREAS FOR LENDERS
a) Financial assistance restrictions
• Legal consequences:
• Shareholders must immediately return the forbidden outpayment.
• Managing director of the company becomes personally liable for any forbidden
outpayment.
• BUT: According to the German Federal Court of Justice, a violation of Section
30 para. 1 GmbHG does not render the security granted to a third party
(lender) invalid (Exception: fraudulent purpose to the detriment of other
creditors)
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RISK AREAS FOR LENDERS
a) Financial assistance restrictions
• Solutions in practice:
• Restriction of realization of security by way of "limitation language" (negative effect on
value of the security)
• Limitation language does not apply if:
• domination and profit and loss pooling agreement between security providing company and
its shareholder.
• to the extent loan funds have been on-lent to security providing company
• Debt push down/up via merger, assumption of debt, etc.
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RISK AREAS FOR LENDERS
b) Typical priority liens
• Account pledge of account holding bank
• Statutory pledge of landlord, shipper, stock keeper
• Land charge / mortgage of a creditor and …
• … rental or lease claims assigned to another lender which relate to such encumbered
real property.
• … building insurance claims assigned to another lender which relate to such encumbered
real property.
• … movable assets serving the economic purpose of such real estate property
(accessories (Zubehör)) have been transferred by way of security to another lender.
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RISK AREAS FOR LENDERS
c) Third-party arrangements (subordinations, waivers, estoppels)
• Waiver / subordination required by priority lien holders.
• Waivers required in case of non-assignability of shares.
57
RISK AREAS FOR LENDERS
d) Usury
• Over-collateralization - The validity and enforceability of German law security
instruments is limited by the general principles of initial or subsequent
overcollateralization:
• Initial overcollateralization as from the outset of the loan (realizable value of all collateral
amounts to > 150 % of the secured claims + security grantee acting in a condemnable
state of mind). → German law security instruments are void.
• Subsequent overcollateralization during the lifetime of the loan (realizable value of all
collateral amounts to > 110 % of the secured claims – mainly due to partial repayment).
→ Excessive part of the security has to be released if the relevant security provider so
requests.
58
RISK AREAS FOR LENDERS
d) Usury
• Collision of global assignment of receivables and extended retention of title of
suppliers.
• If receivables have been or will be subject to a prior assignment to a supplier of the seller
under an extended retention of title regime (verlängerter Eigentumsvorbehalt), such
assignment must be given priority in the security assignment agreement, otherwise the
security assignment would be void.
59
RISK AREAS FOR LENDERS
e) Other
• Provisions allowing a third party (e.g. a lender) to control an entity's choice of
auditor are void since 2016.
• Sanctions provisions going beyond the sanctions of the UN, the EU or
Germany can possibly not be enforced in Germany due to a conflict with
applicable EU and German anti-boycott legislation
60
RISK AREAS FOR LENDERS
f) The Bank as (direct or indirect) shareholder of the obligor
• If a lender (i) holds (directly or indirectly) more than 10% of the shares in a
German debtor company or (ii) holds less shares but is a managing
shareholder, the claims of such lender are subordinated and repayments are
contestable in an insolvency proceeding of such German debtor company.
• The above principles generally also apply where not the lender itself is a shareholder of a
German debtor, but its (direct or indirect) majority shareholders.
• This is also why shares are only pledged and not transferred by way of security to a
lender because the latter would result in the loans becoming shareholder loans
61
RISK AREAS FOR LENDERS
g) The Bank as "quasi shareholder": pursuant to the jurisdiction of the
German Federal High Court a creditor which exercises a strong
influence on the management of an obligor and virtually acts as if it
were the duly appointed management of the obligor, may qualify as
a "quasi shareholder". Consequence: in case of insolvency, the bank
loans will be treated as a subordinated shareholder.
→ In respect of German obligors, restrictive covenants in loan agreements are
often replaced by information undertakings plus right to terminate the loan.
62
RECOMMENDATIONS AND BEST PRACTICES
a) Dealing with local counsel
• Lender / Lender's US/Canadian counsel = client = recipient of legal services =
addressee of German counsel's invoice (i.e. not the borrower or German
obligor)
63
RECOMMENDATIONS AND BEST PRACTICES
b) Due diligence protocols
• Generally (mainly red flag) corporate and legal due diligence requested by
banks
• No search of title or existing collateral possible (exception: land register
search if legitimate interest is proven)
• Insolvency research:
• Opening of insolvency proceedings on companies usually very quickly registered in
commercial register (can be searched online)
• Until then, search in online insolvency register possible – unfortunately the search
engine is not fully reliable …
• No certificates of good standing
64
RECOMMENDATIONS AND BEST PRACTICES
c) Opinion issues
• Market practice in Germany:
• Capacity opinion rendered by security provider's German counsel
• LBVE (legal, binding, valid and enforceable)-opinion rendered by lender's counsel
• Exception: (Only) if US lender has no local German counsel, security provider's
German counsel would upon request usually render a capacity opinion extended
by LBVE-opinions restricted to choice of law, choice of jurisdiction and
enforcement of judgments/arbitration awards in Germany.
