CROSS-BORDER FINANCING REPORT 2014 · 2014. 9. 23. · INTRODUCTION 2 IFLR REPORT | CROSS-BORDER FINANCING 2014 lite and loose loans are becoming more prevalent in Europe. According

Cross-Border Financing Report 2014

IFLRinternational financial law review

CROSS-BORDER FINANCING REPORT 2014

Lead contributor: Adam Freeman

INTRODUCTION

IFLR REPORT | CROSS-BORDER FINANCING 2014 1

T he credit crisis, particularly after the collapse of Lehman Brothers, had a major impacton the financial markets. The period of recovery over the subsequent years has led tointeresting yet challenging times. Financial institutions have had to evolve in order to

find a way to manage the significant constraints being placed on their capital and the increasedregulation and scrutiny which they now face.

Borrowers too have had to diversify, both in terms of the products and markets they havecommonly accessed to fund transactions and the entities they have traditionally turned to asproviders of that finance.

For cross-border loans, this has led to variations in the products used to invest in deals, abroadening of the investor base and changes to documentary terms.

The influence of the USThe evolution of the financial markets since the onset of the credit crisis has highlighted therole that the US has played in influencing developments in the global loan markets. Over thepast couple of years, the European loan market has derived many of its features from the US,with structures and terms in Europe closely following US developments. The high-yield marketin particular has played an important role in the trends that are emerging.

High-yield became a popular alternative source of finance for borrowers looking to raisecapital when traditional bank loans significantly contracted during the credit crisis. Theborrower-friendly features typically seen in indentures have meant that the high yield marketshave remained active, even after the loan markets stabilised. Using a combination of loans andbonds on deals has led to a convergence of certain terms between these two products. Followingcontinued investor demand for new assets in which to invest, borrowers have been able to pushthe boundaries to obtain better terms for loan financings, using the flexibility offered underhigh-yield instruments as a benchmark.

In the US, this has led to the growth of the term loan B (TLB) market. US TLB places someof the upside of high yield flexible terms in a loan package that has none of the securitiesofferings’ downside. The evolution of the TLB market has been aided by the US TLB investorbase, which mainly comprises institutional investors. Institutional investors include entitiessuch as insurance companies, credit funds, hedge funds, private equity funds and insuranceand pension companies who are typically willing to accept fewer controls than traditional banklenders due to factors such as their familiarity with the high yield markets, their assessment ofdefault rates and their ability to trade the paper being bought.

The developments in the US have also provided cross-border financing opportunities fornon-US borrowers. Companies who would have traditionally sought to raise loans in Europehave instead looked to access the US financial markets where there is sufficient liquidity andbecause the financing terms being offered were more liberal than those in Europe. Followingthe migration of a number of European borrowers seeking investment opportunities in the US,a shift in approach in Europe began to emerge. Arrangers and investors outside of the USprogressively became more receptive to US lending terms and structures in order to draw backborrower interest to their home markets. As a result, bond-style provisions, which have becomea feature of US TLB loans, are now appearing in European deals and US-style TLB covenant

The more thingschange...Adam Freeman of Linklaters reports on the way the creditcrisis has forced cross-border loans to evolve and adapt,focusing on the role of the US in driving change

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“High yield became a popularalternative source of finance forborrowers looking to raise capital

INTRODUCTION

IFLR REPORT | CROSS-BORDER FINANCING 20142

lite and loose loans are becoming more prevalent in Europe. According todata from S&P Capital IQ’s LCD (leveraged commentary and data), thevolume of covenant-lite loans syndicated in the European leveraged loanmarket reached €4.7 billion ($6.2 billion) in July 2014, pushing the year-to-date total to €14.6 billion. This compares with €7.7 billion ofcovenant-lite loans issued in 2013. Although the terms seen in Europe todate do not reflect all of the borrower-favourable features customarily seenin the US TLB market, it is anticipated that there will be a furtherconvergence in the European market in the near future.

The growth of alternative credit providersThe shift in approach and loosening of terms can also be attributed to thedevelopment in Europe (following the US) of alternative credit providers asfinanciers of loans. The continued presence of these investors in loantransactions has meant that traditional bank lenders are underwriting fewerdeals or, where they are, no longer hold paper after syndication. As aconsequence, financing terms have evolved to reflect the demands of thisinvestor base rather than the historic norms.

The growth in alternative sources of capital available to borrowers in theEuropean markets results from constraints on liquidity, increased regulatorypressures and higher capital requirements faced by traditional bank lenders.Alternative credit providers (commonly referred to as ACPs) have been ableto take advantage of the fact that they are not constrained by the same issuesfacing the more traditional bank lenders. The continued presence of ACPsas active participants has meant that the loan markets are slowlytransforming from being based on a solely bank-driven model.

Despite the diversification of credit providers, traditional bank lendersstill play an active and important role in financing arrangements due tosome of the limitations faced by ACPs. Principally, ACPs face an issue ofscale: the size of their respective funds restricts them from underwritinglarger deals and similarly their lack of a capital markets sales force precludesthem from syndicating such transactions. Also, due in some cases to a lackof a banking licence, authorisations and consents are required for theseentities to lend in certain jurisdictions. In addition, ACPs are generallyunable to provide the working capital and ancillary services provided bytraditional bank lenders, which are usually considered a necessity byborrowers. In some cases this has led to joint venture arrangements betweenACPs and traditional bank lenders to ensure that all the needs of clients aremet.

It is clear that the increased regulation faced by financial institutions hasbeen an influencing factor in the changing dynamic in the investor basetraditionally associated with cross-border transactions. However, whilstACPs will undoubtedly continue to play an active role in the loan markets,in the same way that traditional bank lenders have come under scrutiny,regulators are becoming increasingly focused on these entities and thepotential risks they pose to the stability of the financial markets. Time willtell what changes will result from this attention.

Impact of regulatory issuesFundamental to all of these changes has been the steady flow of newregulations and legislation imposed on the capital markets and financialinstitutions, most of which has emerged as a direct and indirect result ofthe credit crisis. Much of this regulation is coming from the US and Europeand many of these rules and regulations have extraterritorial effect, whichmeans that the impact is felt on financial institutions and corporates on aglobal basis, for example Basel III and FATCA.

More recently, sanctions have also had an important impact ontransactions with the position evolving on a daily basis and regulatorsstepping up their efforts to take action against financial institutions thatviolate laws in this area. To date, this has resulted in a number of lendersrequiring the inclusion of an extensive package of covenants andrepresentations in documentation to address these issues. Many of the largerfinancial institutions now have sanctions policy requirements in place andany deviation from those terms often requires credit committee approval.

The impact on cross-border transactionsEven though the financial markets are having to adapt to an environmentof increased regulation and scrutiny, the key issues for parties to considerwhen structuring a cross-border transaction have broadly remained thesame. These include working out the optimal entity in the structure towhom the debt should be lent, whether there are any tax-related issues thatmay impact the transaction, ensuring the robustness of any credit supportso that guarantees and security can be easily enforced in the face ofinsolvency proceedings and processes and considering whether anyregulatory provisions apply.

With these issues in mind, the country reports included within this guidehave been prepared to provide a high-level analysis of these key matters,with a view to identifying any potential issues that may require furtherconsideration when embarking on a cross-border transaction.

About the contributorAdam Freeman is a partner in the London office of Linklaters. He hasextensive experience in the execution and restructuring of all types ofacquisition and leveraged finance transactions, with a focus on dealsinvolving financial sponsors. He has advised arrangers, borrowers andfinancial sponsors on the debt aspects of some of the leading, and highlycomplex, cross-border finance transactions in the European leveragedfinance market. He was recognised for banking and finance in the 2014edition of IFLR1000.

Adam FreemanPartner, Linklaters

London, UKT: +44 207 456 4706E: [email protected]: www.linklaters.com

“ACPs are not constrained bythe same issues facing themore traditional bank lenders

“Borrowers have been able topush the boundaries to obtainbetter terms for loan financings

CONTENTS


ContentsCountry reports

Hong Kong 12Nathalie Hobbs and Melanie SchroederLinklaters

Malaysia 16Esther ChikWong & Partners

Mauritius 20Soo Fon Ip Min Wan and Vincent Chong LeungGlobaLex Chambers

Nigeria 24Olanrewaju Fagbohun and Qudus MumuneyRouQ & Company

Singapore 28Susan Wong, Kay Kheng Tan and Sui Tong ChuaWongPartnership

6

10

8

AFME

The educator

Expert analysis

Deutsche Bank

The perfect reflection

LMA

Documentinggrowth

CONTENTS


Country reports

South Africa 36Ulrike Naumann and Jason WilkinsonBowman Gilfillan

South Korea 40Hyun Ju Helen Pak and Tae-Sung Jeong, Shin & Kim

Switzerland 45Daniel Hayek and Alexander Flink,Prager Dreifuss

United Kingdom 49Kirsty Thomson and Caroline Chapman, Linklaters

United States 53Danelle Le Cren and Sabrena Silver, Linklaters

EXPERT ANALYSIS AFME


As European financing surges back to life, a noticeable secondary trend hasemerged: the growth of high yield and bank lending., with so-calledcovenant-lite terms often mirroring high yield structures – and vice versa.There have been disagreements though. On the high yield side, some in-vestors are unhappy about the erosion of safeguards in the region’s boomingdebt markets. In July, six firms met with the Association for Financial Mar-kets in Europe (Afme), hoping to reinforce language in documents govern-ing bond sales. The objections were the first sign of a dispute betweensponsors and buy-side in high yield since investors wrote a letter to sponsorbanks in April 2011, calling for more disclosure on offering documents.

But while high yield remains a popular asset class, fund-raising corporatesare still tempted by the loan market, which is itself not without risks. Whileremoving the early warning mechanisms of financial covenants on strongcredits is accepted, many fear that contracts will also become looser onweaker lenders. And as covenants fall away, some lawyers are worried aboutthe growth of the lending technique.

Against this backdrop, it’s easy to see why Afme director Gary Simmons isplaying such a crucial role. Simmons, with experience as a high-yield lawyerin both New York and London, often acts as a mediator between buy-andsell-side members in the age-old battle over deal protections. He’s busy withissuers too, embarking on a process of education among potential Europeancompanies with little or no experience in the high yield asset class. Here heoutlines Afme’s priorities and his views over the continued convergence offinancing techniques.

How has the bond markets’ increasing role in the provision ofleverage finance affected the market?It’s been affected in quite a big way. We have seen a lot more companiesraising funds in the capital markets rather than in bank lending. On the onehand, over the years there have been many occasions when the market hasbeen convinced that high-yield was due to finally grow closer to levels seenin the US but every time, this direction of travel was interrupted by a marketcrash, crisis or other negative impact. This time though, I think is different,and there seems to have been a permanent shift. That would be good forhigh yield and the market generally.

High yield and bank lending are showing some signs ofconvergence in terms of borrower protections. Do you see thedirection of travel continuing?It is happening quite a bit and there has been convergence. The market willfind its own level but over the past decade we have seen an increasingamount of convergence. This just goes to the dynamism of the market. We’recalling for efficient markets though and if this helps companies grow andadds liquidity to European economies then we’re all for that. I have buy-side firms, arrangers, law firms and others who are all Afme members and

The educator

Afme director Gary Simmons explains how the industry body is guiding the market on financing techniques – from European high yield issuers to investors active in cov-lite deals

“It becomes more difficult tomake a clear and simple assessment of the insolvencyand restructuring risks

EXPERT ANALYSISAFME


will all have divergent views on this, but generally, we consider it a positivedevelopment.

Do you think the market needs more education around high yield?I think more education is needed in Europe, certainly. In the past, manydomestic companies in European jurisdictions were used to borrowingmoney from domestic banks, and they have always had relationships withthose institutions.

This means they are often not used to submitting detailed disclosure on thecompany and its finances to the market. They’re not necessarily comfortablewith rating agencies either. There is also a perception problem among somepotential issuers, with high yield often thought of as part of a private equitybuyout and, of course, the association of ‘junk bonds’ still persists. So yes,a lot of education needs to be done on both the technical aspects of dealsbut also the perception of it.

How has EU sponsors’ increasing use of US markets to fund EUacquisitions affected EU leveraged financing?I think it has made it more competitive. You now have multiple markets tochoose from, across currencies. Again, it should increase efficiencies. It goesto the theme again of increasing the availability of financing options andthat’s a positive development.

What is Afme’s view on the trend for so-called covenant-lite deals inEuropean deals? Do you think concerns are warranted? I shouldn’t really have a view on that. We represent buy-side firms, arrangersand law firms. But if people are examining deals on a case-by-case basis andthey are willing to buy these cov-lite deals then I don’t have a strong opinion.

Is there a dialogue around cov-lite structuresOur Afme investor group actually met recently and discussed next stepsaround this, so yes, there is certainly dialogue.

How do you expect Basel III implementation and the US quantitativeeasing tapering to affect the EU leveraged financing, high-yield andsyndicated lending?Tightening of the availability of credit related both to Basel III and quanta-tive easing will actually lead to a growth in opportunity for high yield. Thistightening has already been one of the factors that had led to high yield’sgrowth up until now.

Recent cross-border restructuring has put a spotlight on dealstructures. What can be done to avoid similar uncertainty overterms for the next wave of restructurings?I think that it’s important that an investor has a good idea of how their in-vestment will be affected by an insolvency or restructuring. As you mention,with more sophisticated products being offered, and often on a cross-borderbasis, it becomes more difficult to make a clear and simple assessment ofthe insolvency and restructuring risks involved. The EC is already taking alook at the ways in which the various European insolvency regimes may behaving a negative effect on the capital market, but frankly, until there is areal desire among individual European countries to make relatively funda-mental changes to their national insolvency regimes that will accommodatetrue reform and harmonisation across Europe, we will have to continue towork within the current framework.

What are Afme’s priorities for 2014?Our priorities are to encourage growth and increase efficiency in the Euro-pean capital markets generally, and the priorities for the Afme high yield di-vision are to do the same with respect to the European high yield Market.In this regard, the high yield division is heavily involved in initiatives de-signed to increase funding opportunities for European corporates and alsoin encouraging reform and, where possible, harmonisation of European in-solvency regimes. This is being accomplished through legal and educationalinitiatives, as well as through partnerships with the relevant regulators andpolicymakers.

“There is a perception problemamong some potential highyield issuers

About the contributorGary Simmons is the director of the Afme high yield division, for whichhe leads the body’s efforts to lower costs and increase efficiency in theexecution of high yield transactions, and lobbies for the reform ofcorporate insolvency laws. Simmons is a New York-qualified lawyer andwas previously a senior associate at Cleary Gottlieb Steen & Hamilton.After an initial period in New York, Simmons spent several years inLondon, gaining extensive experience in cross-border and emergingmarkets debt transactions, particularly high yield bond issuances andleveraged loans. Simmons has a Juris Doctor from Rutgers UniversitySchool of Law (with honours) and a Bachelor of Arts (with highesthonours) from Rutgers University. Following law school, he was a lawclerk to the Honorable William H. Walls of the United States FederalDistrict Court, District of New Jersey.

Gary SimmonsDirector, Afme

London, United KingdomT: +44 (0)20 7743 9508E:[email protected]: www.afme.eu

EXPERT ANALYSIS DEUTSCHE BANK


B arely a week goes by without covenant packages on high-yield dealsshifting, almost imperceptibly, one way or another. With investorshungry for yield, the summer saw the balance of power continue

to move towards borrowers and the dilution of change of control clauses, aswell as shortening non-call periods cropping up on some deals. As associate general counsel at Deutsche Bank, Chronis Anoustis is betterplaced than most to comment on these shifts. Leading the bank’s in-housedebt team from London, and involved in many of the region’s standoutdeals, he has a keen eye trained on current trends, covenant packages andother structural nuances of the constantly shifting asset class. Here he shareshis view on the market - and explains why the shifts in terms are nothingmore than a mirror image.

What volumes are you seeing in the high yield space so far thisyear?This past year has been another landmark year for European high yield bondissuance activity. Here we are in September [at the time of publication] withEuropean issuers having raised around €65 billion ($84 billion) of high-yield bonds since the start of the year. This is a record and significantly inexcess of the circa €50 billion of bonds issued during the same period oflast year – which, in turn, was in excess of the amount raised the year beforethat. So the high-yield market here in Europe continues to grow and matureas it continues to consolidate its journey towards the European mainstream.

But the other story this year has been in the leveraged loan market that hasmade a notable return. Around €60 billion worth of European leveragedloans have been raised since the start of the year. This is a 17% rise on thesame period last year and the highest figure since 2007. Of particular noteis the increase in institutional investor participation in this asset class, which

is up one-third on 2013. There has, of course, been some volatility in thefinancial markets over the summer, but the sub-investment grade debt mar-kets have since reopened and we await year-end to see where the issuancetallies will stand then.

And which industries and geographies are witnessing particulargrowth?Issuance has really been strong across all types of issuers and industries, sec-tors and geographies and whether corporate or private equity-owned, publicor private and repeat or first time issuers. That’s another sign of the newmaturity of the market here in Europe. What is most relevant from an orig-ination and execution perspective is that corporates and financial sponsorsalike both now consider high-yield bonds as part of the standard corporatefinance toolbox. The high level of issuance in the last few years has raisedthe profile and acceptance level of bonds in Europe and it is no longer aniche product considered only by certain types of issuers such as the earlyadopters in the cable and telecoms sectors. Additionally, as and when a com-pany in a particular business sector or geographic market enters the highyield market, it tends to arouse further interest from other similar companiesand help give the product added momentum in those markets and sectors.

Twice as much high-yield issuance in Europe this year wasacquisition-related, compared to last year. What has been the resultof this in terms of the bonds’ structures?I would say this is a reflection of higher volumes of leveraged buyout (LBO)debt being incurred (in this regard, see the Numericable deal mentionedbelow), but it has been a good year for LBO-related bond activity. The struc-tures fundamentally remain the same – a mix of all bond deals with supersenior revolving credit facilities and senior secured bonds, plus some loan

The perfect reflection

Deutsche Bank’s Chronis Anoustis explains how covenant packages are mirroring investorappetite and corporate issuers’ health in European high yield

EXPERT ANALYSISDEUTSCHE BANK


and bond deals, as well as some deals with senior unsecured bonds.

What is particularly noteworthy is that vendors of businesses and their ad-visors now regularly prep their target companies to be ready to do bonds aspart of the M&A sale process. So the sell-side, typically together with oneor more stapled financing banks, work to prepare for a potential high-yieldbond deal by the winning bidder. The required financial statements are read-ied, the rating agencies are approached and a draft offering memorandumis prepared, all so that the bidders can be comfortable that the bond marketcan be accessed quickly and a bridge loan will not need to be funded. Thebond proceeds are then deposited into escrow, pending the completion ofthe acquisition.

What, in your view, would be the stand-out deal from 2014 so far?There have obviously been a number of significant transactions. But it hasto be the €15.8 billion combined bond and loan offering to support Nu-mericable’s acquisition of French mobile phone operator, SFR, in what wasthe largest ever single debt-raising exercise in the European leveraged debtcapital markets. As part of the deal, Numericable issued a dual currency,five-tranche $10.9 billion equivalent bond that is now the largest corporatehigh-yield bond ever. Simultaneously, its shareholder, Altice, issued a two-tranche $5.8 billion bond to support the same acquisition. Both deals arenow the top two European corporate high-yield bonds on record. DeutscheBank acted as joint global co-ordinator of the offerings.

How have volumes been affecting bond terms?The market has been seeing packages that reflect the position of the businessand if one looks at covenants as a package, last year’s trends have continuedinto this year to date. Take the reduction in the length of call protection,with seven-year packages typically having three-year protection rather thanfour. Some issuers have also continued to require portability and increasedability to pay dividends once the business has de-levered below a certainthreshold. The high-yield market is ultimately a market like any otherthough, that can ebb and flow according to market conditions and credit-specific considerations.

There has been a steady growth in southern European issuers overthe past 12 months. What challenges do these new issuers face? Yes, there continues to be demand from southern European corporates forthe asset class. As was the case last year, we have again this year seen a num-ber of transactions by, for example, issuers in Greece. In most respects, is-suers in these markets face the same kinds of considerations as issuers from

elsewhere in terms of their own credit-specific issues and the broader macro-economic conditions applicable to them. Small transaction size can pose anissue for some smaller potential issuers as bond deals obviously need to beable to have enough liquidity to attract investors.

We have seen a growing convergence of bank lending terms withhigh-yield bonds in European deals. Do you see this trendcontinuing?This is likely. There has been this convergence in the US, especially as in-vestor classes across loans and bonds increasingly overlap, and Europeanmarkets have always been influenced by trends in the US markets – includ-ing of late because there is an increasing volume of European borrowers rais-ing loan finance in the liquid US loan market. High-yield itself is of coursean American financing technique and European high-yield can attract size-able interest from US institutional investors. It’s hard to say how far thiswill go though.

Finally, what do you think it will take to disrupt this cycle?These markets have, of course, inevitably seen ups and downs spanning theyears, closing and then reopening. But that’s a difficult question to answer. Ifonly we knew the answer to that. In the end of the day though, the feeling isthat high yield has come of age and is here to stay as a financing technique. Itis part of the wider on-going shift in Europe in companies switching fromloan to bond finance in response to bank deleveraging. The use of high yieldbonds enables companies to diversify their funding sources and extend matu-rities into the future and has become attractive to European corporates whohave to date relied solely on bank relationship lending. Some issuers are alsoattracted by the greater flexibility high yield affords them, when compared tothe terms of traditional European bank lending. Financial sponsors have al-ways historically been more familiar with the product, but corporates are un-doubtedly now getting more and more comfortable with it.

““Issuance has really beenstrong across all types of issuers and industries”

About the contributorAs associate general counsel in Deutsche Bank’s London office, ChronisAnoustis heads the bank’s in-house debt team, covering high yield, capitalmarkets, acquisition finance, leveraged finance, commercial real estatefinance, syndicated lending as well as export, commodity and tradefinance.

He joined Deutsche Bank in 2003 from Clifford Chance, where he was abanking associate, to help Deutsche Bank focus on its leveraged financebusiness.

Chronis AnoustisAssociate general counsel, Deutsche Bank AG

London

W: www.db.com

EXPERT ANALYSIS LMA


Clare Dawson, chief executive of the Loan Market Association (LMA), has hada busy year. From responding to the Crimean crisis and its effect on loan doc-uments, to continuing the body’s work on emerging markets, the LMA has beenas active as ever. Here, she discusses the association’s progress and priorities.

What are the LMA’s priorities for 2014?At the top of our priority list is the private placement project that we’re currentlyworking on. That involves coming up with documentation for private place-ments both in loan and note form, and we’re working with a range of marketparticipants from different jurisdictions – both arrangers and investors.

We’re also working with the International Capital Markets Association (ICMA)on the note side and are involving the ACT. The aim is to get a term sheet anda loan form private placement document and a note form document out. Weare targeting the autumn for that.

We are producing an English law document, but as with all of our English lawdocumentation, the hope is that it can be used on a cross-border basis, and we’retargeting those transactions where a range of investors are looking at differentmarkets across Europe. Hopefully it will be flexible enough to be used outsidethe UK as well.

We are also continuing with our work on real estate finance, both in terms ofrolling out the work that we have done and also working on producing a termsheet to accompany the facility documents we have produced. We’re also goingout to different investors who are looking at that market as well.

It’s not just a case of looking at the documentation side, but also promoting the

work that we are doing in the real estate market, and hopefully going out tonewer investors who might be looking at that market and could increase liquidityin that side of the market. The term sheet should be ready fairly soon but theother work is ongoing.

What do you perceive to be the biggest effect that the EU CapitalRequirements Directive IV (CRD IV) is likely to have on loandocumentation and the lending environment generally?I don’t think we are really seeing a big effect on documents. Obviously there areissues around people potentially looking to tighten up definitions of purposeclauses on revolvers to ensure they don’t fall into the standby category, but I’mnot sure how much that is being focussed on.

Our document essentially carves out a swing-line facility as a portion of a re-volving credit facility, so it draws a very clear distinction between the part thatis expected to be used as a backstop for CP and the part that isn’t. I’m not surehow much of an issue that is at the moment. Then again there is the issue ofwhether with regards to Basel III or CRD IV, market participants want to coverthem in the increased costs clause or not.

Obviously the actual legislation is in place but there might be a commercial dis-cussion around whether you would want to carve it back into your increasedcosts. That’s something that people might be looking at on a deal-by-deal basis.In terms of the lending environment, from what we hear, I don’t think peopleare focusing solely on the regulatory environment in the context of whether ornot they want to lend. There seems to be a lot of liquidity at the moment andthe regulatory background is only one factor in the decision-making process forwhether parties lend or not.

Documenting growthThe Loan Market Association’s Clare Dawson explains the organisation’s work in Africa, andwhy CRD IV hasn’t affected deal structures

EXPERT ANALYSISLMA


Can you explain the background and progress of the LMA’s work indeveloping market documents?Looking at documentation for the developing market generally goes back a cou-ple of years to when we first produced a set of developing market documentswhich were deliberately left to be as widely adaptable to different jurisdictionsas possible. They are English law documents, but they address issues that peoplecurrently come across in developing markets. These tend to include banks want-ing more protections in the context of local legal systems or local law issues, orslightly different perceived risks in those developing markets generally.

When we put the documents together we had a working party with participantswho did a lot of work in Russia, but equally people who worked mostly in Africa.

We were specifically not trying to come up with documents that were targetedat one area or another, but dealt with issues common across developing markets.

After the integration of the African LMA into the LMA at the start of 2014, weinherited the ALMA’s South African law documents. Because we had been work-ing on a number of issues, we have updated them and conformed them to ourexisting investment grade English law documents, and brought them up-to-date with the latest versions of those documents. The ALMA had also beenworking on a project for a document that could be used in Kenya, Tanzania,Uganda and Nigeria, because while you have to take into account aspects suchas different currencies or aspects of local law, there is still quite a bit of com-monality between the legal systems in those different areas.

We have completed that project and the document was launched at the end ofJuly, at the same time as the revised South African law documents. It’s early daysbut they seem to have been warmly welcomed. Hopefully market participantswill soon become familiar with them and start using them. We have a numberof members now in East Africa and Nigeria and there was a lot of enthusiasmfor the project.

How do you see that project developing?Our work in the developing markets is certainly an area of priority for us. Thereare a lot of growing economies in those regions, particularly in Africa, and wefeel that the syndicated loan product generally has a big role to play in thosemarkets. If you go back to the real basics of the syndicated loan product andthe purpose it serves, in terms of promoting economic growth by helping com-panies to grow by providing working capital or finance for projects, we thinkthat there’s definitely a positive outlook for the market. To the extent that thereare things we can do to promote the product and help market participants thenthat’s a big priority of ours.

Whether that leads to further documents remains to be seen. One can alwaysdo additional versions of documents in jurisdictions where we have alreadyworked. I think our focus is to see where there is a sufficient demand and whereproducing local law documents can actually encourage the take up of syndicatedloans, without fragmenting a market that already exists.

To the extent that we see large corporates doing cross-border deals with inter-national lenders featuring then we would anticipate that they will continue touse English law documents. However in the case of fledgling markets where

borrowers aren’t working outside their own jurisdictions and they’re used toworking with their local banks, then if those banks and borrowers are lookingto work more on a syndicated than bilateral basis but feel that moving straightto English law is a step too far, then we might consider doing additional docu-ments.

How has the LMA helped its members, and the market generally, inoffering guidance on sanctions between Russia, the EU and the US?We have helped in two aspects. One, we have looked at the EU and US sanctionsand produced notes that explain those different regimes. We have done somework on various scenarios participants could find themselves in. For instance, ifyou are lending to somebody who is the object of either EU or US sanctions weexamine different situations and address different questions about the effect thatthe sanctions could have in a syndicated loan context and how they might affectthe ability of the parties to perform their obligations under syndicated loanagreements.

We have also produced a paper that examines issues arising more specifically ina documentation context and the possible effect of sanctions on specific provi-sions in loan documents and how you might look to mitigate your position atthe point at which you are drafting a loan agreement, as opposed to lookingback at the position where you already have an agreement. We have also touchedon some of the conflict of law issues, where the US and EU sanctions mightnot be exactly the same.

How have you seen the loan market develop in your time at the LMA?There has been a lot more diversity in terms of the types of borrower that accessthe market. The leveraged market was pretty much in its infancy when I startedand now is clearly a fully developed market. We’ve seen a lot more variation instructures of transactions and a lot of different types of investor in the market,whether it’s CLOs or different sorts of institutional investors. We’re starting tosee insurance companies looking at different parts of the loan market too.

Where do you see the next shift in the funding technique’s evolution?The private placement structure is something that a lot of people are interestedin and keen to see succeed and offer as an alternative product for borrowers toaccess funding. But from what we are still seeing, there is a very strong bankmarket in the syndicated loan product. We’re definitely seeing new types of in-vestor coming into the market, and we see that as positive and do what we canto encourage it. The underlying product is going to remain a core product in aborrower’s financing armoury, but there may be slightly more niche areas of thatproduct that can appeal to particular lenders.

“The private placement structure is something that alot of people are interested in

About the contributorClare Dawson, is chief executive of the Loan Market Association (LMA).She joined the LMA in 1999 after spending two years in the syndicationsdepartment at Sumitomo Bank, working on loans in Europe, the MiddleEast and Africa.

Prior to Sumitomo, she spent two and a half years at the British MuseumDevelopment Trust, raising funds for the Museum’s Great Court project.

Before joining the British Museum, Dawson had spent eight years atSumitomo in the international department, including two years at thebank’s head office in Tokyo, where she helped establish a syndications desk.In London she worked mainly in origination in various western Europeanand Nordic countries.

Clare DawsonChief executive, Loan Market Association

E: [email protected] W: www.lma.eu.com

Section 1 – Bank licences

1.1 What licences or approvals do lenders need to have if lendingto a borrower in this jurisdiction if (a) the lender is a bank or (b) thelender is not a bank? Under the Money Lenders Ordinance (Cap.163) (MLO), a lender must ob-tain a money lender’s licence unless the lending falls within an exemptionset out in the MLO. The requirement to hold a licence does not apply to alender which is an authorised institution with a banking licence under theBanking Ordinance (Cap.155).

1.2 Are any exemptions available and/or are any techniquestypically used to structure around such requirements?The MLO provides for certain exemptions, including:

a) where the lender is an ‘exempted person’ under part I of schedule 1 ofthe MLO (this includes a foreign bank who is recognised as a bank by anapproved foreign banking supervisory authority and carries on a bankingbusiness in the jurisdiction of the relevant banking supervisory authority);and

b) where the relevant loan is an ‘exempted loan’ under part II of schedule 1of the MLO. This includes: (i) a loan to a listed company or a companythat has a paid up share capital of not less than HK$1 million ($129,000);(ii) intercompany group loans; and (iii) loans secured by a charge whichwould be registrable under the Companies Ordinance (Cap.622) if the char-gor were a Hong Kong incorporated company.

Section 2 – Taxes

2.1 Are there any requirements to make deductions or withhold taxfrom payments made to domestic or foreign lenders in thisjurisdiction? Are any techniques typically used to structure aroundsuch requirements?There is no withholding tax payable on interest payments made by a HongKong borrower to a Hong Kong or foreign lender.

2.2 Is interest on debt tax deductible for borrowers incorporated inthis jurisdiction? The interest may be deductible depending on whether the conditions im-posed under the applicable tax laws are met.

2.3 Are there any thin capitalisation rules in effect in thisjurisdiction which would impact the amount of debt that can beborrowed/guaranteed by entities incorporated there?Generally, no.

2.4 Are there any other important tax concerns that lenders toborrowers incorporated in this jurisdiction should be aware of?No.

Section 3 – Security interests

3.1 Can security be taken over the following asset classes and whatdocumentation or formalities are required to create, perfect andmaintain such security?a) sharesb) bank accountsc) receivables d) contractual rights e) insurance policiesf) real propertyg) plant and machineryh) intellectual propertyi) debt securitiesj) future/after acquired propertyk) floating charges over all assets

Security can be taken over all the above asset classes. To create security, thesecurity agreement is usually in the form of a deed. Other formalities mayapply which vary depending on the type of security taken and the assets se-cured.

In Hong Kong, the main perfection requirement is registration of the secu-rity at the appropriate registries (see section 3.8). Where security is takenover bank accounts, receivables, contractual rights and insurance policies,notice of the security is typically given to the relevant third party. It is de-sirable to receive an acknowledgement of the notice from the third party.Where security is taken over shares, share certificates, instruments of transferand contract bought and sold notes (each executed in blank) will typicallybe delivered to the secured party to enable an effective transfer of the shareson enforcement. Where security is taken over real property, it is commonfor the title deeds relating to the real property to be delivered to the securedparty. As real property in Hong Kong is predominately leasehold under agovernment lease, the terms of the government lease should be reviewed toensure it does not restrict the ability to grant security.

3.2 Highlight any issues with securing obligations that may arise inthe future.A security agreement can secure future obligations, provided those obliga-tions are identifiable at the time of entering into the original securityarrangements and it was the contractual intention of the parties for the se-curity to cover both the original and future indebtedness. If the originalcontractual effect was only to create security to cover indebtedness withinparticular parameters and the future obligations are outside those parame-ters, those future obligations will not be secured by the original security.

3.3 Can a universal security agreement be used to grant securityover all assets in this jurisdiction?Yes. The security agreement will identify the types of asset secured and mayinclude a floating charge over all the assets of the chargor.

HONG KONG


Hong Kong

Nathalie Hobbs and Melanie Schroeder of Linklaters

www.linklaters.com

HONG KONG


3.4 Can security be granted for the benefit of different classes ofcreditors under the same security agreement and if so, are thereany issues that creditors should be aware of in adopting thisapproach? Yes, although subordination provisions determining priority between thedifferent classes of creditors would need to be set out either in the securityagreement or, more commonly, a separate intercreditor or subordinationagreement.

3.5 Can security trustee or security agent structures be used in thisjurisdiction to secure obligations that are owed to fluctuatingcreditor classes? Yes.

3.6 Briefly outline any issues to consider when transferring loansand accompanying security interests between lenders.There are no particular issues for Hong Kong obligors and Hong Kong lawgoverned agreements. The loan agreement will usually set out the loan trans-fer procedures, which may include a requirement to obtain consent. Issuesmay arise if there are foreign parties incorporated in a jurisdiction whichdoes not recognise the concept of a security trust, if security is not held bya security trustee or agent or if the MLO exemptions do not apply (see sec-tion 1 above).

3.7 Can security be granted by third parties? Are there any rights ofcontribution, subrogation or similar that might arise as a result ofgranting/enforcing third party security that ought to be/can bewaived? Yes. Rights of subrogation arise automatically under Hong Kong law wherea third party discharges the debt of another entity. In those circumstances,that third party will be subrogated to the claims of the creditor whose debtis discharged. Generally, rights of subrogation are regulated contractuallyby waiving the right, typically until all the underlying debt is discharged.

3.8 Briefly outline the registration requirements, if any, applicable tosecurity interests created in this jurisdiction, including any practicalconsiderations such as the timing, expense and the consequencesof non-registration?Subject to limited exceptions, security interests created by (a) a Hong Kongincorporated company and (b) a registered non-Hong Kong company, arerequired to be registered at the Companies Registry within one month ofthe creation of the security. A registered non-Hong Kong company is onlyrequired to register specified charges in relation to property located in HongKong.

In Hong Kong, charges over deposits of money are no longer regarded ascharges over book debts. As a result, security over bank accounts will not beregistrable unless it falls under one of the other specified charge limbs in theCO (for example, where it contains a floating charge).

In addition, certain types of assets may be registrable on specialist registers,for example for real property, ships, trade marks, patents and designs.

Registration requires the completion of appropriate forms and payment ofa fee. The consequences of failing to register the security agreement at theCompanies Registry within one month are that the relevant charge will bevoid against a liquidator or creditor of the company.

3.9 Briefly outline any regulatory or similar consents that arerequired to create security (other than board/shareholderapprovals)?None.

3.10 Briefly explain the rules governing the priority of competingsecurity interests.The rules of priority are complex. Generally, priority under common lawwill be determined by the order of creating the security, other than: (a) sub-sequent legal security will rank above prior equitable security where theholder of the subsequent legal security has no notice of the prior equitablesecurity; (b) the giving of notice determines the order of priority of assign-ments; and (c) the grant of a subsequent fixed charge or mortgage takes pri-ority over a floating charge, unless at the time the fixed charge is created,the holder of the fixed security has notice of the restriction on creating fur-ther security. Registration of the security at the Companies Registry may bedeemed to act as sufficient notice.

Priority can also be varied contractually among creditors through provisionsin the security agreement or the use of an intercreditor/subordination agree-ment.

Section 4 – Guarantees

4.1 Briefly explain the downstream, upstream and cross-streamguarantees available, with reference to any particular restrictions orlimitations. Are there any techniques typically used to enhancecredit support/guarantees that might otherwise be limited? A Hong Kong company may provide downstream, upstream and cross-stream guarantees, subject to the company having the power to give guar-antees, the directors being authorised to exercise that power and satisfyingcorporate benefit requirements. As corporate benefit may be difficult to es-tablish, it is usual practice for upstream and cross-stream guarantees to beapproved by a unanimous shareholder resolution of the company. In certainlimited circumstances, the prohibition on financial assistance may apply (seesection 7).

4.2 What regulatory or other consents are required to grantdownstream, upstream and cross-stream guarantees (other thanboard/shareholder approvals)? None. There is no requirement to register or file a guarantee in Hong Kong.

4.3 Briefly outline any enforceability concerns associated with thegranting of downstream, upstream and cross-stream guaranteesthat lenders should be aware of (eg any exchange controls orsimilar obstacles). None, except for: (a) capacity and authorisation issues; (b) corporate benefitissues (see section 4.1); (c) insolvency issues (see section 6.2); and (d) theprohibition on financial assistance (see section 7). In addition, if amend-ments to the underlying obligation to which the guarantee relates are beingconsidered, thought should be given as to whether the amendments arewithin the general scope of what was contemplated under the original guar-antee.