• All German LBVE-opinions assume that the terms and conditions of the
agreements in question do not constitute general terms and conditions though
some of them are (market) standard and effectively are to be qualified as general
terms and conditions.
• Limitation of liability? TBD case-by-case.
65
RECOMMENDATIONS AND BEST PRACTICES
d) Costs of taking security
• Pledge on shares in a limited liability company (GmbH)
Notarial fees: EUR 120 to EUR 74,000 plus sales tax depending on the amount of the
secured liabilities or, if lower, the value of the pledged shares and the services of the
notary.
• Land charge/mortgage
Notarial fees: EUR 60 to EUR 68,000 plus sales tax depending on the nominal amount of
the secured liability and the services of the notary
PLUS
Registration costs at the local land register: EUR 60 to EUR 76,000 plus sales tax depending
on the nominal amount of land charge/mortgage and the service of the land register. The
fees can increase if more than one land register is involved or if a land charge/mortgage
certificate has to be issued.
66
RECOMMENDATIONS AND BEST PRACTICES
d) Timeline of taking security
• Registration of land charge/mortgage depends on workload of land register.
Usually around 2-3 weeks. Sometimes quicker, sometimes several months.
• In practice, confirmation from notary that (i) he has filed the land charge for registration,
(ii) there are no other filings pending and (iii) he is not aware of any circumstances that
would hinder the registration of the land charge/mortgage with the agreed rank is
sufficient for disbursement of the loan. It is recommended that such confirmation is
issued no earlier than seven days after filing of the land charge/mortgage
• All other security can be perfected within one – five business days
67
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
a) Choice of law: US law guaranty vs. local law guaranty
• China recognize and enforce a foreign governing law in a contract if there is
foreign element in connection with the contract and the foreign governing
law does not violate China’s social public interest
• Mandatory choice of law rules may apply
• Most foreign investment related contracts have to be governed by PRC law.
68
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
b) Overview of legislation applicable to creation of personal property
security
• The Guarantee Law of PRC
• The Property Law of PRC
• “numerus clausus” (property right limit)
• The Contract Law of PRC
• The Corporate Law of PRC
• Interpretation (legal interpretation & judicial interpretation)
• Regulations from administrative departments
There are additional regulations if foreign entities or investment are involved
69
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
c) Common form of security and security instrument(s) available
Form
Description
Guarantee
Guarantor assume debtor’s liability
Mortgage
Take certain property (real property, machinery, equipment, etc.) as collateral, but
guarantor keeps possession of the collateral before enforcement
Pledge
Take personal property and rights as collateral, but possession of the collateral has to
transfer to creditor to be effective
Lien
Creditor already obtains possession of debtor’s property in accordance with the
arrangements of the agreement and debtor fails to pay the debt under such agreement
Deposits
Monetary payment as a security
70
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
Common Form of Collateral
According to PRC law, the following collateral is available to secure lending
obligations (limited):
•
•
•
•
•
•
•
•
•
land, buildings or other fixtures;
manufacturing facilities, raw materials, semi-manufactured goods and products;
transportation vessels;
drafts, checks, promissory notes, bonds, deposit certificates, warehouse receipts, bills of
lading;
transferable shares and fund units;
trademark rights, patent rights, copyright or other property rights in intellectual property
that can be transferred;
accounts receivable;
construction-in-progress; and
others
71
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
Common Form of Security
• Mortgage
• Collateral:
•
•
•
•
Real property (certain types of real property are not allowed);
Manufacturing facilities, raw materials, semi-manufactured goods and products;
Buildings, vessels and aircraft that are under construction;
Means of transportation.
• No need to transfer possession
• Registration may be required
• Floating charge with respect to manufacturing facilities, raw materials, semimanufactured goods and products
• Mortgage at maximum amount
72
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
Common Form of Security
• Pledge
• Collateral:
•
•
•
•
•
Moveable assets;
Accounts receivable;
Intellectual properties rights;
Securities and checks;
Stock rights and transferable fund.
• Transfer of pledge is generally required
• Exception: accounts receivable, intellectual property rights, stock and transferable fund
pledge require registration
73
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
d) Description of local law formalities (execution, notarization,
registration, etc.)