Section 5 – Enforcement

5.1 Do the local courts generally recognise and enforce foreign-lawgoverned contracts? Subject to certain exceptions, a Hong Kong court will generally recogniseand enforce a foreign law governed contract, provided the relevant foreignlaw is pleaded and proved as fact in accordance with Hong Kong proceduraland evidential rules.

5.2 Will the local courts generally recognise and enforce a foreignjudgment that is given against a domestic company in foreigncourts (particularly the New York or English courts) without re-examining the merits of the decision?It depends on the jurisdiction rendering the foreign judgment. For certainjurisdictions, there are reciprocal arrangements in place in Hong Kong forenforcing judgments.

HONG KONG


A judgment obtained from a court in England or New York would be dealtwith under common law and the Foreign Judgments (Restriction on Recog-nition and Enforcement) Ordinance (Cap.46). A judgment will be entitledto recognition in Hong Kong if: (i) it is for a definite sum of money (notrelating to taxes or penalties); (ii) it is final and conclusive; (iii) the foreigncourt had jurisdiction to grant the judgment according to the common lawof the conflict of laws; and, (iv) the foreign judgment was not obtained byfraud, does not contravene the rules of natural justice and is not contraryto public policy.

5.3 Will the local courts recognise and enforce an arbitral awardgiven against the company without re-examining the merits of thedecision?If the seat of the arbitration is situated in a New York Convention country,an arbitral award should be recognised and enforced provided the companydoes not challenge enforcement and the Hong Kong courts do not refuseenforcement, in each case on the grounds set out in the New York Conven-tion (or the Arbitration Ordinance (Cap.609) where the seat is in HongKong).

5.4 When enforcing security, what factors significantly impact thetime such enforcement takes and the value of the proceedsreceived from such enforcement? For example, are there anystatutory requirements such as (a) holding a public auction; (b)court involvement; or (c) obtaining regulatory consents?Generally, a secured party is not required to seek prior court approval or ob-tain regulatory consent to enforce its security, although some methods ofenforcement (including foreclosure) require an order of the court. A publicauction is not statutorily required but may be desirable in order to ensurethat the price obtained is defensible.

5.5 Are there any restrictions that apply specifically to foreignlenders when taking enforcement action? No.

Section 6 – Bankruptcy and insolvency proceedings

6.1 Briefly, outline the main bankruptcy/insolvency processes inthis jurisdiction, including any control or influence that creditorscan exert on the process, the timeframes usually involved and anymandatory filing requirements. There are two main insolvency regimes for companies in Hong Kong.

(a) Liquidation Liquidation is a termination procedure and, once completed, the companyis dissolved. A liquidator is appointed to take control of the company, tocollect and realise its assets and distribute realisations to satisfy, as far as pos-sible, the company’s liabilities. The four types of procedure are:

(i) Members’ voluntary liquidation – only available to solvent companiesand initiated by shareholders passing a resolution to wind up the companyand appoint a liquidator. The directors must make a declaration of solvencystating the company will be able to pay its debts in full within a maximum12 months following the commencement of the winding-up.

(ii) Creditors’ voluntary liquidation – initiated by the shareholders passinga winding-up resolution. The company is likely to either already be insolventor the directors are unwilling to make a statutory declaration of solvency.

(iii) Compulsory liquidation – a procedure made by order of the court, ini-tiated by the creditors filing a winding-up petition based on one or morespecified grounds, including the inability of the company to pay its debts.

(b) ReceivershipReceivership is an enforcement right for individual secured creditors. Mostcharges created under Hong Kong law give the charge holder the power toappoint a receiver. There is no court involvement and the security agreementusually states when the appointment can be made.

Arrangements with creditors can be made as schemes of arrangements,which offer alternative methods for reaching agreements or compromiseswithout needing all the creditors’ consent.

6.2 Are there any preference, fraudulent conveyance, claw-back,hardening periods or similar issues or preferential creditor rightsthat lenders should be aware of? Various rules give the courts power to set aside transactions entered into byan insolvent company within a period of time before the commencementof liquidation. The periods differ depending on the transaction, but includesix months for preferences (two years if to an associate) and three years forextortionate credit transactions. Hong Kong does not have a concept of atransaction at an undervalue, although transactions that have the same effectare likely to fall under the misfeasance provisions of the Companies (Wind-ing-Up and Miscellaneous Provisions) Ordinance. Subject to certain excep-tions, floating charges created within 12 months may also be invalid.

Fixed charge realisations are not subject to deductions other than expensesincurred by the liquidator in preserving or realising fixed charge assets. Float-ing charge realisations are subject to the following deductions: (a) liquidationexpenses; and (b) preferential debts, (including employee salary, holidayclaims, severance payments, long service leave and certain provident fundscheme payments).

6.3 Do bankruptcy/insolvency processes provide for any kind ofstay/moratorium on enforcement of lender claims? If so, does thestay/moratorium apply to the enforcement of security interests?In Hong Kong, a court may stay proceedings at any time after a winding-up application has been made. Once a winding-up order has been made ora provisional liquidator has been appointed, all proceedings are automati-cally stayed. There is no moratorium available during receivership or ascheme of arrangement.

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Section 7 – Other matters

Financial assistance

7.1 Are there any restrictions in place on locally incorporatedcompanies in assisting the acquisition of shares in itself, its sistercompanies or in its holding companies? Do these prohibitionsapply to all forms of company, to companies being acquired whichare incorporated outside this jurisdiction and indirect holdingcompanies? Financial assistance given by a company (or any of its subsidiaries) for theacquisition of shares in a Hong Kong incorporated target company is pro-hibited.

Financial assistance is defined widely and includes the granting of a guar-antee, security, indemnity, release or waiver, loan, and any other assistancewhich reduces the net assets of the company giving the assistance to a ma-terial extent.

If unlawful financial assistance is given, the company (and any officer) iscommitting an offence and could face a fine or imprisonment. The financialassistance itself (for instance, the guarantee or security) will not be void orunenforceable solely because of the contravention.

7.2 Are there any exceptions to these restrictions and/or are thereany structuring techniques that can be used to achieve targetcollateral support? There are three main statutory exceptions to the prohibition on financialassistance: (i) where the aggregate amount of the assistance does not exceedfive percent of the paid-up shareholder funds of the company; (ii) wherethe assistance is approved by all the shareholders of the company; or (iii)where the assistance is approved by an ordinary resolution of the company.

In each case, the assistance must be supported by a resolution of the directorsconfirming it is in the best interests of the company and the terms are fairand reasonable. The directors must also make a solvency statement. Exceptin the case of approval by all shareholders, the solvency certificate must besent to shareholders 15 days after the giving of financial assistance.

Shareholders representing five percent of the total voting rights or five per-cent of all the shareholders of the company may apply to court to restrainthe giving of financial assistance within a prescribed timeframe.

Section 3 of the report was reviewed by Davy Yun of Deloitte. Davy specialisesin the financial services industry and leads knowledge management for the taxdepartment of Deloitte in Hong Kong

About the authorNathalie Hobbs is a partner in the Hong Kong office of Linklaters,having also spent time in the Paris and London offices. She specialises ininternational secured and unsecured loans, syndicated lending andacquisition financings (public, private and leveraged), acting for lendersand borrowers. Hobbs is recognised as a leading lawyer in banking andfinance in the 2014 edition of IFLR 1000.

Nathalie Hobbs Partner, Linklaters

Hong KongT: +852 2842 4168E: [email protected]: www.linklaters.com

About the authorMelanie Schroeder is a senior professional support lawyer in theknowledge and learning team in the Hong Kong office of Linklaters.

Schroeder specialises in banking law and practice and focuses ondrafting precedents, know-how and training on banking and projectfinance sectors.

Melanie Schroeder Associate, Linklaters

Hong KongT: +852 2842 4822E: [email protected]: www.linklaters.com


1.1 Can security be taken over the following asset classes and whatdocumentation or formalities are required to create, perfect andmaintain such security?a) Shares and debt securitiesYes. Security can be created over shares of a Malaysian company or debt se-curities, and in the form of: (i) a legal charge effected by transferring theownership in the secured securities to the chargee; or (ii) an equitable chargeeffected by transferring the beneficial interest in the secured securities to thechargee with legal title to the secured securities remaining with the chargor.An equitable charge is created and perfected by the chargor depositing theoriginal share certificates and executed transfer instruments with the chargee.

In the case of a charge over scripless securities, the secured securities willtypically be credited into the securities account maintained by an authoriseddepository agent for the benefit of the chargee.

Other general perfection requirements with respect to the creation and per-fection of a legal share charge and an equitable share charge under Malaysianlaw also include those specified in paragraph 1.7.

b) Bank accountsYes. Security over bank accounts can be created by way of a legal assignmentor charge over the bank accounts and all credit balances in the bank ac-counts.

Under the Malaysian Civil Law Act 1956, a legal assignment must be anabsolute assignment of all rights made in writing and an express notice ofthe assignment must be served on the counterparty from whom the assignorwould have been entitled to enforce a right, or receive or claim a debt. Inthe case of an assignment over bank accounts, the contractual counterpartyis the account bank. No separate acknowledgement by the contractual coun-terparty is required, but it is commonly procured in Malaysia to ensure thatthe contractual counterparty has full knowledge of such assignment andcharge.

The other general perfection requirements discussed in paragraph 1.7 willapply.

c) Contractual rights, receivables and insurance policiesYes. Security over contractual rights, receivables and insurance policies canbe created by way of a legal assignment. The general legal requirements asdiscussed in paragraph 1.1(b) and paragraph 1.7 will apply.

d) Real propertyYes. Security over real property can be created by way of a legal charge or adeed of assignment.

In the case of a real property with individual or separate issue document oftitle, security over such real property must be created by way of a legal landcharge under the Malaysian National Land Code (for property situated inWest Malaysia), or the Sarawak Land Code (for property situated inSarawak) or the Sabah Land Ordinance (for property situated in Sabah).Note that second and subsequent charges over the same piece of real prop-erty are possible with the prior consent of the existing chargees.

In the case of a real property without individual or separate issue documentof title, security over such real property may be created by way of a legal as-signment over the relevant instrument of title (typically the sale and purchaseagreement in respect of such real property) under the Civil Law Act.

In addition to the general perfection, the requirements as discussed in para-graph 1.1(b) and paragraph 1.7 will apply.

e) Plant and machineryYes. Security over plant and machinery can be taken by way of a fixed charge.Please note that the general perfection requirements discussed in paragraph1.7 will apply.

f) Intellectual propertyYes. Security over intellectual property can be taken by a charge (typically afixed charge). There is no statutory requirement to record or register the se-curity interest created over any intellectual property with any public registryfor intellectual property rights in Malaysia. However, the general perfectionrequirements discussed in paragraph 1.7 will apply.

g) Future/after acquired propertyYes. Security over future assets can be effected by way of a fixed or floatingcharge.

h) Floating charges over all assetsYes. A floating charge can be taken over all assets of a company, includingfuture assets. A company is, during the existence of the floating charge, gen-erally free to deal with its assets in its ordinary course of business withoutreferring to or procuring any consent from the chargee. Upon the occurrenceof a crystallisation event, the floating charge will crystallise and attach as afixed security to all the assets then in the pool of assets specifically describedas acquired by the company. Please note that the general perfection require-ments discussed in paragraph 1.7 will also apply.

1.2 Highlight any issues with securing obligations that may arise inthe future.Generally speaking, security may be created to secure future liabilities andobligations, provided that the relevant security documents adequately andclearly provide for such arrangement.

1.3 Can a universal security agreement be used to grant securityover all assets in this jurisdiction?Yes. A general debenture is commonly used as a security agreement, creatinga fixed and floating charge over all present and future assets of the companyand a legal assignment over any asset of the company which is not chargedunder the fixed or floating charge.

1.4 Can security be granted for the benefit of different classes ofcreditors under the same security agreement and if so, are thereany issues that creditors should be aware of in adopting thisapproach?Yes. This is typically done by way of a single security agreement created infavour of a security agent holding the security on behalf of and for the ben-efit of the different classes of creditors.

MALAYSIA


Malaysia

Esther Chik of Wong & Partners

www.wongpartners.com

MALAYSIA


1.5 Can security trustee or security agent structures be used in thisjurisdiction to secure obligations that are owed to fluctuatingcreditor classes?Yes.

1.6 Can security be granted by third parties? Are there any rights ofcontribution, subrogation or similar that might arise as a result ofgranting/enforcing third party security that ought to be/can bewaived?Generally speaking, security to secure a loan can be granted by a third party,provided that the third party is empowered by its constitutional documentsto do so and there is no contravention of the Malaysian Companies Act1965 (MCA), particularly, section 133A. Right of subrogation may arise,which is commonly waived in the third party security document.

1.7 Briefly outline the registration requirements, if any, applicable tosecurity interests created in this jurisdiction, including any practicalconsiderations such as the timing, expense and the consequencesof non-registration?The most common and general registration requirements applicable to se-curity interest created under Malaysian law are set out below.

(i) If a security is created by a company incorporated under the MCA, andif the security is a registrable charge under the MCA, that charge must beregistered with the Companies Commission of Malaysia (CCM). This isdone by filing Form 34 (Statement of Particulars to be lodged with Charge)as prescribed by the MCA with the CCM within 30 days of its creation.

A failure to register a registrable charge with the CCM within the prescribedtimeframe will result in the charge being void against the liquidator and anyother creditors of that company. In this case, during the liquidation of thatcompany, the liquidator can deal with the charged property in total disregardof any interest that the charge purports to give to the chargee. In addition,non-registration of a registrable charge may affect the priority of the chargee.

Form 34 must be signed by a director or the company secretary. It must beduly completed, signed and physically presented at the CCM. A filing feeof RM300 ($94) is payable to the CCM.

A similar requirement applies to a company incorporated under theMalaysian Labuan Companies Act 1990 (MLCA), whereby a Form 21(Statement of Particulars in respect of Charge) as prescribed by the MLCAmust be lodged with the Labuan Financial Services Authority (LFSA) within30 days of creation of the security. The lodgment of a Form 21 is done on-line at the LFSA official website and a filing fee of RM50 is payable to theLFSA.

(ii) If a power of attorney clause is included in the security document, astamp duty of RM10 should be paid on such power of attorney clause.Under the Power of Attorney Act 1949 (PoAA), the powers of attorney con-tained in any security document are required to be lodged at the High Courtof Malaya for the powers granted to be exercisable in West Malaysia. Thereis no statutory timeframe for such lodgment. A filing fee of RM35 plusRM2 for each page of the security document in question is payable to theHigh Court of Malaya.

The PoAA also requires the execution of the document containing a powerof attorney clause to be witnessed and attested by the approved category ofpersons, which include advocates and solicitors practicing at the High Courtof Malaya, and a notary public and commissioner for oath officiating in thejurisdiction in which the document is signed.

(iii) In the case of a legal land charge created under the relevant land codes,the legal land charge must be registered with the relevant land registries.Registration of the land charge is done by presenting the original completed,signed, dated and stamped statutory instrument of charge as prescribedunder the relevant land codes (charge forms). In practice, parties also attach

an annexure to the charge forms setting out the terms and conditions gov-erning the security. The registration fees payable to the land registries varyfrom one state to another.

The legal land charge document must be stamped appropriately before itcan be accepted for registration at the relevant land registries. The landcharge must be presented for registration at the relevant land registry withinthree months from the date of the land charge document, failing which apenalty will be imposed.

1.8 Briefly outline any regulatory or similar consents that arerequired to create security (other than board/shareholderapprovals)?Common regulatory or governmental approvals which may need to be con-sidered are state authority approval and approval of the Central Bank ofMalaysia (BNM).

Prior approval from the relevant state authority is required for real propertythat is subject to certain restrictions in interest against the creation of chargesover that real property.

Under the Malaysian Financial Services Act 2013, prior approval from theBNM or registration with the BNM may be required in some circumstancesfor the creation of security and giving of a guarantee.

1.9 Briefly explain the rules governing the priority of competingsecurity interests.The general rule governing the priority of competing security interests is es-sentially the time of creation of the security interests. Any security interestcreated subsequent to an existing security interest over the same asset ranksbelow the existing security interest in point of priority and security.

However, it is open to the creditors to agree amongst themselves on thequestion of priority, in which case, the creditors will typically agree the pri-ority and security arrangement in a priority and security sharing agreement.In the case of land charges, any reshuffling of priority can only be effectedby lodging a relevant prescribed form with the relevant land registries.


2.1 Briefly explain the downstream, upstream and cross-streamguarantees available, with reference to any particular restrictions orlimitations. Are there any techniques typically used to enhancecredit support/guarantees that might otherwise be limited?Under Malaysia law, companies are free to give any downstream, upstreamor cross-stream guarantee as long as: (i) the giving of such guarantee hasbeen approved by the shareholders or directors of the guarantor company,the giving of such guarantee is not inconsistent with the guarantor com-pany’s constitutional documents and the guarantor company is clearly em-powered by its constitutional documents to give such guarantee; (ii) theguarantor company is able to satisfy itself and establish that there is com-mercial and corporate benefit in giving such guarantee (the question of cor-porate and commercial benefit is a matter of fact to be considered anddetermined by the directors of the guarantor company); (iii) there is no con-travention of the MCA (in particular, section 133A or section 67 of theMCA) or in the case of a public listed company, any provision of the listingrequirements of Bursa Malaysia Securities; and, (iv) the relevant foreign ex-change control rules in Malaysia are complied with.

Section 133A(1)(b) of the MCA prohibits a company (guarantor company)from giving a guarantee for the benefit of another company (second com-pany) if the second company is connected to a director of the guarantorcompany, unless the guarantor company and the second company have aparent-subsidiary relationship.

MALAYSIA



3.1 Do the local courts generally recognise and enforce foreign-lawgoverned contracts?Generally, yes. Malaysian courts generally uphold and enforce the expresschoice of law decided by the parties as the governing law of the contractsubject to certain qualifications and conditions (for instance, that the choiceof law is a bona fide choice).

3.2 Will the local courts generally recognise and enforce a foreignjudgment that is given against a domestic company in foreigncourts (particularly the New York or English courts) without re-examining the merits of the decision?A judgment obtained from the courts of certain jurisdictions (permitted ju-risdictions) listed in the Malaysian Reciprocal Enforcement of JudgmentsAct 1958 (REJA), subject to certain qualifications, may be enforced inMalaysia once it has been registered under the REJA and no separate actionneeds to be commenced for the enforcement of such foreign judgment. AMalaysian court may, subject to certain conditions being fulfilled (for in-stance, the judgment is not obtained by fraud), register a judgment obtainedfrom those courts of the permitted jurisdictions.

A judgment obtained from a court of a jurisdiction which is not a permittedjurisdiction (for instance, New York courts) will not be recognised by theMalaysian courts. An action may, however, be commenced in the Malaysiancourts for an amount due under a judgment given by the court of foreignjurisdiction. Note that certain conditions and qualifications do apply in thiscircumstance.

3.3 Will the local courts recognise and enforce an arbitral awardgiven against the company without re-examining the merits of thedecision?Yes. Malaysian courts generally do recognise and enforce an arbitral awardgiven against a company under section 38 of the Arbitration Act 2005, un-less it falls under certain grounds for refusing the recognition or enforcementunder and as listed in section 39 of the Arbitration Act.



4.1 Are there any restrictions in place on locally incorporatedcompanies in assisting the acquisition of shares in itself, its sistercompanies or in its holding companies? Do these prohibitionsapply to all forms of company, to companies being acquired whichare incorporated outside this jurisdiction and indirect holdingcompanies?Yes, section 67(1) of the MCA prohibits the giving of financial assistanceby a company in relation to the purchase of its own shares or the shares ofits holding company, subject to certain limited exceptions. Note that theprohibition only applies to companies incorporated under the MCA. Thereare three exceptions under section 67 of the MCA, but note that there is noconcept of a whitewash procedure.

About the authorEsther Chik is a partner in the finance and projects practice group ofWong & Partners, the Malaysian member firm of Baker & McKenzieInternational. She has been practicing law for more than 10 years inleading Malaysian law firms and had served as a foreign counsel in aSingaporean law firm.

Chik has represented financial institutions and corporate borrowers invarious conventional and Islamic banking and finance transactions,both domestic and cross-border. She has also been involved in debtcapital markets transactions in conventional and Islamic structures andprovided a wide range of legal support in her discipline, includingproject financing and acquisition finance. Chik was admitted to practisein the High Court of Malaya in 2002. She holds an LLB (Hons) fromStaffordshire University, United Kingdom.

Esther ChikPartner, Wong & Partners

Kuala Lumpur, MalaysiaT: +603 2298 7961F: +603 2282 2669E: [email protected]: www.wongpartners.com

MAURITIUS



1.1 What licences or approvals do lenders need to have if lendingto a borrower in this jurisdiction if a) the lender is a bank or b) thelender is not a bank?A bank or non-bank lender licensed as non-bank deposit-taking institution,credit union or money lender under the Banking Act 2004 does not requirea further licence to lend. A financial services provider licensed by the Finan-cial Services Commission to carry out insurance, leasing, credit finance, orfactoring business may lend to a borrower.

1.2 Are any exemptions available and/or are any techniquestypically used to structure around such requirements?Foreign banks do not require a licence in Mauritius to lend to a Mauritiancompany.

Section 2 – Taxes

2.1 Are there any requirements to make deductions or withhold taxfrom payments made to domestic or foreign lenders in thisjurisdiction? Are any techniques typically used to structure aroundsuch requirements?Withholding tax is applicable on interest payable by a person (other than abank or non-bank deposit-taking institution) to a non-resident lender, butthis can be reduced under a double taxation treaty.

There is no withholding tax on payment of interest made: (i) to a domesticlender; or (ii) by a company holding a Category One Global Business Li-cence to a non-resident not carrying out any business in Mauritius.

2.2 Is interest on debt tax deductible for borrowers incorporated inthis jurisdiction?Interest is deductible provided it is incurred in respect of capital employedexclusively in the production of gross income. However, any interest ondebentures issued by a company to its shareholder by reference to shareswill not be deductible.

2.3 Are there any thin capitalisation rules in effect in thisjurisdiction which would impact the amount of debt that can beborrowed/guaranteed by entities incorporated there?There are generally no thin capitalisation rules.

2.4 Are there any other important tax concerns that lenders toborrowers incorporated in this jurisdiction should be aware of?Please see section 2.1.


3.1 Can security be taken over the following asset classes and whatdocumentation or formalities are required to create, perfect andmaintain such security?a) shares b) bank accountsc) receivables d) contractual rights e) insurance policiesf) real property g) plant and machineryh) intellectual propertyi) debt securitiesj) future/after acquired propertyk) floating charges over all assets

Security can be taken over the above asset classes and should be in writing.A mortgage (hypotheque) over immovable property must be in notarisedform, whereas fixed and floating charges must be made in a format pre-scribed by law. To create an assignment or pledge of receivables under theCommercial Code, a memorandum (bordereau) in prescribed format mustbe signed by the assignor or pledgor.

The perfection requirements would depend on the nature of the securitybeing granted or the asset class itself.

In the case of mortgages over immovable property and fixed and floatingcharges, the security document must be registered with the registrar-generaland inscribed with the conservator of mortgages. Inscription is valid for only40 years and is renewable. Fixed and floating charges will have their priorityranking only as from the registration date.

For an assignment of receivables (cession de créances) or a pledge over receiv-ables (nantissement de créances) under the Commercial Code, notificationto the debtor and acceptance in writing by the debtor to pay the assignee orpledgee are required to perfect the security. Similar requirements apply to apledge over a bank account.

The share pledge can only be created on existing shares. However, the pled-gor can be made to undertake to pledge any future shares it receives fromtime to time. A pledge of shares made under the Civil Code or the Com-mercial Code, must be inscribed in the register of the company in whichthe shares are being pledged. For a pledge of shares made under the Com-mercial Code, a signed blank transfer instrument is remitted to the benefi-ciary to be completed in the name of the beneficiary or a third party uponenforcement.

3.2 Highlight any issues with securing obligations that may arise inthe future.Future obligations can be assigned or pledged provided that they can be as-certained or ascertainable and the pledgee or assignee will acquire a securityinterest only when the obligations materialise.

Mauritius

Soo Fon Ip Min Wan and Vincent Chong Leung of GlobaLex Chambers

www.globalexchambers.com

MAURITIUS


3.3 Can a universal security agreement be used to grant securityover all assets in this jurisdiction?A charge can cover all assets where this is specifically provided for.

3.4 Can security be granted for the benefit of different classes ofcreditors under the same security agreement and if so, are thereany issues that creditors should be aware of in adopting thisapproach?A security trustee or agent is able to take and hold security under a securityagreement for the benefit of different classes of creditors. The creditorsshould have an intercreditor agreement or a subordination agreement inplace to regulate their relationship.

3.5 Can security trustee or security agent structures be used in thisjurisdiction to secure obligations that are owed to fluctuatingcreditor classes?Yes, it is possible.

3.6 Briefly outline any issues to consider when transferring loansand accompanying security interests between lenders.Loans and accompanying security interests are generally transferable betweenlenders by way of assignment, novation or sub-participation. In a novation,the consent of the borrower is required and the intention of the parties todo so must be clearly stated in the agreement witnessing the novation. Incase of an assignment, the borrower should be duly notified.

3.7 Can security be granted by third parties? Are there any rights ofcontribution, subrogation or similar that might arise as a result ofgranting/enforcing third party security that ought to be/can bewaived?Yes. The third party providing security for the benefit of a borrower may besubrogated to the right of the lender by agreement or by operation of law.Such right of subrogation can be suspended or waived expressly in the se-curity document.

3.8 Briefly outline the registration requirements, if any, applicable tosecurity interests created in this jurisdiction, including any practicalconsiderations such as the timing, expense and the consequencesof non-registration?A company must file with the registrar of companies a statement of partic-ulars of security interest granted over its assets, within 28 days of the cre-ation. Non-registration will not generally affect the validity of the security.

Registration of a security document with the registrar-general should bemade within eight days of the date of the document (in case of a companyholding a Global Business Licence, within three months) or else a penaltyof 50% of the duty leviable is applicable. A security document will typicallyattract a registration duty of MauR50,000 ($1,800) and stamp duty ofMauR500.

Apart from as indicated in section 3.1, registration of a security documentwith the registrar-general is optional. A security document may still be reg-istered to give a date certaine, to make such documents opposable againstthird parties and to ensure that they may be used in Mauritius. However, asecurity document needs not be registered with the registrar-general to beproduced in any civil proceedings before a Mauritius court.

3.9 Briefly outline any regulatory or similar consents that arerequired to create security (other than board/shareholderapprovals)?Generally none, except where there is a third party contractual prohibitionon the company granting security on its assets.

3.10 Briefly explain the rules governing the priority of competingsecurity interests.In a winding-up, the order of priority under the Insolvency Act 2009 is asfollows: (i) payments made pari passu with first ranking fixed and floatingcharges and mortgages inscribed for more than three years; (ii) first ranking,fixed and floating charges and mortgages inscribed for less than three years;(iii) other privileges, securities and creditors; and (iv) all other unsecuredcreditors.


4.1 Briefly explain the downstream, upstream and cross-streamguarantees available, with reference to any particular restrictions orlimitations. Are there any techniques typically used to enhancecredit support/guarantees that might otherwise be limited?Any holding or subsidiary company may agree to guarantee or subordinateits rights in favour of a lender to any of the group company subject to share-holders approval, if applicable. A subsidiary must be expressly permitted todo so by its constitution.

4.2 What regulatory or other consents are required to grantdownstream, upstream and cross-stream guarantees (other thanboard/shareholder approvals)?None, except where the guarantor has undertaken with a third party not togrant any such guarantee.

4.3 Briefly, outline any enforceability concerns associated with thegranting of downstream, upstream and cross-stream guaranteesthat lenders should be aware of (eg any exchange controls orsimilar obstacles).A guarantor may require a lender to first enforce its claim against the debtorbefore claiming under the guarantee. It may also request, where it is a co-guarantor, the lender’s claim be divided between all co-guarantors. Such ob-stacles can be waived in the guarantee document.


5.1 Do the local courts generally recognise and enforce foreign-lawgoverned contracts?The local courts will generally do so except in instances where the choice ofgoverning law was not made in good faith by the contracting parties, withthe intention to evade the provisions of another more appropriate jurisdic-tion or where the choice of law infringes a mandatory provision of Mauritianlaw or is contrary to public policy.

5.2 Will the local courts generally recognise and enforce a foreignjudgment that is given against a domestic company in foreigncourts (particularly the New York or English courts) without re-examining the merits of the decision?A final and conclusive judgment for a definite sum duly obtained against aMauritian company under a loan or security document in a foreign court isgenerally enforceable in Mauritius without re-examination of the merits byway of exequatur proceedings, if it complies with certain general principleslaid down by Mauritius courts.

If the judgment emanates from a superior court of the UK, it may also beenforced by way of registration under the Reciprocal Enforcement of Judg-ments Act 1923, except where the Supreme Court considers that registrationand enforcement of the judgment would not be just and convenient.

MAURITIUS


5.3 Will the local courts recognise and enforce an arbitral awardgiven against the company without re-examining the merits of thedecision?Generally yes, unless the subject matter of the dispute is not capable of set-tlement by arbitration under the laws of Mauritius or the recognition or en-forcement of the award would be contrary to the public policy of Mauritius.Recognition and enforcement of a foreign arbitral award will be governedby the Convention on the Recognition and Enforcement of Foreign ArbitralAwards Act 2001.

5.4 When enforcing security, what factors significantly impact thetime such enforcement takes and the value of the proceedsreceived from such enforcement? For example, are there anystatutory requirements such as (a) holding a public auction; (b)court involvement; or (c) obtaining regulatory consents?The main factors are the nature of the security itself and whether there arecourt or insolvency proceedings. Otherwise, a lender secured by fixed andfloating charge or security given under the Commercial Code may usuallyenforce its security without court involvement or regulatory consent or hold-ing a public auction.

5.5 Are there any restrictions that apply specifically to foreignlenders when taking enforcement action?No, but the foreign lender may need to provide security for the defendant’scosts.


6.1 Briefly outline the main bankruptcy/insolvency processes in thisjurisdiction, including any control or influence that creditors canexert on the process, the timeframes usually involved and anymandatory filing requirements.A company may be wound up voluntarily, by court order or a resolution ofcreditors passed at the watershed meeting. A voluntary winding-up may be:(a) a creditors’ voluntary winding-up where the company is insolvent andthe liquidator is appointed by a meeting of creditors; or (b) a shareholders’voluntary winding-up where the company is solvent and the liquidator isappointed by a shareholders’ meeting. A company could also be placedunder receivership, administration or enter into a compromise under Mau-ritius law.

A liquidator must:

• within seven days of appointment, give public notice and submit to theDirector of Insolvency Service (Director), notice of his appointment andthe date of the commencement of the liquidation;

• 14 days after their appointment in the case of a creditors’ voluntary wind-ing-up and 28 days after their appointment in a winding-up by the court,prepare a list of creditors of the company and (except in the case of ashareholders’ voluntary winding-up), prepare and submit to the Directora report containing the details, including a statement of the company’saffairs, proposals for conducting the liquidation and the estimated dateof its completion;

• within 28 days of the end of each six-month period following the com-mencement of the liquidation, prepare and send to every known creditorand shareholder, and submit to the Director, a report on the conduct ofthe liquidation during the preceding six months and of any further pro-posals which the liquidator has for completing the liquidation.

The timeframes involved vary on the method of winding-up. Where a sol-vent company is wound-up voluntarily, this would normally take a fewmonths whereas, a court-petitioned winding-up would generally take about12 months to complete.

6.2 Are there any preference, fraudulent conveyance, claw-back,hardening periods or similar issues or preferential creditor rightsthat lenders should be aware of?Certain claims and privileges, for example government taxes and dues, thecosts of insolvency proceedings and remuneration due to employees, havestatutory priority over both unsecured and secured creditors.

A liquidator may apply to the court to set aside a transaction that is a void-able preference and is made within two years of the commencement ofwinding-up. A voidable preference is a transaction (which includes the cre-ation of a security) that: (i) is made at a time when the debtor is unable topay its due debts; and (ii) enables another person to receive more towardssatisfaction of a debt by the debtor than that person would receive, or wouldbe likely to receive, in the liquidation.

A security over any property or undertaking of a debtor may also be set asideby the court on the grounds: (i) the security was given within two years im-mediately before the commencement of the winding up; and (ii) immedi-ately after the security was given, the debtor was unable to pay its due debts.

A creditor may also challenge a security where its grant has been made infraud of its rights. Provided the creditor’s rights exist before the fraudulentact, the creditor may claim the revocation of the fraudulent act once theprejudice is ascertained and proof of collusion between the debtor and thethird party benefiting from the security is established.

6.3 Do bankruptcy/insolvency processes provide for any kind ofstay/moratorium on enforcement of lender claims? If so, does thestay/moratorium apply to the enforcement of security interests?A security interest may not be enforced during administration except withthe administrator’s written consent or with the permission of the Court.

Where a winding-up order is made or a provisional liquidator is appointed,no action or proceedings may be commenced against the company exceptby leave of the court. The right of a secured creditor to take possession of,and realise or otherwise deal with, property of the company over which thatcreditor has a security will not be affected generally.

MAURITIUS




7.1 Are there any restrictions in place on locally incorporatedcompanies in assisting the acquisition of shares in itself, its sistercompanies or in its holding companies? Do these prohibitionsapply to all forms of company, to companies being acquired whichare incorporated outside this jurisdiction and indirect holdingcompanies?A Mauritius company may provide financial assistance (which includes giv-ing a loan or guarantee, or the provision of security) for the acquisition ofits own shares provided its board is satisfied that: (i) giving the assistance isin the interests of the company; (ii) the assistance given is fair and reasonableto the company and to any shareholders not receiving that assistance; and(iii) the company shall satisfy the statutory solvency test immediately aftergiving the assistance.

A company will satisfy the statutory solvency test where: (i) it is able to payits debts as they become due in the normal course of business; and (ii) thevalue of the company’s assets is greater than the sum of the value of its lia-bilities and its stated capital.

Where the amount of any financial assistance approved together with theamount of any other financial assistance which is still outstanding, exceeds10% of the company’s stated capital, the company will not give the assis-tance unless it first obtains a certificate from its auditor to do so.

7.2 Are there any exceptions to these restrictions and/or are thereany structuring techniques that can be used to achieve targetcollateral support?The whitewash procedure is described above.

About the authorSoo Fon Ip Min Wan is a partner at GlobaLex Chambers. She is apioneer in the global business sector and specialises in funds, securitiesmarkets and finance transactions. A qualified barrister admitted to theHonourable Society of Lincoln’s Inn since 1995 and called to theMauritius bar in 2002, Soo obtained her law degree from the Universityof Birmingham, UK. She previously practiced as senior associate in aleading local law firm and earned recognition by IFLR1000. Beforethat, Soo was the head of legal, trust and compliance at one of thelargest management companies in the global business sector.

Soo Fon Ip Min WanPartner, GlobaLex Chambers

E: [email protected]: www.globalexchambers.com

About the authorVincent Chong Leung is a partner at GlobaLex Chambers. He focuseson cross-border transactions and regularly advises lenders andborrowers on Mauritius-related financing matters. A former partner ata leading local law firm and previously the head of legal at amanagement company, Leung graduated in English and French lawfrom the University of Kent, UK and Universite Montesquieu-Bordeaux IV, France. He also completed both the legal practice courseand the bar vocational course at the Inns of Court School of Law, UK.He is a member of the Honourable Society of Lincoln’s Inn and wascalled to the Bar of England and Wales and that of Mauritius.

Vincent Chong LeungPartner, GlobaLex Chambers

E: [email protected]: www.globalexchambers.com

NIGERIA



1.1 What licences or approvals do lenders need to have if lendingto a borrower in this jurisdiction if a) the lender is a bank or b) thelender is not a bank?There are no legal requirements for foreign lenders to obtain licences orapprovals to lend money to borrowers in Nigeria. However, the CentralBank of Nigeria’s Regulation on Capital Importation issued on June 22 2012requires that such foreign lenders must obtain a certificate of capitalimportation.

Where the lender is a bank incorporated in Nigeria, such bank is requiredto obtain its licence from the Central Bank of Nigeria according to sections2 and 3 of the Bank and Other Financial Institutions Act chapter B3 LFN,2004 (BOFIA).

Where the lender is not a bank, the lender is required to obtain a licenceaccording to the provisions of the Money Lenders Law of the state wherethe lender carries on business.

1.2 Are any exemptions available and/or are any techniquestypically used to structure around such requirements?There is no provision in BOFIA which exempts banks from obtaining alicence. There are, however, certain exemptions available in various stateswhich exempt money lenders from obtaining a licence for their operation.For instance, section 3 of the Money Lenders Law of Lagos State, chapterM7, Laws of Lagos State 2003, provides that the state commissioner mayby order exempt any person or corporate body from all or any of theprovisions of this law.

Section 2 – Taxes

2.1 Are there any requirements to make deductions or withhold taxfrom payments made to domestic or foreign lenders in thisjurisdiction? Are any techniques typically used to structure aroundsuch requirements.The applicable tax regime in Nigeria requires that tax be withheld on interestpayable on loans.

Section 78 of the Companies Income Tax Act chapter C21, LFN 2004provides that 10% of deductions be made on payments from one companyto another (either a foreign or domestic lender). Regarding foreign lendersthat have double taxation treaties with Nigeria, the applicable deductablepercentage would be 7.5%.

2.2 Is interest on debt tax deductible for borrowers incorporated inthis jurisdiction?Interest on debt is tax deductable at 10%.

2.3 Are there any thin capitalisation rules in effect in thisjurisdiction which would impact the amount of debt that can beborrowed/guaranteed by entities incorporated there?At present, thin capitalisation rules are not applicable in Nigeria.