• Under PRC law, a security agreement in writing is required
• Separate agreement for each asset class
• Specific information regarding the loan and collateral
• Perfection: Registration/Possession
• Mandatory registration: real property, manufacturing facilities, vehicles, stock pledge, IP
pledge and receivable pledge
• Possession: pledge, except for stock pledge and IP pledge
74
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
d) Description of local law formalities (execution, notarization,
registration, etc.) (cont’d)
• Mandatory Registration
• Agreement + Registration
• Security is created as of the date of registration
• No unified registration system
• Possession
• Agreement + Transfer of Possession
• Security is created as of the date of transfer of possession
• Registration is voluntary. But if the party does not register, it may not defend against the
claim of bona fide third parties
• Best practice: register
• Register with local public notary organs
75
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
e) Overview of legislation applicable to enforcement of security,
insolvency and acquisition finance
Enforcement
• Enforcement could be consensual (rare)
• Enforcement could also be proceedings in a competent PRC court seeking a
judgment, then enforcement proceedings
• Court awards do not form judicial precedent, just guidance
• Foreign judgment issues
• Foreign arbitral award will be enforced in China provided that it is in compliance with the
New York Convention
• Foreign judgment will be recognized and enforced if:
• Bilateral treaties or reciprocity, and
• Compliance with social public interest of China
76
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
e) Overview of legislation applicable to enforcement of security,
insolvency and acquisition finance
Bankruptcy & Priority Claims
• Bankruptcy Law of China recognizes preference period and clawback rights
• Be careful when debt is paid off
• Priority Claims:
•
•
•
•
Unpaid salaries
Pension and medical insurance
Other compensation incurred before August 27, 2006
Overdue tax payment
77
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
e) Overview of legislation applicable to enforcement of security,
insolvency and acquisition finance
Acquisition Finance
• There is no general prohibition on acquisition finance with respect to
company’s ability to provide security
• Look out for restrictions in articles of association
• Restrictions are imposed on the banks
• M&A loan shall account for no more than 60% of the funds of transaction (used to be
50%)
• Term of the M&A shall be no more than 7 years (used to be 5 years)
78
Foreign Exchange Regulations
With respect to cross-border guarantees:
• Onshore guarantees for offshore loans
• Offshore guarantees for onshore loans
• Other forms of cross-border guarantees
May be popular in the future due to the recent restriction on ODI
Guarantor
Debtor
Creditor
Onshore guarantee for offshore loans
In China
Outside China
Outside China
Offshore guarantees for onshore loans
Outside China In China
In China
79
Common Form of Onshore Guarantees for Offshore Loans (cont’d)
80
Common Form of Onshore Guarantees for Offshore Loans
81
Common Form of Onshore Guarantees for Onshore Loans
82
Common Form of Onshore Guarantees for Onshore Loans (cont’d)
83
Additional requirements for cross-border guarantee:
• Not a condition to effect the guarantees & securities, but fundamental to the
enforceability
• Notarization may be required
• Register with the SAFE within 15 business days after the date of guarantee
• The use of proceeds will also need to comply with the SAFE regulations
• Stock pledge of a foreign invested enterprise is subject to approval from the
Ministry of Commerce or its local branch and registration with the local SAIC
• Foreign debt
84
RECOMMENDATIONS AND BEST PRACTICES
a) Dealing with local counsel
b) Due diligence protocols
• Extensive registration search
c) Opinion issues
• Statement vs. Opinion
d) Register the collateral
85
RECOMMENDATIONS AND BEST PRACTICES
e) Costs and timeline of taking security
• Registration cost: depends on type of asset, but generally nominal
• Time: depends on type of asset
• Perfection for a pledge of shares of a foreign invested entity would take several months
• Mortgage of equipment or property takes considerably shorter period
• Enforcement proceeding is unpredictable
f) Foreign exchange regulations
• Take extra caution to comply with registration requirements, approval
requirements, policy and rules
86
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
a) Choice of law: US law guaranty vs. local law guaranty
• English law generally gives effect to a corporate guaranty irrespective of
choice of law, i.e. whether made under the law of a US State or of England.
• Recognition of choice of law of a US State is uncontroversial.
• N.B. Jurisdiction:
• No automatic recognition or reciprocal enforcement of judgments made in US courts,
but there is a well-established common law regime, provided the judgment is (a) final
and conclusive in the US court that gave it and (b) for a sum of money (no, e.g., an
injunction).
• At common law, US judgment constitutes a debt obligation which is enforceable in fresh
proceedings.
• Usual to apply for (and obtain) summary judgment on the ground that there is no
defence to the claim.
87
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
b) Overview of legislation applicable to creation of personal property
security
• Personal property security in England derives not from statute but from
common law and equity.
• In contrast, security over real estate usually takes form of a “charge by way of
legal mortgage”, which is a statutory creation (Law of Property Act, 1925)
88
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
b) Overview of legislation applicable to creation of personal property
security, (cont’d)
• Certain statutes impact on taking and enforcing security, e.g.:
• Many forms of security created by companies must be perfected by registration at
Companies House – Companies Act 2006.