2.4 Are there any other important tax concerns that lenders toborrowers incorporated in this jurisdiction should be aware of?Regarding non-resident lenders, the deducted withholding tax will be thefinal tax. For lenders resident in Nigeria, all tax regimes such as theEducation Tax Act, Information Technology Tax, Capital Gains Act, ValueAdded Tax Act, and Industrial Training Fund Act will be applicable.



The above listed assets may be used as securities in Nigeria.

The most commonly used documentations include mortgages, charges(fixed and floating), assignments, liens and pledges. Where the borrowerand lender have consented to use any of the stated assets as security for theloan, the parties enter into a written agreement in the form of applicabledocumentation, which would amongst other things indicate the nature ofthe security. The requirement of consent, registration, stamp duties wouldalso apply, depending on the peculiarity of each security.

3.2 Highlight any issues with securing obligations that may arise inthe future.Depending on the peculiarity of the relevant security, there are several issueswhich may arise after the creation of the facility. For instance, where a trusteewho has no right to employ trust property as security in a mortgagetransaction proceeds with the transaction without authorisation, unless suchpower is reserved for the trustee in the trust instrument or by statute, thismay result in issues in the future. Also, where there is default on a mortgagecreated on a property and such property is the security for more than onemortgage and the value of the property cannot satisfy all mortgages created,the legal mortgage takes priority followed by other equitable mortgages inaccordance with the time of creation.

3.3 Can a universal security agreement be used to grant securityover all assets in this jurisdiction?Yes, this is usually in the form of an all-asset debenture granted mostly bycorporate bodies to banks and other financial institutions.

Nigeria

Olanrewaju Fagbohun and Qudus Mumuney of RouQ & Company

www.rouqandco.org

NIGERIA


3.4 Can security be granted for the benefit of different classes ofcreditors under the same security agreement and if so, are thereany issues that creditors should be aware of in adopting thisapproach?Security can be granted for the benefit of different classes of creditors underthe same agreement, provided that all the parties agree. One major issuethat the creditors should be aware of in this regard is the issue of priority ofinterests. The interest of a secured creditor, which in most cases is a legalinterest, will take precedence over the interest of an unsecured creditor whousually holds an equitable interest. Where more than one creditor is secured,the first in time would take precedence.

3.5 Can security trustee or security agent structures be used in thisjurisdiction to secure obligations that are owed to fluctuatingcreditor classes?A loan or mortgage agreement is generally viewed as any other contract. Asecurity trustee structure can be used in Nigeria to secure obligations todifferent creditor classes. A debtor can set up a security trust and appoint atrustee to manage the trust with the view to fulfilling obligations owed bythe debtor to the creditors.

3.6 Briefly outline any issues to consider when transferring loansand accompanying security interests between lenders.The transfer of loans and accompanying securities can be done by eitherassignment or novation, provided that there are no limitations to transferin any other relevant agreement between the parties. The issues to beconsidered would differ on a case by case basis, depending on the type ofloan and security involved. For instance, in a loan transaction where thesecurity is a real property, the mortgage must have been duly registered atthe relevant land registry and the Corporate Affairs Commission (CAC),otherwise the loan transfer will be hindered.

3.7 Can security be granted by third parties? Are there any rights ofcontribution, subrogation or similar that might arise as a result ofgranting/enforcing third party security that ought to be/can bewaived?Security can be granted by third parties on behalf of a borrower. This isusually created with a deed of guarantee executed by the guarantor in favourof the borrower. The waiver of rights to contribution or subrogation isusually reached by an agreement between a third party and a debtor beforeit can be enforced in a loan agreement. In the absence of any agreement tothat effect, rights of subrogation or contribution will not be deemed to havebeen waived.

3.8 Briefly outline the registration requirements, if any, applicable tosecurity interests created in this jurisdiction, including any practicalconsiderations such as the timing, expense and the consequencesof non-registration?There are different laws guiding different transactions relating to therespective securities. Consequently, registration requirements of thosesecurities differ from one to another. For instance, under the Registrationof Titles Law in Lagos State (Lagos State is the commercial hub of Nigeria),registration requirements for legal mortgages on real property include: (i)obtaining the Governor’s consent; (ii) payment of stamp duties; (iii)registering the mortgage instrument at the state land registry; and (iv) wherethe mortgagor is a company, registering the mortgage at the CAC within90 days of creation.

It is also important to note that, depending on the type of security involved,registration with other regulatory agencies may be required. For instance,in a mortgage transaction where the security is a vessel, the mortgage mustbe registered with the Nigerian Maritime Administration and Safety Agency.Also, mortgage transactions on securities of quoted public limitedcompanies are required to be registered with the Securities and ExchangeCommission.

3.9 Briefly outline any regulatory or similar consents that arerequired to create security (other than board/shareholderapprovals)?See 3.1 and 3.8.

3.10 Briefly explain the rules governing the priority of competingsecurity interests.The basic principle guiding priority of competing security interests is thatthe competing interests rank according to their creations. Therefore, anearlier security interest has priority over a later security interest. In securitiesinvolving real property, the priority lies with the interest that has beenperfected over the interest which has not been perfected. Where there aretwo interests that have not been perfected, the first in time ranks in priority.


4.1 Briefly explain the downstream, upstream and cross-streamguarantees available, with reference to any particular restrictions orlimitations. Are there any techniques typically used to enhancecredit support/guarantees that might otherwise be limited?There is no law in Nigeria prohibiting downstream, upstream and cross-stream guarantees. These guarantees may be in the form of letters of credit,performance bonds and payment guarantees (popularly called bankguarantees) and advance payment guarantees. Lenders generally accept suchguarantees subject to certain factors, including the acceptable financial statusof the guarantor, the nature and duration of the facility, the nature and valueof security furnished by the borrower being guaranteed. Such guarantees areenhanced where the guarantor executes a mortgage or debenture over itsassets as co-obligor to the borrower’s facility.

4.2 What regulatory or other consents are required to grantdownstream, upstream and cross-stream guarantees (other thanboard/shareholder approvals)?No other consents are required under the provisions of the Company’sMemorandum and Articles of Association. Where the security provided bythe guarantor is real property, the consent of the governor of the state wherethe land is situated is required (see 3.8).

4.3 Briefly, outline any enforceability concerns associated with thegranting of downstream, upstream and cross-stream guaranteesthat lenders should be aware of (eg any exchange controls orsimilar obstacles).Enforceability of a guarantee only becomes difficult where the guaranteehas no mortgage or lien. To guard against this, the lender usually requiresthat specific assets be charged under a mortgage with the guarantor actingas co-obligor to the borrower.


5.1 Do the local courts generally recognise and enforce foreign-lawgoverned contracts?There is no provision under Nigerian Law which prohibits the enforceabilityof a contract governed by any foreign law. The position of Nigerian courtsis that parties are at liberty to select the laws which they wish to govern theircontract, and if they choose a foreign law, it will be enforced by the courts.

NIGERIA


5.2 Will the local courts generally recognise and enforce a foreignjudgment that is given against a domestic company in foreigncourts (particularly the New York or English courts) without re-examining the merits of the decision?Nigerian courts will generally recognise and enforce a foreign judgment(including those from New York or English courts), even if the judgment isagainst a domestic company, as long as it is from a country that accordsreciprocal treatment to judgments given in Nigeria.

The only ground upon which a Nigerian court may have cause to re-examine on merits and so set aside a foreign judgment on the applicationof the defendant (judgment debtor) is if the court is satisfied that: (i) therewas no fair hearing; (ii) that the courts of the country of the original courthad no jurisdiction in the circumstances of the case; (iii) that the judgmentwas obtained by fraud; (iv) that the enforcement of the judgment would becontrary to public policy in Nigeria; and (v) that the rights under thejudgment are not vested in the person by whom the application forregistration was made.

5.3 Will the local courts recognise and enforce an arbitral awardgiven against the company without re-examining the merits of thedecision?Nigeria is a signatory to and has ratified the 1958 New York Conventionon the Recognition and Enforcement of Foreign Arbitral Awards, and hasthrough the Arbitration and Conciliation Act 2004 (Arbitration Act)incorporated it as part of Nigerian Law. Arbitral awards made by arecognised international arbitration will be recognised and enforced byNigerian courts, subject to the provisions of the Arbitration Act.

A Nigerian court may re-examine or refuse to recognise or enforce any awardin accordance with the provision of the Arbitration Act.

5.4 When enforcing security, what factors significantly impact thetime such enforcement takes and the value of the proceedsreceived from such enforcement? For example, are there anystatutory requirements such as (a) holding a public auction; (b)court involvement; or (c) obtaining regulatory consents?The enforcement procedure in this regard depends entirely on the natureof the security or class of asset. Where such enforcement requires a courtorder, the time the enforcement may take depends on the schedule of thecourt and readiness of parties.

5.5 Are there any restrictions that apply specifically to foreignlenders when taking enforcement action?There are no restrictions on enforcement action on loans by secured foreignlenders, provided a foreign lender has taken an adequate security for theloan, and other legal formalities of a loan agreement are satisfied to ensurethat the loan is legal and enforceable.


6.1 Briefly, outline the main bankruptcy/insolvency processes inthis jurisdiction, including any control or influence that creditorscan exert on the process, the timeframes usually involved and anymandatory filing requirements.The insolvency processes in Nigeria are carried out through winding-upproceedings initiated by the courts or winding up under the supervision ofthe courts. The bankruptcy processes as provided for under the BankruptcyAct are carried out by the creditor where he serves a bankruptcy note on thedebtor after obtaining a court judgment or by the debtor where he files anotice in court of his inability to pay his debts. The creditor can exert controlon the bankruptcy or insolvency processes by simply initiating the processof bankruptcy or insolvency in court. The creditor can also exercise the rightof lien on the debtor’s property. The timeframe for bankruptcy or insolvencydepends mostly on the schedule of the court and the readiness of the parties.Mandatory filings with the CAC after the completion of the process arerequired for companies.

6.2 Are there any preference, fraudulent conveyance, claw-back,hardening periods or similar issues or preferential creditor rightsthat lenders should be aware of?The law protects the interest of the lender where it appears that there hasbeen a fraudulent conveyance of the borrower’s property which has beenused as security for the loan. The lender may apply to court on the groundthat payment by fraudulent preference has been made, to determine anypayment issues arising between the person to whom the payment was madeand the guarantor, and to grant relief. With respect to claw-back, hardeningperiods or similar issues, the lender may apply to court if it appears that anyof the borrower’s business has been carried out in a reckless manner or withintent to defraud the lenders. The court may declare that any person whowas knowingly party to carrying on the business in such a way will bepersonally responsible, without any limitation of liability for all or any ofthe debts or other liabilities of the borrower, as the court may direct. Afloating charge created on the property of a borrower within three monthsof commencement of winding up is invalid; a lender’s right to claw-back is,however, protected if proven that cash was paid to the company at the timeof creation.

6.3 Do bankruptcy/insolvency processes provide for any kind ofstay/moratorium on enforcement of lender claims? If so, does thestay/moratorium apply to the enforcement of security interests?Yes. Section 412 of the Companies and Allied Matters Act allows a lenderto apply to the court for an order staying winding-up proceedings. The courtmay, with or without imposing terms, stay or restrain winding-upproceedings or, if it thinks fit, refer the case to the court hearing the windingup petition.

The moment the court grants an order staying the winding-up proceedings,the lender may, subject to the terms imposed by the court, apply to enforcesecurity interests.



7.1 Are there any restrictions in place on locally incorporatedcompanies in assisting the acquisition of shares in itself, its sistercompanies or in its holding companies? Do these prohibitionsapply to all forms of company, to companies being acquired whichare incorporated outside this jurisdiction and indirect holdingcompanies?Companies are not allowed to provide financial support to a third party forthe purpose of purchasing the company’s shares, shares in sister companiesor its holding companies.

7.2 Are there any exceptions to these restrictions and/or are thereany structuring techniques that can be used to achieve targetcollateral support?A company may acquire its own shares only for the purpose of: (i) fulfillingthe terms of a non-assignable agreement under which the company has anoption or is obliged to purchase shares owned by an officer or an employeeof the company; (ii) settling or compromising a claim against the company;(iii) eliminating fractional shares; (iv) complying with a court order; or (v)satisfying the claim of a dissenting shareholder.

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About the authorQudus Mumuney is a lead member of the dispute resolutiondepartment of RouQ & Company, a leading commercial law firmestablished in Lagos, Nigeria. His passion is rooted in corporate practiceand commercial dispute resolution, particularly as it relates tocommercial negotiation, commercial mediation and commerciallitigation.

Mumuney has acted on complex litigation matters in various courts inNigeria, including superior courts. He has also represented severalmultinational clients on commercial mediation and commercialnegotiation. He is a member of the Institute of Chartered Mediatorsand Conciliators (ICMC), the Institute of Strategic Management,Nigeria (ISMN), and a student member of the Institute of CharteredSecretaries and Administrators of Nigeria (ICSAN). He has undertakenseveral courses on negotiation and dispute resolution at Harvard LawSchool, the United States Institute of Peace (USIP) and the PeaceOperations Training Institute (POTI).

Qudus MumuneyLegal practitioner, RouQ & Company

Lagos, NigeriaT: +234-1-2801263; +234-8024923662E: [email protected]: www.rouqandco.org

About the authorOlanrewaju Fagbohun is a professor with the Nigerian Institute ofAdvanced Legal Studies, and a partner at RouQ & Company. Hispractice, research writing and teaching has, over the last 26 years,focused on corporate and M&A, financial services regulation andenvironment and regulatory law. He has served as consultant and taskleader for corporate bodies and public institutions within Nigeria,multinational clients, the European Commission and international lawfirms. Fagbohun has also served as expert witness in trans-bordertransactions. He is a regular speaker at programmes organised by theInternational Bar Association and the Association of CommonwealthLawyers. He is a national consultant to the Federal Government ofNigeria on biodiversity in the Niger Delta, and a member of thePresidential Task Force on Climate Change Justice and Human Rightsof the International Bar Association.

Olanrewaju FagbohunPrincipal partner, RouQ & Company

Lagos, NigeriaT: +234-1-2801263; +234-8034020086E: [email protected]: www.rouqandco.org


1.1 What licences or approvals do lenders need to have if lendingto a borrower in this jurisdiction if a) the lender is a bank or b) thelender is a not a bank?Moneylending is regulated by various statutes depending on the person pro-viding the funds. The business of moneylending is prohibited under theMoneylenders Act (Chapter 61) of Singapore (MA) unless one is licensedunder the MA, an ’excluded moneylender‘, or exempted from the MA re-quirements.

Banks with a valid licence issued by the Monetary Authority of Singapore(MAS) or approved as a merchant bank under the MAS Act (Chapter 186)of Singapore are examples of such ‘excluded moneylenders’ and would re-quire no additional licences or approvals to lend money.

However, for an interest-bearing loan where the lender is not a bank, theissue is whether any of the MA exceptions apply. If it cannot be establishedon the facts that the statutory exceptions apply, an MA exemption or MAlicence is required.

1.2 Are any exemptions available and/or are any techniquestypically used to structure around such requirements?As indicated above, where the lender is not a bank licensed by the MAS orapproved as a merchant bank, to conduct the business of moneylending thelender will need to either: (i) fall within one of the statutory exceptionsunder the MA; (ii) obtain an MA exemption; or (iii) obtain an MA licence.

Alternative financing structures include the issuance of bonds and notes,the issuance of convertible and redeemable shares and (where the lender isa related company) the provision of shareholder loans. There has also beena rise in the use of crowd-financing in the past year. However, these struc-tures are not within the scope of this article and the comments below areon the basis that the financing structure used is a traditional bank-lendingstructure.

Section 2 – Taxes

2.1 Are there any requirements to make deductions or withhold taxfrom payments made to domestic or foreign lenders in thisjurisdiction? Are any techniques typically used to structure aroundsuch requirements?Yes. Generally, Singapore withholding tax would be applicable to interestpayments made to non-Singapore tax resident lenders. Such withholdingtax can be reduced or exempted under an applicable double tax treaty. Pay-ments of interest to Singapore tax resident lenders and Singapore branchlenders would not be subject to Singapore withholding tax.

2.2 Is interest on debt tax deductible for borrowers incorporated inthis jurisdiction?Interest expenses can be tax deductible provided that they are related to in-come-producing assets.

2.3 Are there any thin capitalisation rules in effect in thisjurisdiction which would impact the amount of debt that can beborrowed/guaranteed by entities incorporated there?No, there are no thin capitalisation rules.

2.4 Are there any other important tax concerns that lenders toborrowers incorporated in this jurisdiction should be aware of?There is a withholding tax exemption regime known as the qualifying debtsecurities (QDS) scheme in Singapore. Under the QDS scheme, interestpayments made by borrowers on notes issued to non-Singapore tax residentnote-holders can qualify for exemption from Singapore withholding tax,provided certain conditions are met.



a) SharesSecurity can be taken over both scrip and scripless shares in a Singapore-in-corporated company.

For scrip shares, this would be a contractual agreement (usually by deed)for a legal or equitable charge. A legal charge involves an outright sharetransfer and registration of the shares in the chargee’s name. An equitablecharge sees the shares remaining in the chargor’s name and perfected by thedelivery of the relevant original share certificates and the share transfer forms(executed in blank) to the chargee.

A security interest in scripless shares may be created by way of statutory orcommon-law security. A statutory security (an assignment or charge) overscripless shares is created through compliance with the provisions of theCompanies Act (Chapter 50) of Singapore (CA) and regulations and via theexecution of statutorily-prescribed forms. The statutory assignment orcharge takes effect when the central depository transfers the securities or en-dorses the charge in the register respectively. A common law security overscripless shares is also recognised (with limitations) in the CA regulations.Notice of the charge and assignment should be given by the chargor to thedepository agent and acknowledged by the depository agent.

Stamp duty of up to a maximum of S$500 ($400) is imposed by the InlandRevenue Authority of Singapore (IRAS) on security documents relating tostocks and shares.

b) Bank accountsA charge can be taken over bank accounts; these are contractual agreements,usually by deed. To better protect the chargee’s interest in the deposits, suchaccount charge is often coupled with an assignment (with an express or im-plied right for re-assignment) of all the chargor’s present and future rights,title and interest in and to the account. Notice of the charge and assignmentto the relevant bank should be given.

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Singapore

Susan Wong, Kay Kheng Tan and Sui Tong Chua of WongPartnership

www.wongpartnership.com

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c) Receivables Security over receivables is usually taken via an assignment of the rights topayment of the receivables or rights under the contract giving rise to suchpayment. Notice of such assignment is required to be given to perfect theassignment.

d) Contractual rightsWhen contracts are identifiable and of particular importance, specific as-signments over the contractual rights are often given. Often, such assign-ment would be of all the assignor’s present and future rights, titles andinterests in and to the relevant contracts, including all moneys received byor payable to the assignor under or in connection with the contracts. Otherthan perfection, a notice of such assignment coupled with a request for ac-knowledgement from the counterparty can serve to impose important lim-itations on the counterparty to the contract.

e) Insurance policiesIt is possible to create security over insurance policies by way of an assign-ment of those policies and insurance proceeds. This would be a contractualagreement with no formal requirement as to the form. Notice of such as-signment is required to be given to perfect the assignment.

f) Real propertyFor land, charges or mortgages of land (whether legal or equitable) can becreated. The formalities depend on whether the land is registered or unreg-istered land and whether separate title has been issued.

In the case of registered land, the form of mortgage or charge is prescribedunder subsidiary legislation and registration is via e-lodgement. For unreg-istered land, the mortgage must be by way of deed in the English languageand can be registered at the land registry manually.

Equitable mortgages may be created via the deposit of title deeds coupledwith a memorandum of deposit or, in respect of a part of land where separatetitle has not yet been issued, an assignment of the rights, title and interestunder the relevant contract (such as a sale agreement) coupled with a mort-gage-in-escrow.

Stamp duty of up to a maximum of S$500 ($400) is imposed by the IRASon security documents relating to immovable property.

g) Plant and machineryA charge may be created over specific plant, machinery, equipment andother movables; this would be a contractual agreement, usually by deed.

h) Intellectual propertyIt is possible to take security over intellectual property rights (IPR). Thismay be by way of an assignment and licence-back, charge, or mortgage ofthe IPR, and may be contained in a specific security document or in a gen-eral debenture. The nature of the underlying IPR will often affect the char-gor’s choice of security interest, and also determines the relevant registrationand legal formalities to be complied with. For example, registrable IPRssuch as trade marks and patents will require recordals of the security interestwith the Intellectual Property Office of Singapore, in addition to registra-tions of the security interest otherwise required at general law.

i) Debt securitiesDebt securities are typically issued either in bearer form or registered form.Such securities are often deposited in the Singapore clearing system, theCentral Depository (Pte) Ltd (CDP).

Where such debt securities are deposited with the CDP, the creation of statu-tory and common law security as described in paragraph a) with respect toshares would similarly apply.

With respect to registered bonds, the transfer of such bonds is effected uponregistration of the new holder in the relevant register of bondholders. Again,the manner of creation of security over registered bonds should not differfrom that of scrip shares as described in paragraph a).

Different considerations apply for the creation of security over the debt se-curities of the Government of Singapore, as such actions will be governedby the Government Securities Act (Chapter 121A) of Singapore.

j) Future/after acquired propertyA debenture incorporating fixed and floating charges can be taken over allthe present and future assets and undertakings of a Singapore-incorporatedcompany. Where specific charges over the categories of assets listed aboveare to be taken, these may usually be crafted to also cover future or after-ac-quired property falling within the category of assets charged. This is partic-ularly common for charges taken over bank accounts, charges taken overshares and dividends and assignments of receivables and contractual rights.

3.2 Highlight any issues with securing obligations that may arise inthe future.The main issue is the extent to which the underlying assets have to be, andcan be, identified. The precise identification of the asset at the time theagreement for security is entered into is not required. However, it must bepossible to identify such assets when they come into existence and the secu-rity is to be enforced.

3.3 Can a universal security agreement be used to grant securityover all assets in this jurisdiction?It is possible for security to be taken over all present and future assets in asingle document which is usually referred to as a debenture.

In practice, a debenture is usually used in tandem with other asset-specificsecurity documents as there may be particular registration formalities, per-fection requirements and undertakings for specific classes of assets. The rel-evant security document will then legislate for such asset-specificrequirements and provisions (such as security taken over real property inSingapore will usually be governed by a mortgage). Where the scope of thedebenture covers assets which are subject to particular security or registrationregimes (for example, real property), the relevant registration formalities,perfection and other requirements will still need to be complied with. Seeparagraph 3.1.

The security interests created by a debenture usually incorporate fixed andfloating charges. Where certain assets are secured only by a floating chargein the debenture, creditors will need to be aware of the comparative issuesand weaknesses in taking a floating charge instead of a fixed charge.

3.4 Can security be granted for the benefit of different classes ofcreditors under the same security agreement and if so, are thereany issues that creditors should be aware of in adopting thisapproach?Yes, the same security agreement may be used to grant security interests forthe benefit of different classes of creditors. In practice, the security documentwill usually provide that the distribution of proceeds from the realisation ofthe security is governed by an intercreditor agreement which regulates thepriorities, positions and rights of the different classes of creditors in relationto the security. In such a case, it is also common to use a security trustee orsecurity agent structure.

The key issues considered in the intercreditor arrangement in relation to se-curity are priorities in enforcement rights, priorities to the proceeds of se-curity and other issues relevant to security sharing arrangements betweenthe different classes of creditors. The intercreditor agreement will usuallyalso provide for the subordination of and impose other restrictions on thejunior class of creditors.

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3.5 Can security trustee or security agent structures be used in thisjurisdiction to secure obligations that are owed to fluctuatingcreditor classes?Such structures may be used in Singapore to secure obligations that are owedto a group of potentially fluctuating creditors.

3.6 Briefly outline any issues to consider when transferring loansand accompanying security interests between lenders.Interests in loans and accompanying security interests are mostly transferablebetween lenders, commonly via sub-participation, novation and assignment.Some of the key issues which arise in the context of such transfers are:

• the rules for consensual assignment of a security interest and the formal-ities involved depend on the nature of the asset constituting the security.For example, when security over land needs to be transferred to the newsecurity agent or security trustee, the relevant prescribed forms for trans-fers or mortgages, or for charges, will have to be adopted; and,

• the formalities involved with a transfer of security by novation, for ex-ample, the need for consideration. Perfection of the novated security isalso important, as there has been discussion that a new security interestis created on novation.

3.7 Can security be granted by third parties? Are there any rights ofcontribution, subrogation or similar that might arise as a result ofgranting/enforcing third party security that ought to be/can bewaived?Third-party security can be granted. Upon the enforcement of such security,the security provider usually acquires certain rights unless such rights areexpressly excluded or limited. A right of indemnity against the primaryobligor may arise via an express agreement, but more commonly by impli-cation; a right of contribution from any co-surety arises whenever a third-party security provider has paid more than its rateable share of a debt; and,a right of subrogation arises once the principal debt or obligation is satisfied,permitting a guarantor the right to stand in the shoes of the creditor in en-forcing the debtor’s principal obligation as well as any ancillary rights.

3.8 Briefly outline the registration requirements, if any, applicable tosecurity interests created in this jurisdiction, including any practicalconsiderations such as the timing, expense and the consequencesof non-registration?The registration requirements depend on the entity creating the securityand the underlying security asset.

For a Singapore-incorporated company, registration at the Accounting andCorporate Regulatory Authority (ACRA) of charges created over certainasset classes is required, failing which such charges will be void against theliquidator and any creditor of the company. Where registration is required,a statement containing particulars of the charge would need to be filed withACRA within 30 days of the creation of the charge.

Similarly, a foreign company registered in Singapore must register chargescreated over the same asset classes in Singapore. If a foreign company hadcharges over property in Singapore before the company was registered lo-cally, it would be required to register these existing charges within 30 daysof the registration.

Certain asset classes, particularly asset classes where title to such asset is en-tered into a register (such as land, ships, aircraft, scripless shares, intellectualproperty), will have specific registration requirements depending on theform of security being created. Some of the registration requirements havebeen highlighted in paragraph 3.1.

3.9 Briefly outline any regulatory or similar consents that arerequired to create security (other than board/shareholderapprovals)?Due diligence is typically conducted to determine what consents are re-quired to create security over the subject assets of a Singapore-incorporatedcompany. There are various types of consent which may be required, for ex-ample, governmental and third-party consents.

• In the case of a charge or mortgage of land, regulatory and governmentalconsents and approvals may be required for the creation of such security,depending on the type of properties involved. For example, where theproperty is held under a lease from a statutory board such as the JurongTown Corporation (JTC), unless the relevant parameters set out in theJTC’s circular dated September 8 2008 are satisfied, JTC’s prior writtenconsent to the creation of the mortgage is required.

• In the case of third-party consents, the relevant contracts of the companywill also have to be examined to determine if the company is contractu-ally prohibited from granting security over its assets.

3.10 Briefly explain the rules governing the priority of competingsecurity interests.The rules governing the priority of competing security interests depend onthe security interest in question, but generally:

• the law of property applies and a person cannot transfer a better titlethan he himself possesses (the nemo dat rule);

• a legal charge prevails over an equitable charge unless the equitable chargewas created first and the legal chargee had notice of the equitable charge;

• between two equitable charges, the first in time prevails where equitiesare equal; and,

• the priority of successive assignees is determined by the order in whichthe assignments are made, with the exception that an assignee will havepriority over the earlier assignee if, without notice of an earlier assign-ment, they are first to give notice of assignment to the debtor.

Further, as long as a charge which is registrable is registered within the req-uisite timeframe, priorities are unaffected solely by the order of registration.


4.1 Briefly explain the downstream, upstream and cross-streamguarantees available, with reference to any particular restrictions orlimitations. Are there any techniques typically used to enhancecredit support/guarantees that might otherwise be limited?Generally, such guarantees may be issued, subject to due consideration ofthe requirement of commercial benefit (the giving of the guarantee has tobe in the guarantor’s commercial interests).

Downstream guarantees are least likely to present a corporate benefit prob-lem, it being usually self-evident that the parent benefits from guaranteeingthe obligations of its subsidiary. The assumption of corporate benefit be-comes weaker with upstream guarantees, with such assumptions being weak-est with cross-stream guarantees.

Where guarantees are taken, lenders may require other forms of credit sup-port by imposing financial covenants, negative pledges or non-disposal andsubordination undertakings. While these do not have the effect of security,such undertakings will provide some assurance to lenders through the preser-vation of the repayment capacity of, and protection against credit-adverseoccurrences afflicting, the relevant guarantor or obligor. These covenantsalso provide a form of early-warning system to the lenders, allowing pre-emptive steps to be taken to avert potential payment defaults.

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4.2 What regulatory or other consents are required to grantdownstream, upstream and cross-stream guarantees (other thanboard/shareholder approvals)?Aside from issues of financial assistance (which are discussed below), thelimitations imposed by section 163 of the CA need to be noted. Under sec-tion 163, it is unlawful for a company to make a loan or give a guarantee orsecurity for a loan to another company, if a director or directors of the first-mentioned company is or together are interested in 20% or more of thetotal number of equity shares in the other company (excluding treasuryshares). This prohibition also covers borrowing companies who are incor-porated outside Singapore and involves an expanded definition of interest(an interest of a member of a director’s family will be treated as the interestof the director for this purpose).

There are statutory exceptions to the above, notably, for dealings amongstrelated corporations and private exempt companies.

4.3 Briefly, outline any enforceability concerns associated with thegranting of downstream, upstream and cross-stream guaranteesthat lenders should be aware of (eg any exchange controls orsimilar obstacles).We are not aware of any additional enforceability concerns associated withsuch guarantees.


5.1 Do the local courts generally recognise and enforce foreign-lawgoverned contracts?Generally, yes.

5.2 Will the local courts generally recognise and enforce a foreignjudgment that is given against a domestic company in foreigncourts (particularly the New York or English courts) without re-examining the merits of the decision?Generally, yes. Under Singapore law, foreign judgments may be enforced

either by action under the common law, or through registration if the judg-ment is from a court designated under specific statutes. Under either process,provided certain conditions are fulfilled, the local courts generally will notre-examine the merits of the foreign judgment.

5.3 Will the local courts recognise and enforce an arbitral awardgiven against the company without re-examining the merits of thedecision?Generally, yes. The Singapore courts respect the autonomy of arbitral pro-ceedings and consistently follow a policy of upholding the finality of arbitralawards.

5.4 When enforcing security, what factors significantly impact thetime such enforcement takes and the value of the proceedsreceived from such enforcement? For example, are there anystatutory requirements such as (a) holding a public auction; (b)court involvement; or (c) obtaining regulatory consents?The Singapore legal system is very effective in enforcing secured propertyrights. Secured lenders can usually enforce their security without court in-volvement or the need for regulatory consents. More time and expense maybe incurred if some form of court proceeding is necessary. The commence-ment of formal insolvency proceedings may also in certain circumstancesimpact on the enforcement process (see below).

5.5 Are there any restrictions that apply specifically to foreignlenders when taking enforcement action?No. But a plaintiff in Singapore court proceedings who is ordinarily residentoutside of Singapore may in some cases be ordered by the Singapore courtsto provide security for a defendant’s legal costs.


6.1 Briefly, outline the main bankruptcy/insolvency processes inthis jurisdiction, including any control or influence that creditorscan exert on the process, the timeframes usually involved and anymandatory filing requirements.There are three types of insolvency procedure under Singapore law: schemesof arrangement; judicial management; and liquidation. These are brieflyoutlined below.

A scheme of arrangement is a statutory framework that is intended to facil-itate the compromise of creditor claims. To initiate the statutory process, acourt order must first be obtained for permission to convene a creditors’meeting. The scheme becomes binding on all creditors if it is approved atthe court-ordered meeting by the requisite majority of each creditor class (asimple majority in number and 75% in value) and subsequently confirmedby the court. This process allows dissenting creditors to be crammed down.In terms of timeframes, an application for permission to convene a creditors’meeting is usually heard by the Singapore courts within three to four weeksof filing. Subsequent timeframes can vary significantly depending on factorssuch as the complexity of the scheme.

Judicial management is a court-supervised corporate rescue proceeding. Thecourt may appoint a judicial manager upon the application of the companyor a creditor if it is satisfied that judicial management is likely to result inthe survival of the company or its business, the approval of a restructuringplan, or a more advantageous realisation of the company’s assets than wouldresult in a liquidation. The judicial manager’s role is to replace managementand to propose a rescue process to the creditors after assessing the company’sfinancial position and prospects. A judicial management order remains inforce for 180 days, but it may be extended at the judicial manager’s request.

An insolvent company can be liquidated either through a court-orderedcompulsory liquidation or a voluntary liquidation. A creditor can initiatecompulsory liquidation proceedings through a court application on thegrounds of the company’s insolvency. The creditor nominates a liquidatorand the court usually accedes to this nomination. A liquidation order canbe obtained quite quickly in cases where the company is clearly insolvent.A voluntary liquidation is initiated by the company’s directors, but the cred-itors have the right to choose the liquidator. In both types of liquidation,the general body of creditors can compel the appointment of a committeeof inspection to oversee and supervise the liquidator. The liquidator’s role isto dispose of the company’s assets and apply the resulting proceeds in theorder of priority mandated by law. There is no statutory time limit for thecompletion of a liquidation under Singapore law.

6.2 Are there any preference, fraudulent conveyance, claw-back,hardening periods or similar issues or preferential creditor rightsthat lenders should be aware of?Singapore’s insolvency laws allow a liquidator and a judicial manager of aninsolvent company to apply to court to set aside past transactions whichconstitute either a transaction at an undervalue or an unfair preference. Atransaction at an undervalue is one where the company receives significantlyless consideration than what it had provided, while an unfair preference isone which is intended to and has the effect of putting a creditor in a betterposition than it would have been in otherwise in the event of the company’sliquidation. The relevant claw-back periods for an undervalue transactionand an unfair preference are respectively five years and six months beforethe commencement of liquidation. Where an unfair preference is given toa creditor who is the company’s associate (a broadly defined term), the hard-ening period is extended to two years before the liquidation date.

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A floating charge created within six months of the commencement of liq-uidation is void unless it can be shown that the company was solvent at thetime the charge was created. However, if cash was advanced to the companywhen the charge was created or subsequently, the charge is valid to coverthat amount together with interest at five percent per annum.

Secured lenders generally have priority over all other claims against a debtorin a liquidation. Certain debts have priority over a floating charge holderand unsecured creditors. These debts in order of priority are the costs andexpenses of the winding up, employees’ remuneration and other paymentsdue to employees, and all taxes assessed before the date of commencementof winding up or assessed at any time before the expiration of the time fixedfor the proving of debts.

6.3 Do bankruptcy/insolvency processes provide for any kind ofstay/moratorium on enforcement of lender claims? If so, does thestay/moratorium apply to the enforcement of security interests?Yes, in certain circumstances.

The commencement of judicial management proceedings brings into effecta broad moratorium on the enforcement of creditor claims without leave ofcourt. This moratorium extends to taking any steps to enforce security aswell as the commencement or continuation of any legal proceedings.

Upon commencement of liquidation proceedings, no legal proceedings maybe commenced or continued against the company except with leave of court.This, however, does not affect a secured creditor’s right to enforce securityout of court.

Where a company has proposed a scheme of arrangement to its creditors, itmay also apply for a court order restraining further court proceedings (in-cluding court proceedings to enforce security).



7.1 Are there any restrictions in place on locally incorporatedcompanies in assisting the acquisition of shares in itself, its sistercompanies or in its holding companies? Do these prohibitionsapply to all forms of company, to companies being acquired whichare incorporated outside this jurisdiction and indirect holdingcompanies?Except as expressly provided by the CA, a Singapore-incorporated companymay not give financial assistance to any person, whether directly or indi-rectly, for the purpose of the acquisition or proposed acquisition of shares(or units of such shares) in the company or its holding company.

Financial assistance in the CA is very widely defined and includes the givingof financial assistance by means of the making of a loan, the giving of a guar-antee, the provision of security, the release of an obligation or the release ofa debt or otherwise.

7.2 Are there any exceptions to these restrictions and/or are thereany structuring techniques that can be used to achieve targetcollateral support?A Singapore-incorporated company may not provide any financial assistanceunless it has completed one of the three statutorily-prescribed whitewashprocedures.

There are also statutory exceptions to the prohibition against financial as-sistance, for instance, the payment of dividends by the company in goodfaith and in the ordinary course of commercial dealing and a payment madepursuant to a reduction of capital authorised under the CA.

Section 8 – Market developments and deal trends

8.1 Briefly outline any developments within cross-border financingin your jurisdiction over the past 12 months. These can includegeneral market changes or deal trends. 2013 saw increasing volume of cross-border financing, especially in acqui-sition and real estate investment trust financing. Particularly, 2013 saw oneof the largest acquisition finance deals in the Singapore market to date – amulti-billion dollar financing to finance the mandatory conditional cashoffer by TCC Assets (an investment company of a Thailand-based group)for Fraser and Neave, which is the largest mergers and acquisitions transac-tion in Southeast Asia’s corporate history.

2013 also saw strong lending to real estate investment trusts in Singapore,with many keen to take advantage of low interest rates in Singapore. Therewas an unprecedented volume of issuance of perpetual bonds, with compa-nies keen to raise funds with no set maturity (although momentum hasslowed since), and also the uptake of Islamic financing structures with theincrease in Islamic funds (for example, Islamic assets under managementhave increased fourfold over the past five years) and the further developmentof Islamic finance structures, both by MAS and financial institutions in Sin-gapore.

In terms of future development, cross-border financing is set to expand withthe announcement of new initiatives to boost offshore renminbi loans fromSingapore banks. Such initiatives include the offering of an overnight ren-minbi liquidity facility by MAS to complement the existing liquidity facil-ities offered, and the introduction of measures to relax restrictions oncross-border renminbi financing from Singapore banks in key industrialareas. MAS is also keen to develop regional cooperation for project and in-frastructure financing in the Asia-Pacific region by identifying infrastructureneeds and bankable projects within the region.