• Security over cash, financial instruments (e.g. shares, bonds, warrants) and credit claims
(claims under loans made by credit institutions) may amount to “financial collateral” to
which the Financial Collateral Arrangements (No.2) Regulations 2003 (“FCA Regulations”)
apply.
• Secured lenders typically seek to take “qualifying floating charges” as defined in the
Insolvency Act 1986 in order to gain valuable enforcement rights.
89
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
c) Common form of security and security instrument(s) available
• forms of consensual security recognised by English law:
•
•
•
•
mortgage
charge
pledge
contractual lien
90
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
c) Common form of security and security instrument(s) available, (cont’d)
• Mortgages and charges (almost all asset-classes):
• Non-possessory security interests and most widely-used in practice.
• Include security assignments of intangibles such as accounts receivable (not to be
confused with factoring which entails outright assignment)
• In the context of personal property the difference between mortgages and charges –while
it exists from a legal-analytical perspective - is regarded as being of limited significance.
• Courts, writers and statutes use the two expressions interchangeably.
91
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
c) Common form of security and security instrument(s) available, (cont’d)
• Pledges and contractual liens (tangible movables – “chattels”)
• Possessory security interests.
• Require actual or constructive possession of the collateral assets (for example in a trade
finance context, where shipping documents are pledged as documents of title to a
shipment which is financed by a letter of credit).
• Individual security instruments can be created (e.g. for each type of asset) but
in the context of corporate security interests:
• Usual to take a “debenture” containing range of mortgages and charges over corporation’s
entire present and future undertaking and assets, i.e. a universal business security
interest.
• Confers advantages on enforcement; usually enables secured creditor to appoint an
administrator (below) over entire corporation.
92
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
c) Common form of security and security instrument(s) available, (cont’d)
• Charges may be “fixed” or “floating”:
• Fixed charge attaches immediately to the charged asset.
• Floating charge is unattached (but still immediate) security interest which hovers over a
class of assets that change over time in course of corporation’s business.
• Fixed charges imply – indeed, to be effective, require – control over the asset.
Corporation is not free to dispose of them.
• Floating charges carry an implied dealing license under which corporation is free to
dispose of assets in ordinary course of business.
93
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
c) Common form of security and security instrument(s) available, (cont’d)
• Asset classes:
• Floating charges are suited to accounts receivable, inventory and other assets that are
constantly changing.
• Fixed charges suit constant or rarely-changing assets such as machinery and equipment,
as well as stocks and shares held in subsidiaries.
• Absence of control over a security asset can cause a fixed charge to be characterised as a
floating charge. This caused long-running issues in the English courts with reference to
security over accounts receivable.
94
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
c) Common form of security and security instrument(s) available, (cont’d)
• Fixed v floating charge distinction is important:
• Holder of fixed charge enjoys advantage, in priority of distributions to creditors, over
holder of floating charge (below).
• BUT all debentures include floating charge because right to appoint an administrator
upon enforcement depends on secured creditor holding “qualifying floating charge” (as
defined in the Insolvency Act 1986).
95
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
d) Description of local law formalities (execution, notarization,
registration, etc.)
• Notarisation is not required for English law security interests.
• Usual for security documents to be executed as “deeds”:
• Avoids necessity for conformity to certain requirements for contracts, e.g. consideration.
• May be required by law, e.g. for security over land (LPA 1925) or in order to contain a
security power of attorney.
• Security created by corporate entities must in nearly all cases be perfected at
Companies House (CA 2006):
• Void for non-registration.
• Exception for “financial collateral” not frequently relied on in corporate lending (and may
vanish after Brexit as it stems from EC legislation, albeit incorporated into English law).
• Registration must take place within 21 days after security created.
96
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
d) Description of local law formalities (execution, notarization,
registration, etc.)
• Separate regimes for registration of security over:
•
•
•
•
•
Real estate (compulsory) at Land Registry;
IP (non-compulsory but highly advisable) at UK IP Office
Ships (compulsory) at ship’s port of registration;
Aircraft (compulsory) at UK Aircraft Mortgage Register; and
Certain agricultural assets (compulsory) at the Agricultural Credits Department.
• Limited regime for registering certain kinds of security created by noncorporate legal persons.
97
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
e) Conflict of law rules applicable to collateral (i.e. inventory, A/R,
equipment, IP, investment property)
• Immovables: English law is clear that the lex situs must apply.
• Tangible movables:
• Protracted period of uncertainty but now fairly clear preference for the lex situs.
• Registered ships and aircraft not immune from this, notwithstanding an argument that
the law of the place of registration should apply. Likely that the law of the place of
registration should apply when the ship/aircraft is on or over the ‘high seas’.