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About the authorSusan Wong heads the financial services group and the banking andfinance practice. She has extensive experience in banking and financework covering local and international loan and other debt-relatedtransactions, including project, acquisition, real estate, asset and Islamicfinancing, sub-participations, securitisations, sale of loans andreceivables and security arrangements and documentation. Significant deals which Wong has more recently worked on include theS$2.1 billion ($1.7 billion) and S$1.2 billion financings relating to twomixed-use developments in Marina Bay, Singapore; the S$5 billionfinancing for the development of two integrated projects in downtownSingapore which are being jointly developed by the state-ownedinvestment companies of Singapore (Temasek Holdings) and Malaysia(Khazanah Nasional); and, the multi-billion dollar landmark financingfor the high-profile takeover offer for Fraser and Neave.

Susan WongPartner, WongPartnership

T: +65 6416 2402E: [email protected]: www.wongpartnership.com

About the authorKay Kheng Tan heads the firm’s tax practice and is also a partner in thelitigation and dispute resolution group. His areas of practice encompassboth contentious, and advisory and transactional work relating toincome tax, stamp duty, property tax and goods and services tax. Healso practises in the field of general litigation and arbitration.

Tan has acted for an insurance company in an income tax appeal beforethe High Court and Court of Appeal on whether insurance companiescan hold shares as long-term investments, so that gains, amounting toalmost S$100 million, from the disposal of such shares will not besubject to income tax. He worked on behalf of BFC Development, theowner of two office towers at the Marina Bay Financial Centre,Singapore, in its appeal to recover S$6.9 million in property taxrefunds.

Kay Kheng TanPartner, WongPartnership


About the authorSui Tong Chua is a partner in the banking and financial disputespractice. He focuses on banking and finance-related disputes, insolvencyand restructuring, and arbitration.

Significant matters which Chua has recently been involved in includeacting for a Thai public company in successfully overturning on appeala High Court decision which set aside for the first time an internationalarbitral award on the grounds that it was in conflict with the publicpolicy of Singapore; the Astro group of companies in an internationalarbitration in Singapore concerning a complex joint venture dispute,which culminated in awards of over $230 million in favour of Astro;and, a large Wall Street institution in relation to claims arising from theissuance of retail credit-linked notes.

Sui Tong ChuaPartner, WongPartnership



1.1 What licences or approvals do lenders need to have if lendingto a borrower in this jurisdiction if a) the lender is a bank or b) thelender is not a bank? In either case, no licence is required. However, prior approval must be ob-tained from the Financial Surveillance Department (FSD) of the SouthAfrican Reserve Bank (SARB) for a local borrower to borrow from a foreignentity.

1.2 Are any exemptions available and/or are any techniquestypically used to structure around such requirements?No.

Section 2 – Taxes

2.1 Are there any requirements to make deductions or withhold taxfrom payments made to domestic or foreign lenders in thisjurisdiction? Are any techniques typically used to structure aroundsuch requirements?There is no withholding tax on interest (WHT). However, a final WHT of15% will be introduced from January 1 2015, applying to interest paymentsmade from a South African source to non-residents, which are paid or be-come due and payable on or after that date. The legislation introducing theWHT contains certain exemptions, and South Africa is a party to manydouble taxation treaties that may provide full or partial relief (however, anti-avoidance rules must be considered).

2.2 Is interest on debt tax deductible for borrowers incorporated inthis jurisdiction?To qualify as a deduction, expenditure must be incurred in the productionof the income. For example, interest expenditure is generally not deductibleif the debt was used to purchase shares to earn dividends (because dividendsare generally exempt income for South African companies), whereas interestexpenditure incurred to acquire productive assets would generally be tax de-ductible. New rules allow limited deductions for interest expenditure in-curred to acquire shares (see section 2.4).

2.3 Are there any thin capitalisation rules in effect in thisjurisdiction which would impact the amount of debt that can beborrowed/ guaranteed by entities incorporated there?Yes. South Africa’s thin capitalisation rules previously provided for a safeharbour debt to equity ratio of 3:1, which is no longer applicable. The ac-ceptable amount of debt must now be determined on an arm’s length basis,being the lesser of the amount that could have been borrowed and theamount that would have been borrowed in a transaction between independ-ent persons. However, the South African Revenue Service will consider sev-eral factors in addition to the above general principle.

2.4 Are there any other important tax concerns that lenders toborrowers incorporated in this jurisdiction should be aware of?Tax deductions for interest incurred on certain acquisition and reorganisa-tion transactions may be limited in particular circumstances. Effective fromJanuary 1 2015, deductions of interest owed by resident debtors to creditorsthat are not subject to South African income tax will also be limited (seesection 2.1). South Africa’s Exchange Control regulations must also be con-sidered where any payments are made from South Africa to a non-resident.


3.1 Can security be taken over the following asset classes and whatdocumentation or formalities are required to create, perfect andmaintain such security?a) Sharesb) bank accountsc) receivables d) contractual rights e) insurance policiesf ) real propertyg) plant and machineryh) intellectual propertyi) debt securitiesj) future/after acquired propertyk) floating charges over all assets

Security over shares, bank accounts, receivables, contractual rights, insurancepolicies, debt securities and intellectual property rights can be created interms of a cession. A cession creates a valid security interest over these assetsby agreement between the creditor (the cessionary) and the debtor (the ce-dent) without any additional formalities. There are no perfection require-ments for a valid cession in security. Save for copyrights, security overintellectual property can also be created in terms of a deed of hypothecation.Such hypothecation must be in writing and lodged with the appropriateregistrar.

The only way to create valid security over immoveable property is by wayof a special mortgage of the immovable property. The special mortgage iscreated by way of a mortgage bond and is perfected by the mortgage bondbeing registered at the appropriate deeds registry office.

Security over moveable property can be created by a pledge, general notarialbond or special notarial bond. A pledge is an agreement entered into be-tween the debtor (the pledgor) and the creditor (the pledgee). For the pledgeto be valid and enforceable, the pledged asset must be delivered by the pled-gor to the pledgee.

A general notarial bond is a mortgage over all of the borrower’s movable as-sets and is perfected by registration at the applicable deeds registry. A specialnotarial bond is similar to a general notarial bond but has the additional re-quirement that it must specifically identify and describe the property securedin a manner which makes the property secured readily recognisable, for ex-ample, by reference to serial numbers or codes. A special notarial bond isperfected by registration of the bond at the applicable deeds registry.

3.2 Highlight any issues with securing obligations that may arise inthe future.

The liquidator of a company may elect not to perform the obligation of acompany that is being wound-up if the obligation constitutes an executorycontract.

3.3 Can a universal security agreement be used to grant securityover all assets in this jurisdiction?No. See section 3.1.

SOUTH AFRICA


South Africa

Ulrike Naumann and Jason Wilkinson of Bowman Gilfillan

www.bowman.co.za

SOUTH AFRICA


3.4 Can security be granted for the benefit of different classes ofcreditors under the same security agreement and if so, are thereany issues that creditors should be aware of in adopting thisapproach?No. In South Africa, the best way to grant the same security package for thebenefit of different classes of creditors in a transaction is by use of the secu-rity special purpose vehicle (SPV) structure (see section 3.5). This is usuallysupported by an inter-creditor agreement that sets out how the differentclasses of creditors may exercise their rights under the security.

3.5 Can security trustee or security agent structures be used in thisjurisdiction to secure obligations that are owed to fluctuatingcreditor classes?Under South African law, for security to be valid, the granter of the securitymust have a valid principal obligation towards the beneficiary of the security.This legal requirement is absent under the concept of the security trustee.

Further, the security trustee or agent structure is an inappropriate mecha-nism to hold security for a fluctuating creditor class where the obligationsare secured by mortgage bonds and notarial bonds. This is because section54 of the Deeds Registry Act makes it unlawful for any bond to be registeredin the name of any person acting as an agent for a principal.

This issue can be addressed by the creation of a parallel debt obligation,equal to the obligation owed to the lenders, between the borrower and thesecurity trustee. The security must then be granted in favour of the securitytrustee for the parallel debt obligation.

The other, more common, solution to the issue of fluctuating creditor classesin secured lending transactions is the use of an SPV to house the securityprovided for the benefit of the lenders. In terms of this arrangement, a se-curity SPV is established to grant the lenders a guarantee for the obligationsof the borrower. This guarantee creates a primary obligation on the securitySPV to pay the lenders on demand on occurrence of a default. The securitySPV is indemnified by the borrower against any claims from the lenders interms of the guarantee. The borrower secures this indemnity with securityinterests in its various assets as agreed with the lenders.

3.6 Briefly outline any issues to consider when transferring loansand accompanying security interests between lenders.When syndicating or transferring a secured loan, the lender’s rights to thesecurity package are transferred by a cession in security of the rights. If abond forms part of the security, then such cession must be registered at theappropriate deeds registry.

If the loan is sold down or transferred in parts, then it is important that theborrower’s prior consent be obtained, as partial selling down would resultin the splitting of claims, which is not permitted under South African law.The only way to avoid this issue and facilitate the syndication of loans is toensure that the loan agreement provides for this from the outset of the trans-action.

The above considerations are not an issue where the security SPV structureis used to house the security for the loan being transferred, because the doc-umentation for this structure generally provides that the guarantee issuedby the security SPV is granted to the lenders (or other debt holders), in-cluding any transferees.

3.7 Can security be granted by third parties? Are there any rights ofcontribution, subrogation or similar that might arise as a result ofgranting/enforcing third party security that ought to be/can bewaived?Yes, security can be granted by a third party. It should be noted that sincethe third party’s obligations are only accessory in nature, the lender can onlyenforce this security upon a default of the principal obligation.

3.8 Briefly outline the registration requirements, if any, applicable tosecurity interests created in this jurisdiction, including any practicalconsiderations such as the timing, expense and the consequencesof non-registration?Please refer to section 3.1 for details on the registration requirements appli-cable to certain security interests. The registration fees payable to the relevantregistrars are nominal and non-prohibitive. Fees (prescribed by tariff ) arealso payable for the preparation of the bonds. Assuming there are no exam-ination delays in the relevant deeds office, registration normally takes twoweeks from the date of lodgement.

3.9 Briefly outline any regulatory or similar consents that arerequired to create security (other than board/shareholderapprovals).An application for exchange control approval must be submitted to the FSD,by a local bank that is registered as an authorised dealer, on behalf of thecompany providing the security for the loan in favour of a foreign lender.This process takes approximately six weeks from the date of application.

In addition, other than the registration requirements of certain forms of se-curity, the creation of security over certain assets needs to comply with lawsthat govern and restrict the taking of security over them, for example takingsecurity over mineral rights or taking security over shares in entities thatown gaming or insurance licences.

3.10 Briefly explain the rules governing the priority of competingsecurity interests.When a situation of competing security interests in the same asset arises,the general rule governing priority is timing – a security interest properlygranted over an asset first in time takes preference over the security interestgranted over the same asset later in time.


4.1 Briefly explain the downstream, upstream and cross-streamguarantees available, with reference to any particular restrictions orlimitations. Are there any techniques typically used to enhancecredit support/guarantees that might otherwise be limited?Guarantees are commonly used in loan transactions to create an obligationon the guarantor that is usually a company related or inter-related to theborrower. The provision of a guarantee constitutes financial assistance whichis subject to the relevant provisions (section 44 and 45) of the CompaniesAct 2008 and that company’s constitutional documents.

Sections 44 and 45 regulate all financial assistance provided by a companyand require the appropriate board and shareholders resolutions to be passedfor such financial assistance to be valid.

4.2 What regulatory or other consents are required to grantdownstream, upstream and cross-stream guarantees (other thanboard/shareholder approvals)? The prior approval of the FSD is required in connection with any guaranteegiven by a local entity in favour of a non-resident entity or for the obligationsof a non-resident entity.

4.3 Briefly, outline any enforceability concerns associated with thegranting of downstream, upstream and cross-stream guaranteesthat lenders should be aware of (eg any exchange controls orsimilar obstacles).See section 5.5.

SOUTH AFRICA



5.1 Do the local courts generally recognise and enforce foreign-lawgoverned contracts?Provided that a South African court has jurisdiction over the contractualdispute in question, it will generally recognise and enforce a foreign-lawgoverned contract if that law can be ascertained readily and with sufficientcertainty.

5.2 Will the local courts generally recognise and enforce a foreignjudgment that is given against a domestic company in foreigncourts (particularly the New York or English courts) without re-examining the merits of the decision?South African courts will enforce a foreign judgment without re-examiningthe merits of the decision if the judgment satisfies certain requirements.These requirements include that: i) the judgment is final and conclusive; ii)the foreign court must have had international jurisdiction or competenceto decide the case; and, iii) the recognition and enforcement of the judgmentmust not be against public policy. The enforcement of certain judgmentswill require the consent of the Minister of Trade and Industry, whose consentis rarely withheld.

5.3 Will the local courts recognise and enforce an arbitral awardgiven against the company without re-examining the merits of thedecision?In terms of the Recognition and Enforcement of Foreign Arbitral AwardsAct 1977, any foreign arbitral award may be made an order by a SouthAfrican court without a re-examination of the merits. The Act prescribesthe grounds upon which such an application may be refused by a court.

5.4 When enforcing security, what factors significantly impact thetime such enforcement takes and the value of the proceedsreceived from such enforcement? For example, are there anystatutory requirements such as (a) holding a public auction; (b)court involvement; or (c) obtaining regulatory consents?This will depend on the asset which is subject to the security. Regulatoryapprovals are generally required in relation to the enforcement of securityover assets or entities which are subject to such regulation. For instance, achange of control of an entity holding a mining right or a gaming licenceas a result of the enforcement of a cession and pledge of shares, will entailobtaining prior approval from the relevant authorities. Court involvementor public auctions are generally not required.

5.5 Are there any restrictions that apply specifically to foreignlenders when taking enforcement action?A foreign lender must obtain the approval of the FSD before the transaction.At the time of enforcement, any resultant extraction of cash by the foreignlender is facilitated by an authorised dealer on the basis of the prior approvalof the FSD for the transaction.


6.1 Briefly, outline the main bankruptcy/insolvency processes inthis jurisdiction, including any control or influence that creditorscan exert on the process, the timeframes usually involved and anymandatory filing requirements.A company in financial difficulty can be put into liquidation or, alterna-tively, the company can commence an informal reorganisation or a formalreorganisation (business rescue or a scheme of compromise).

Creditors can initiate liquidation or business rescue, but cannot initiate ascheme of compromise or an informal reorganisation without the company’sco-operation.

6.2 Are there any preference, fraudulent conveyance, claw-back,hardening periods or similar issues or preferential creditor rightsthat lenders should be aware of?A liquidator is entitled to recover from any third party any assets of the com-pany that were disposed of before liquidation to third parties, including theshareholders and directors, in circumstances that constitute impeachabletransactions as contemplated in the Insolvency Act 1936. These claw-backsand preferences are not available in business rescue.

There are no general hardening periods but, when a special notarial bondor a mortgage bond is passed over assets or real estate to secure a previouslyunsecured debt, which was unsecured for at least two months before theregistration of the notarial bond or mortgage bond, and the debtor is liqui-dated within six months of the registration of the notarial bond or mortgagebond, no preference is recognised under the notarial bond or mortgagebond. Effectively, the creditor loses their security.

6.3 Do bankruptcy/insolvency processes provide for any kind ofmoratorium on enforcement of lender claims? If so, does themoratorium apply to the enforcement of security interests?A liquidation initiates a moratorium on all claims including the enforcementof security that lasts until three weeks after the first meeting of creditors.Similarly, a business rescue initiates this moratorium for the duration of thebusiness rescue (which could be between three to 18 months). There is nomoratorium in an informal reorganisation or scheme of compromise, whichleaves the company vulnerable to creditor actions or security enforcementduring the proceedings.



7.1 Are there any restrictions in place on locally incorporatedcompanies in assisting the acquisition of shares in itself, its sistercompanies or in its holding companies? Do these prohibitionsapply to all forms of company, to companies being acquired whichare incorporated outside this jurisdiction and indirect holdingcompanies?Yes. See section 4.1 and note the requirement for an FSD approval wherethe financial assistance or security is given in favour of a non-resident or inconnection with the obligations of a non-resident.

7.2 Are there any exceptions to these restrictions and/or are thereany structuring techniques that can be used to achieve targetcollateral support?No.

SOUTH AFRICA


About the authorUlrike Naumann is a partner and head of finance in the banking andfinance department at Bowman Gilfillan. She has considerableexperience acting for lenders, borrowers and financial advisers inrelation to the full range of finance transactions, with an emphasis oncross-border acquisition finance, complicated debt restructuring,secured and syndicated lending, structured finance and preference sharefunding transactions.

Naumann also has significant experience in capital markets transactionsin the South African and offshore markets, and she advises on fundformation and other private equity related work.

Naumann has a BCL from the University of Oxford, and an LLB andBCom (both cum laude) from the University of Stellenbosch. She hasworked and lived in South Africa, England and Germany and is fluentin English, Afrikaans and German.

Ulrike NaumannPartner and head of finance practicegroup, Bowman Gilfillan

Johannesburg, South AfricaT: +27 11 669 9377E: [email protected]: www.bowman.co.za

About the author

Jason Wilkinson is a partner in Bowman Gilfillan’s banking and financedepartment, specialising in leveraged finance (senior, second lien,mezzanine, high-yield and payment-in-kind), acquisition finance,structured finance, debt capital markets, margin loan financing, debtrestructurings and general banking and finance transactions.

Wilkinson has represented many of the leading US, European andAfrican financial institutions, private equity sponsors, investment fundsand international corporations on some of the largest transactions inrecent years. He has advised and worked extensively in the London,New York, Moscow, Paris, Hong Kong and South African financialmarkets.

Wilkinson has an LPC and CPE (London), and an LLB and BA in lawand history from Rhodes University. He was admitted as a solicitor ofthe Senior Courts of England and Wales in 2005.

Jason WilkinsonPartner, Bowman Gilfillan

Johannesburg, South AfricaT: +27 11 669 9423E: [email protected]: www.bowman.co.za


1.1 What licences or approvals do lenders need to have if lendingto a borrower in this jurisdiction if a) the lender is a bank or b) thelender is not a bank?Any entity wishing to engage in the lending business in Korea must be ap-propriately licensed. Foreign banks and non-banking institutions are re-quired to obtain a lending business licence under the Act on Registrationof Lending Businesses and Protection of Finance Customers. Whether anentity should be viewed as being engaged in the business of lending requiresa factual analysis of the entity’s activities.

1.2 Are any exemptions available and/or are any techniquestypically used to structure around such requirements?No.

Section 2 – Taxes

2.1 Are there any requirements to make deductions or withhold taxfrom payments made to domestic or foreign lenders in thisjurisdiction? Are any techniques typically used to structure aroundsuch requirements.Interest paid to a domestic corporate lender is generally subject to Koreanwithholding tax at the rate of 14%. For a foreign lender (without a perma-nent establishment in Korea), the withholding tax rate is generally 22%,subject to reductions and exemptions that may be available under an appli-cable tax treaty.

Interest on foreign currency denominated bonds issued outside of Koreapaid to a foreign company without a permanent establishment in Korea isexempt from corporate income tax (but not local income tax). As such, theissuance of bonds may be an alternative source of financing if withholdingtax is a concern.