98
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
e) Conflict of law rules applicable to collateral (i.e. inventory, A/R,
equipment, IP, investment property), (cont’d)
• Intangibles:
• The most complicated asset class to analyze.
• “Rome I Convention” governs the choice of law in the European Union but is strictly
concerned with contractual matters, despite difficulty of drawing the line between
contractual and proprietary matters.
• Assignments of accounts receivable probably fall within Art 14 of Rome I (under English
law they amount to contractual debt claims):
• This would apply the governing law of the account receivable to its assignability, the
relationship between debtor and assignee, the enforceability of the assignment as against the
debtor and whether the debtor’s obligations are discharged.
• By virtue of art 14(3), ‘assignment’ extends to the creation of security rights.
99
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
e) Conflict of law rules applicable to collateral (i.e. inventory, A/R,
equipment, IP, investment property), (cont’d)
• Intangibles:
• Other intangibles may be characterised as ‘property’ and therefore fall outside Rome I.
English decisions have identified, e.g.:
• Intellectual property: law of the place where IP right is to be enforced.
• Shares: law of the place of incorporation.
• But there seems to be no issue with the pledgor and pledgee exercising their own choice
of law to govern the terms of their security document as long as rules of perfection are
followed in the appropriate lex situs for the asset.
100
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
f) Overview of legislation applicable to enforcement of security, and
insolvency
• Lender’s rights derive from:
• The terms of the security document
• Certain statutes which both create rights and may limit rights contained in the security
document
101
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
f) Overview of legislation applicable to enforcement of security, and
insolvency (cont’d)
• Principal enforcement mechanisms:
• Appointment of a receiver – Law of Property Act 1925
• Appointment of an administrator – Insolvency Act 1986
• Foreclosure – common law, available only for a mortgage and requires court order (N.B.
special rules for “financial collateral”)
• Taking possession of the security assets – Law of Property Act 1925
• Sale of the secured assets - Law of Property Act 1925 (also contract/common law, e.g.
for pledges)
102
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
f) Overview of legislation applicable to enforcement of security, and
insolvency (cont’d)
• Receivers:
•
•
•
•
Holder of fixed charge may appoint receiver to realise specific assets
Appointed by secured lender but an agent of the company giving security
Personal liability
Appointment terminates on liquidation or administration
103
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
f) Overview of legislation applicable to enforcement of security, and
insolvency (cont’d)
• Insolvency generally
• Regime contained in the Insolvency Act 1986 and associated legislation
• Reviewable transactions can impact on security taken within a stated period prior to
onset of insolvency - may be challenged under IA 1986
• Only the most relevant listed here (undervalues not included)
• Preferences (s. 239 IA 1986)
• transaction put creditor in a better position than it would otherwise have been in on
company's insolvency
• company was influenced by a desire to prefer creditor
• company was insolvent at time of transaction or became insolvent as a result of transaction
• risk period: six-month period before onset of insolvency (2 years for ‘connected persons’)
104
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
f) Overview of legislation applicable to enforcement of security, and
insolvency (cont’d)
• Insolvency generally (cont’d)
• Order of payment on insolvency:
• Fixed charge holders – on specific asset realizations
• Expenses incurred by the insolvency estate (including administrator’s fees)
• ‘Preferential creditors”
• unpaid pension contributions
• unpaid wages up to £800 per employee
• unpaid holiday pay
105
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
f) Overview of legislation applicable to enforcement of security, and
insolvency (cont’d)
• Insolvency generally (cont’d)
• Order of payment on insolvency: (cont’d)
• Floating charge holders but NB:
• carve-out of “prescribed part”
• 50% of first £10,000 of net floating charge realisations plus 20% of any excess, subject to
cap of £600,000
• payable to unsecured creditors
• Unsecured creditors
• Shareholders
106
LEGISLATIVE FRAMEWORK FOR TAKING SECURITY
f) Overview of legislation applicable to enforcement of security, and
insolvency (cont’d)
• Miscellaneous:
• Pensions
• Generally treated as unsecured creditor
• But note:
• scheme may have taken security
• unpaid employer contributions may be preferential claims
• Alternatives to formal insolvency
• Company voluntary arrangements – agreed framework with creditors for paying debts,
requires supervision by an IP
• Schemes of arrangement – creditors compromise their claims, subject to majority approval
and court order
107
RISK AREAS FOR LENDERS
a) Financial Assistance
• Former restrictions for private companies were repealed in 2009 but NB:
• A private company that is a subsidiary of a public company cannot give financial
assistance for the acquisition of shares in the public holding company
• A public company that is a subsidiary of a private company cannot financial assistance
for the purpose of the acquisition of shares in the private holding company
• Still unlawful for a public company whose own shares are being, or have
been, acquired (or for any of that company's subsidiaries) to give financial
assistance for the purpose of that acquisition
108
RISK AREAS FOR LENDERS
a) Financial Assistance (cont’d)
• Companies Act 2006 does not define ‘financial assistance’ but includes:
• gift
• guarantee, security or indemnity, release or waiver
• loan
109
RISK AREAS FOR LENDERS
a) Financial Assistance (cont’d)
• Exceptions
•
•
•
•
No principal purpose
Incidental part of a larger purpose
Lawful distributions
So-called conditional exceptions:
• Moneylending, employee share schemes and employee loans
• Conditional on no reduction in net assets or (if they are reduced) the assistance is provided
out of distributable profits
• Criminal sanctions - company liable to a fine and every officer in default liable
to a fine or up to two years' imprisonment (or both)
110
RISK AREAS FOR LENDERS
b) Typical priority liens
• Liens that prime on insolvency (above)
• Unregistered quasi- security can be an issue:
• Reservation of title provisions in supplier contracts (if ‘simple’)
• Unpaid seller liens
• Title finance (e.g. factoring, hire purchase)
111
RISK AREAS FOR LENDERS
c) Third party arrangements
• Company security priorities
• Fixed charge ranks ahead of floating charge (even when created later)
• Fixed charges rank in priority according to date of creation
• Floating charges rank in priority according to date of creation
112
RISK AREAS FOR LENDERS
c) Third party arrangements (cont’d)
• Exceptions and qualifications
• Security needing registration in a special register (e.g. land, ships, aircraft – but not
registration at Companies House), it will rank in priority according to date of registration
• Competing assignments of claims (e.g. A/R) rank in priority according to order in which
they are notified to the counterparty (unless later assignee took with notice of existence
of the prior assignment)
• Certain security interests created in equity (e.g. charges) may be defeated by a “bona
fide purchaser without notice”
• Appropriation of “financial collateral” by collateral holder effectively renders that
security first-ranking.
113
RISK AREAS FOR LENDERS
c) Third party arrangements (cont’d)
• Subordination and intercreditor arrangements
• Secured and unsecured creditor are free to modify priorities of claims by
contract or by means of structural subordination
• Structural subordination involves junior lender taking security from holdco,
whereas senior takes security from opco (hence closer to assets)
• Unitranche AALs increasingly commonplace
• Split collateral structures (e.g. ABL and term debt) gaining acceptance slowly
114
RISK AREAS FOR LENDERS
c) Third party arrangements (cont’d)
• Insolvency and contractual subordination:
• Usual to agree “turnover subordination”
• Each creditor claims in the insolvency and shares recoveries in agreed order, therefore
not offending the statutory order of payment of claims
• Earlier doubts over intercreditor agreements breaching insolvency law principles now
largely cleared up
115
RECOMMENDATIONS AND BEST PRACTICES
a) Dealing with local counsel
• Language not an issue but beware common terms with different meanings
(e.g. lien).
• Most large firms will be familiar with US terminology and will have at least
some finance lawyers. Consider using a US firm with a UK office – they are
not necessarily a threat back home.
• English conflicts rules are different to US rules. Strictly, ethical walls are not
permitted but some firms may be able to find a work-around. Also, conflicts
cannot strictly be ‘waived’ by clients.
• Provide your credit and security documentation early, so they can see what
they are meant to be replicating under their own legal system.
• Provide the draft closing checklist early and ask them to annotate it with the
English items.
116
RECOMMENDATIONS AND BEST PRACTICES
a) Dealing with local counsel (cont’d)
• Likewise, a typical English lawyer thinks that “Sungard” is something that
shields you from excessive solar radiation. Tell them what it really is.
• Credit agreements in England don’t come with Notes attached to the back.
• Hopefully, in a large firm, the lawyer will remind you about section 956 and
deemed dividends – but you’re the US lawyer. It’s up to you to know what a
CFC is and whether or not the English company has earnings or profits that
would trigger a deemed dividend.
• Be clear about not only the English security assets (e.g. 66% of shares), but
what liabilities the collateral will secure – all moneys or specific obligations.
• Ask them to spell out not only their fees but also their ‘disbursements’ – costs
that must be covered, for example to register security at the various registries
that may be applicable.
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RECOMMENDATIONS AND BEST PRACTICES
b) Due diligence protocols
• English lawyers will automatically undertake company searches against local
subsidiaries and report on them to you.
• They should ask if there are other specific assets, notably real estate and IP, so
that they can carry out searches in the specialist registers. Make sure that
real estate searches are ‘priority searches’ as they confer a measure of
protection against intervening dealings, e.g. competing security created for a
stated period after searching.
• Company searches do not reveal (a) “financial collateral” or (b) quasi-security
such as factoring, HP, finance leases, etc. These must be raised by direct
equity with the borrower.
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RECOMMENDATIONS AND BEST PRACTICES
b) Due diligence protocols (cont’d)
• Most English lawyers have no idea what a perfection certificate is or why you
would want one - and a certificate of good standing in England doesn’t do
what you think it should and is not a popular request (though always worth
asking for).
• Insolvency searches will be carried out on the day of closing – they are
conducted by telephone with the appropriate courts, and have their
limitations.
• Company searches should be renewed prior to closing and referred to in the
local legal opinion (together with insolvency searches, real estate searches,
etc).
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RECOMMENDATIONS AND BEST PRACTICES
c) Opinion issues
• Common mistake: leaving drafting and negotiation of foreign legal opinion to
the last minute – which highlights issues that should have been considered
much earlier!
• Confirm whether bank’s English counsel will opine on all matters (not merely
validity, enforceability and perfection of security) or whether borrower’s
counsel will need to opine on existence, capacity, and authority and due
execution.
• Tax opinions are not usually required. Discuss with English counsel if your
client does need one.
• Internal counsel’s opinions are almost non-existent in English practice – likely
to be viewed with some scepticism.
• Limitations on liability are increasingly standard.
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RECOMMENDATIONS AND BEST PRACTICES
d) Costs and timeline of taking security
• Costs, taxes, etc:
•
•
•
•
•
No notarisation, therefore no notarial fees.
£15 to register security document at Companies House (electronic filing).
IP registration fees are nominal.
Land Registry fees are on a sliding scale, maximum £250.
No stamp duty (documentary tax) on security documents.
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RECOMMENDATIONS AND BEST PRACTICES
d) Costs and timeline of taking security
• Timeline:
• Companies House registration must be within 21 days of creation of security.
• IP security should be registered at the UK IP Office as soon as possible to put third
parties on notice, but in any case within 6 months to protect certain ancillary rights of
the lender in the case of a security assignment/mortgage.
• Land registration should be as soon as possible to preserve priority and in any event
before a priority search expires (searches last for 30 days and can be renewed).
122
Q&A
123
SOURCES
• Latin Lawyer – Bank Financing Mexico 2015
• http://www.nhg.com.mx/pdfs/Latin_Lawyer_Bank_Financing_2015_Mexico_MNS_and_JGC.
pdf
• Mexican Commercial Code (in Spanish):
• http://www.diputados.gob.mx/LeyesBiblio/pdf/3_250117.pdf
• Mexican General Law of Credit Instruments and Transactions (in Spanish)
• http://www.diputados.gob.mx/LeyesBiblio/pdf/145_130614.pdf
• Mayer Brown: Outlook for International Trade Negotiations and Agreements
Under Trump Administration
• https://www.mayerbrown.com/Outlook-for-International-Trade-Negotiations-andAgreements-Under-a-Trump-Administration-11-17-2016/
• Mayer Brown – Mexico Energy Reforms
• https://www.mayerbrown.com/Mexico-Energy-Reform/?section=newspubs
124
SOURCES
German Civil Code in English:
http://www.gesetze-im-internet.de/englisch_bgb/
CMS eGuide "Taking Security in Europe":
https://eguides.cmslegal.com/Guide_to_taking_security
CMS eGuide "Real Estate Financing in Europe":
https://eguides.cmslegal.com/real_estate_finance_14
125
SOURCES, (cont’d)
RegZone: Provides you with expert analysis and daily news from the
fast-changing world of European financial institution regulation.
Created by CMS regulatory lawyers for those working in banking and
finance, insurance, funds and asset management and securities and
derivatives. The RegZone web site is free to view covering over 70
regulatory topics across Europe and updated each day.
http://www.cms-lawnow.com/regzone/
126
SOURCES, (cont’d)
Brexit Next: Analysis, commentary and checklists on the legal
implications of a Brexit on businesses operating in, and trading with,
the UK
http://www.cms-lawnow.com/brexit
Law-Now: Expert commentary and updates on the legal issues. Access
over 75 areas of law free of charge. Covering 20 sectors across 28
countries. Website available in English, French and German.
www.cms-lawnow.com
All CMS eGuides:
https://eguides.cmslegal.com/selection.aspx
127
SOURCES
• Guarantee Law of PRC:
• http://www.lawinfochina.com/Display.aspx?lib=law&Cgid=12418;
• Property Law of PRC:
• http://www.lawinfochina.com/Display.aspx?lib=law&Cgid=89386;
• Contract Law of PRC:
• http://www.lawinfochina.com/display.aspx?id=6145&lib=law&SearchKeyword=&Sea
rchCKeyword=%ba%cf%cd%ac%b7%a8;
• Corporate Law of PRC:
• http://www.lawinfochina.com/display.aspx?id=16202&lib=law&SearchKeyword=&Se
archCKeyword=%b9%ab%cb%be%b7%a8
• Lending & Secured Finance 2016:
• https://iclg.com/practice-areas/lending-and-secured-finance/lending-and-securedfinance-2016/china
128
SOURCES
• Great Repeal Bill: UK government white paper on Brexit legislation:
• https://www.gov.uk/government/uploads/system/uploads/atta
chment_data/file/604516/Great_repeal_bill_white_paper_acc
essible.pdf
• Secured Transactions Law Reform Project – potential areas of reform
in key areas of secured transactions law:
• https://securedtransactionslawreformproject.org/discussionpapers/
• Insolvency Act 1986:
• http://www.legislation.gov.uk/ukpga/1986/45/contents
129
Keyvan Nassiry is a partner in the Montreal office of Miller Thomson LLP and
a member of the Banking & Finance practice group. His practice focuses
primarily on sophisticated domestic and cross-border financings. Keyvan has
significant experience in asset-based lending, syndicated loans, real estate
loans, securitization, mine and consumer financings, equipment financing and
leasing, factoring, intercreditor relations, consumer finance and other aspects
of banking and financing law. He regularly acts for Canadian, American and
offshore banks, PE funds and commercial lenders, as well as borrowers,
regarding complex secured and unsecured credit facilities. His practice also
focuses on turnarounds, private equity, second liens, mezzanine, bridge and
hospitality M&A and finance.
Keyvan Nassiry, Partner
Miller Thomson LLP
1000, De La Gauchetière Street West
Suite 3700
Montréal, Québec H3B 4W5
T: +1 514.871.5355
[email protected]
millerthomson.com
130
Gabriela Sakamoto is a partner in the Washington DC office of Mayer
Brown LLP and a member of the Banking & Finance and Latin America and
Global Projects practice groups. Gabriela’s practice focuses on advising
commercial banks, multilateral agencies and other financial institutions on
cross-border project finance, structured finance, capital markets and
acquisition financing transactions, particularly in Latin America. Her Latin
American experience is extensive and includes transactions in more than
ten countries in the region and across a wide range of sectors, including
energy, oil and gas, and infrastructure.
Gabriela Sakamoto, Partner
Mayer Brown LLP
1999 K Street, N.W.
Washington, DC 20006-1101, USA
T: +1-202-263-3029
[email protected]
mayerbrown.com
131
Axel Dippmann is a partner in the Berlin office of CMS, and a member of the
Banking and Finance practice group. Axel has long-standing experience as a
finance lawyer, working both on the lender and borrower side. He specializes in
high-volume syndicated loans for corporates, acquisition financing as well as for
real estate developments and acquisitions. He has a strong track record advising
German and international lenders on financing hotels and other operator-run
properties. His client portfolio also includes private equity funds, credit funds,
insurance companies and private sector companies. Axel's international work is
mainly concentrated on the USA, EU countries and Israel. He regularly publishes
in a number of legal and specialist journals and is, among others, co-author of a
popular corporate acquisitions guide for lawyers.
Axel Dippmann, Partner
CMS Hasche Sigle
Lennéstraße 7
10785 Berlin, Germany
T +49 30 20360 2809
[email protected]
cms.law
132
Alex Yong Hao is a partner in the New York office of Jun He LLP and a member
of the M&A and Banking and Finance practice groups. He has significant
experience in corporate, M&A, finance and FDI matters involving China. He
also advises US clients on complying with China’s rapidly developing laws in
areas such as anti-bribery, anti-monopoly, labor and employment, and
national security. In addition, Alex acts as outside general counsel for many
Chinese clients doing business in the U.S. (including some of China’s largest
developers, banks and manufacturers) and links them with U.S. lawyers and
other professionals.
Alex Yong Hao, Partner
JunHe LLP
630 Fifth Ave, Suite 2320
New York, NY 10111
T: +1 646 797 5704
[email protected]
junhe.com
133
Andrew Knight is a partner in the London office of Squire Patton Boggs (UK)
LLP and a member of the Banking & Debt Finance practice group. His practice
focuses on international financial law in the context of asset-based lending,
syndications, restructurings, loan and receivables finance book sales,
secondary market transactions and distressed debt trading. Andrew mainly
represents banks and other lending institutions, especially asset-based
lenders in the United Kingdom and the United States. He has particular
expertise in negotiating, documenting and restructuring multijurisdictional
credit facilities extended to transnational borrowers and groups including
cross-border insolvencies and pre-packed exits.
Andrew J. Knight, Partner
Squire Patton Boggs (UK) LLP
7 Devonshire Square
London, EC2M 4YH, England
T : +44 20 7655 1679
[email protected]
squirepattonboggs.com
134
Disclaimer
• This presentation is a general overview of the topics discussed. It is
not an exhaustive description or analysis of the laws of any of the
jurisdictions mentioned. Before making any decision or taking any
action in respect of such jurisdictions, please consult qualified
professional advisors for specific legal advice.
135