2.2 Is interest on debt tax deductible for borrowers incorporated inthis jurisdiction?Yes.

2.3 Are there any thin capitalisation rules in effect in thisjurisdiction which would impact the amount of debt that can beborrowed/guaranteed by entities incorporated there?There are thin capitalisation rules for: (i) borrowings from certain foreign-controlled shareholders (FCS); or (ii) borrowings from unrelated third par-ties that are guaranteed by an FCS.

If a Korean company borrows from (i) its FCS or, (ii) an unrelated thirdparty with a guarantee (including grant of security) from the FCS in anamount exceeding 300% (600%, in the case of financial institutions) of itsequity, interest on the excess (x) of the amount of such borrowings over (y)300% (or 600%, as the case may be) of such equity will not be tax-de-ductible.

2.4 Are there any other important tax concerns that lenders toborrowers incorporated in this jurisdiction should be aware of?In order to claim a reduced withholding tax rate under a tax treaty, a foreignlender should provide the withholding agent (usually the borrower) with anapplication for reduced tax rate before receiving payment of such income.



Depending on the type of assets offered as collateral, one of the followingthree types of security interest may be created: mortgage; pledge; or yangdodambo (an assignment for security purposes). There is also a newly-legislatedsecurity regime under the Act on Security Over Movables and Receivableswhich came into force in June 2012, which provides an alternative meansfor creating security interests in movable properties and receivables (otherthan intellectual property).

To create and perfect a mortgage, the mortgagor and the mortgagee mustexecute a mortgage agreement and register the mortgage with the relevantregistry.

To create and perfect a pledge: (i) the pledgor and the pledgee must enterinto a pledge agreement; (ii) the pledgee must have actual (or deemed) pos-session of the collateral; and (iii) in the case of a pledge of chae-kwon, a no-tice of pledge is given to, or the consent to pledge is obtained from, theobligor. Notices and consents must be affixed with a fixed-date stamp. Thereis no registration requirement for creation or perfection of a pledge.

Yangdo dambo is a type of security constituted by way of transferring legaltitle to the collateral to the creditor for security purposes. This form of se-curity is a non-statutory right which has developed through custom and isnow recognised by Korean courts as a valid form of security. There is noregistration requirement for the creation or perfection of yangdo dambo.

In order to create a valid yangdo dambo security interest, the transferor andthe transferee must enter into a yangdo dambo agreement. The perfection ofyangdo dambo is the same as for a pledge, except that constructive possessionis allowed in the case of yangdo dambo.

a) SharesSecurity over shares may be taken by way of pledge or yangdo dambo.

b) Bank accountsSecurity over cash deposits is usually created by way of pledge of bank ac-counts.

In order to perfect the pledge, a fixed-date stamped notice of the pledge issent by the pledgor to the account bank, or the account bank provides afixed-date stamped consent to such pledge.

SOUTH KOREA


South Korea

Hyun Ju Helen Pak and Tae-Sung Jeong of Shin & Kim

www.shinkim.com

SOUTH KOREA


c) ReceivablesReceivables constitute a right or claims against third parties (chae-kwon).Either a pledge or yangdo dambo may be created with respect to receivables.

d) Contractual rightsSee c), but usually yangdo dambo is taken with respect to contractual rights.

e) Insurance policiesSee c).

f) Real propertySecurity over real property is constituted by a mortgage. A mortgage of realproperty is perfected by filing the mortgage with the relevant real estate reg-istry.

g) Plant and machinerySecurity over plants and equipment may be taken by way of a comprehensivefactory mortgage (gongjang jeodang). This type of mortgage creates a securityinterest in all of the real property, the plant (including fixtures) and equip-ment constituting a factory property as set out in the registered list.

h) Intellectual propertySecurity interests in patent, trade mark and design rights and copyrightsmay be effected by way of pledge. Pledges over patent, trade mark and designrights are registered with the Korea Intellectual Property Office for perfec-tion; a pledge of copyright is registered with the Copyright Commission ofKorea.

i) Debt securitiesSee a).

j) Future/after acquired propertySecurity interests may be granted in future or after acquired property, butperfection can only be achieved once the pledgor actually obtains title tosuch property.

k) floating charges over all assetsNot possible under Korean law.

3.2 Highlight any issues with securing obligations that may arise inthe future.As a general rule, Korean law allows obligations that may arise in the futureto be secured only if such obligations can be identified with a degree ofspecificity.

3.3 Can a universal security agreement be used to grant securityover all assets in this jurisdiction?No.

3.4 Can security be granted for the benefit of different classes ofcreditors under the same security agreement and if so, are thereany issues that creditors should be aware of in adopting thisapproach?Yes. Please note that the priority of security interests is determined by orderof perfection. If the security interest is to be perfected at the same for allclasses of creditors, the security agreement should contractually set out thepriority of security interest among the classes.

3.5 Can security trustee or security agent structures be used in thisjurisdiction to secure obligations that are owed to fluctuatingcreditor classes?The generally accepted view in Korea is that a parallel debt structure maybe used to provide for such arrangement. Under such structure, the debtowing to the security agent or trustee must be established as an independentand separate obligation owed by the debtor to such person, apart from itsobligations to the creditor classes.

3.6 Briefly outline any issues to consider when transferring loansand accompanying security interests between lenders.In the event that a parallel debt structure is not used, the relevant securityagreements will need to be amended to reflect any change in secured par-ties.

3.7 Can security be granted by third parties? Are there any rights ofcontribution, subrogation or similar that might arise as a result ofgranting/enforcing third party security that ought to be/can bewaived?Security can be granted by a third party. The third party has contributionand subrogation rights against a borrower after the third party security isenforced. Such rights may be waived.

3.8 Briefly outline the registration requirements, if any, applicable tosecurity interests created in this jurisdiction, including any practicalconsiderations such as the timing, expense and the consequencesof non-registration?Registration is required for security interests in registrable assets such as realproperty.

Time and expense associated with registration depend on the type of assetsconcerned. For instance, the major cost associated with establishing a mort-gage over real property is registration tax, which is 0.2% of the maximumsecured amount.

3.9 Briefly outline any regulatory or similar consents that arerequired to create security (other than board/shareholderapprovals)?Loans and certain other transactions between a non-resident and a residentrequire a filing of a report under the Foreign Exchange Transactions Act.

3.10 Briefly explain the rules governing the priority of competingsecurity interests.The priority of competing security interests is determined by order of per-fection. For mortgages, the date of registration will determine priority. Inthe case of a pledge or yangdo dambo, priority is determined in the order ofthe date a notice or consent with fixed date stamp is given or obtained.


4.1 Briefly explain the downstream, upstream and cross-streamguarantees available, with reference to any particular restrictions orlimitations. Are there any techniques typically used to enhancecredit support/guarantees that might otherwise be limited?In general, a company is restricted from providing a guarantee to an affiliatewithout receiving a corporate benefit. Further, if a company is a member ofa Korean conglomerate which falls within a ’designated corporate group‘under the Monopoly Regulation and Fair Trade Act (Monopoly Act), it isprohibited from providing any type of downstream, upstream or cross-stream guarantees to another group member.

SOUTH KOREA


4.2 What regulatory or other consents are required to grantdownstream, upstream and cross-stream guarantees (other thanboard/shareholder approvals)?The granting of such guarantees does not itself require governmental ap-proval or consents.

4.3 Briefly, outline any enforceability concerns associated with thegranting of downstream, upstream and cross-stream guaranteesthat lenders should be aware of (eg any exchange controls orsimilar obstacles).Other than the restrictions discussed above, none.


5.1 Do the local courts generally recognise and enforce foreign-lawgoverned contracts?Yes, except with respect to certain matters that require application of themandatory laws of Korea.

5.2 Will the local courts generally recognise and enforce a foreignjudgment that is given against a domestic company in foreigncourts (particularly the New York or English courts) without re-examining the merits of the decision?The Korean courts will enforce a judgment without re-examining the meritsof the case if the following factors are satisfied:

• such judgment was finally and conclusively given by a court with validjurisdiction;

• a defendant, who has lost a case, received service of process, other thanby publication or similar means, in sufficient time to enable such partyto prepare its defence in conformity with the laws of the relevant foreignjurisdiction (or in conformity with the laws of Korea, if service of processwas made on the defendant in Korea) or responded to the action withoutbeing served with process;

• such judgment is not contrary to the public policy of Korea; and,

• (i) judgments of the courts of Korea are accorded reciprocal treatmentunder the laws of the relevant foreign jurisdiction, or (ii) judgments ofthe Korean courts in the relevant foreign jurisdiction are not treated ina manner which is considerably prejudicial to their recognition and theirtreatment is substantially the same as treatment by the Korean courts ofthe judgments obtained in the foreign jurisdiction in material respects.

5.3 Will the local courts recognise and enforce an arbitral awardgiven against the company without re-examining the merits of thedecision?If the country where the seat of the arbitration lies is a signatory to theUnited Nations Convention on the Recognition and Enforcement of Arbi-tral Awards (the New York Convention), the award will be recognised andenforced so long as it meets the requirements under the New York Conven-tion.

If the New York Convention does not apply, the Civil Procedures Code ofKorea regulates the recognition and enforcement of foreign court decisions.

5.4 When enforcing security, what factors significantly impact thetime such enforcement takes and the value of the proceedsreceived from such enforcement? For example, are there anystatutory requirements such as (a) holding a public auction; (b)court involvement; or (c) obtaining regulatory consents?A secured creditor is not prescribed by law to enforce its security interest inany particular manner and may elect from remedies specified in the relevantsecurity agreement.

5.5 Are there any restrictions that apply specifically to foreignlenders when taking enforcement action?No.


6.1 Briefly, outline the main bankruptcy/insolvency processes inthis jurisdiction, including any control or influence that creditorscan exert on the process, the timeframes usually involved and anymandatory filing requirements.The Debtor Rehabilitation and Bankruptcy Act (Act) provides for bank-ruptcy proceedings and corporate rehabilitation proceedings.

A bankruptcy proceeding may be initiated by the insolvent debtor, any di-rector of the debtor company or the creditors of the debtor. The adjudica-tion of bankruptcy is usually made within one month of filing of abankruptcy petition.

A corporate rehabilitation proceeding may be initiated by any creditor thatholds claims of an aggregate amount that is at least 10% of the debtor’sstated capital or by any shareholder controlling 10% or more of the totalissued and outstanding shares of the debtor.

Upon commencement of the rehabilitation proceeding, there is a statutorilyprescribed period during which: (i) creditors may object to the list of cred-itors and claims filed by the receiver by filing a proof of claim; (ii) the re-ceiver and other interested parties may dispute claims filed by a creditor;and (iii) a creditor may file for a review of claim and initiate a claim al-lowance proceeding.

The rehabilitation plan is generally prepared and submitted to the court bythe receiver. The plan must be approved by each group of interested persons(secured creditors, unsecured creditors and shareholders). Once the plan isratified by interested persons, the court makes a determination as to whetherthe plan should be accepted.

6.2 Are there any preference, fraudulent conveyance, claw-back,hardening periods or similar issues or preferential creditor rightsthat lenders should be aware of?The Act allows a trustee or a receiver in insolvency proceedings to avoid orset aside transactions that are deemed to harm the interests of the creditors.Also, under the Korean Civil Code, creditors may raise fraudulent con-veyance claims regardless of a commencement of bankruptcy or rehabilita-tion proceedings.

6.3 Do bankruptcy/insolvency processes provide for any kind ofstay/moratorium on enforcement of lender claims? If so, does thestay/moratorium apply to the enforcement of security interests?Secured creditors remain free to exercise their security interests in a bank-ruptcy proceeding. In a corporate rehabilitation proceeding, however, cred-itors may be stayed from exercising their creditors’ rights, includingenforcement of security interests.

SOUTH KOREA




7.1 Are there any restrictions in place on locally incorporatedcompanies in assisting the acquisition of shares in itself, its sistercompanies or in its holding companies? Do these prohibitionsapply to all forms of company, to companies being acquired whichare incorporated outside this jurisdiction and indirect holdingcompanies?A company may acquire its own shares up to an amount equal to its dis-tributable income. Accordingly, a company may assist such acquisition tothe extent it has distributable income.

A company may not acquire shares in its parent company (a company whichowns at least 50% of the shares in the subsidiary). If a company is a memberof a certain designated Korean conglomerate under the Monopoly Act, thecompany may not acquire the shares in its sister companies or holding com-panies that already own shares in the company.

7.2 Are there any exceptions to these restrictions and/or are thereany structuring techniques that can be used to achieve targetcollateral support?Certain structuring techniques, such as the merger of target and acquisitioncompanies, may be employed depending on the facts underlying a financing.However, Korean laws relating to financial assistance are generally strictlyapplied, and a careful consideration of the overall circumstances of the fi-nancing is necessary in using any structuring technique.

About the authorHyun Ju Helen Pak is a partner and a senior foreign attorney of Shin &Kim. She has extensive experience in international project and corporatefinance transactions and has advised major financial institutions andcorporations in a wide range of banking and corporate transactions. Herclients have included JP Morgan Chase, Citigroup, Standard CharteredFirst Bank Korea, the National Pension Service of Korea, the KoreaExport-Import Bank, the Korea Trade Insurance Corporation, the KoreaDevelopment Bank, POSCO Engineering & Construction andPOSCO Energy.

Pak began her practice at the New York offices of Simpson Thatcher &Bartlett in 1987 and joined Shin & Kim in 1992. From 1996 to 2001,she was with Simpson Thacher & Bartlett in Hong Kong. She returnedto Korea in 2003 and became a partner with Horizon Law Group,rejoining Shin & Kim’s finance department in 2007.

Hyun Ju Helen PakSenior Foreign Attorney, Shin & Kim

Seoul, South KoreaT: +82 2 316 4212F: +82 2 756 6226E: [email protected]: www.shinkim.com

About the authorTae-Sung Jeong is a partner at Shin & Kim in the finance department.He advises clients in all areas of banking and corporate financetransactions, including acquisition financing and domestic and cross-border securities offerings. Jeong also has extensive experience inadvising on mergers and acquisitions involving financial institutions.He has been with Shin & Kim since 2006.

Tae-Sung JeongPartner, Shin & Kim

Seoul, South KoreaT: +82 2 316 4228F: +82 2 756 6226E: [email protected]: www.shinkim.com

SWITZERLAND



1.1 What licences or approvals do lenders need to have if lendingto a borrower in this jurisdiction if a) the lender is a bank or b) thelender is a not a bank?No licences or approvals are required to make commercial loans.

1.2 Are any exemptions available and/or are any techniquestypically used to structure around such requirements?Not applicable.

Section 2 – Taxes

2.1 Are there any requirements to make deductions or withhold taxfrom payments made to domestic or foreign lenders in thisjurisdiction? Are any techniques typically used to structure aroundsuch requirements.While interest paid on a loan granted to a Swiss non-bank is generally freefrom taxes, interest payments may become subject to 35% Swiss withhold-ing tax if the loan qualifies as a bond for Swiss withholding tax purposes.

According to the prevailing practice of the Swiss Federal Tax Administration,a loan qualifies as a bond for withholding tax purposes if: (i) the aggregatenumber of non-bank lenders (including sub-participations) to a Swiss entityunder a facility agreement with identical terms exceeds 10; or, (ii) the ag-gregate number of non-bank lenders (including sub-participations) to aSwiss entity under various facility agreements (that is, with varying terms)exceeds 20.

Swiss or foreign banks do not count as non-banks. Therefore, these rulesare referred to as the 10 and 20 Non-Bank Rules. Also, intra-group lenders,in general, do not count as creditors under these rules.

Typically-employed mitigations are used:

• to restrict the number of non-bank lenders in the facility agreement toa maximum of 10, or to subject the accession of any (additional) non-bank lenders to the facility agreement to the previous approval of theborrower(s); and,

• to oblige any Swiss borrower in the facility agreement to limit the num-ber of its non-bank lenders to a maximum of 20 at any time.

2.2 Is interest on debt tax deductible for borrowers incorporated inyour jurisdiction?For corporate borrowers in Switzerland, interest on debt is tax deductible,provided that there is a legitimate business reason for such interest paymentand, if applicable, interest payments to a related party are at arm’s length.Further, interest paid or accrued in connection with hidden equity may notbe tax deductible (see section 2.3).

2.3 Are there any thin capitalisation rules in effect in thisjurisdiction which would impact the amount of debt that can beborrowed/guaranteed by entities incorporated there?The Swiss thin capitalisation rules restrict the amount of debt raised fromrelated parties as well as the interest paid on it. Debt raised from independ-ent third parties is not restricted, provided that the debt is not guaranteedby related parties; but such debt reduces the amount of debt that may beraised from related parties.

Any excess debt from related parties is considered so-called hidden equity,which is subject to Swiss capital tax. Interest paid or accrued on loanamounts qualifying as hidden equity is, in general, not tax-deductible. Inaddition, such non-deductible interest is considered a deemed dividend dis-tribution, which is subject to 35% Swiss withholding tax.

2.4 Are there any other important tax concerns that lenders toborrowers incorporated in this jurisdiction should be aware of?Swiss income taxes at source (Quellensteuer) may become due on interestpayments secured by Swiss real estate. If so, a Swiss borrower would have towithhold the source taxes from the gross interest payments on the part ofthe loan which is secured by Swiss real estate. The applicable combined taxrate would be in the range of 13% and 33%, depending on the domicile ofthe Swiss borrower. However, many double taxation treaties provide thatthe applicable tax rate is reduced (for example, for lenders in the US, theUK, Germany, Ireland or Luxembourg, which can rely on a double taxationtreaty with Switzerland, the applicable tax rate is reduced to nil). However,particularly if there is no Swiss borrower or the interest is not paid to thelender but to a third party, an advance tax ruling should be obtained fromthe competent Swiss tax authorities to ensure that no income taxes at sourcebecome due.

The Swiss Federal Tax Administration may treat a loan which falls underthe 10 and 20 Non-Bank Rules and which is guaranteed by a Swiss entity,as a bond issued by the Swiss guarantor, if the funds borrowed under theloan agreement are on-lent to Switzerland. Consequently, interest paid onsuch a loan may become subject to 35% Swiss withholding tax. Upstreamand cross-stream guarantees in favour of the foreign issuer will not usuallytrigger Swiss withholding tax, but this should be discussed with the SwissFederal Tax Administration and it is advised to obtain a tax ruling beforeimplementing the proposed structure.



Security can be granted over the assets listed above under a security agree-ment for each type of asset at issue (subject to the perfection requirementsset out below).

In order to perfect and maintain a pledge over shares (or other movable ob-jects), the security trustee needs to be in possession of the pledged movableobjects during the security period (Faustpfandprinzip). As a consequence ofthis requirement, security over plants, machinery, equipment or inventoryis possible, but is usually not taken.

Switzerland

Daniel Hayek and Alexander Flink of Prager Dreifuss

www.prager-dreifuss.com

SWITZERLAND


An assignment of bank account balances and receivables is valid without anotification to the debtors. However, before such a notification, bona fidepayments by the debtors to the assignor will release the debtors from theirpayment obligations. A pledge of bank account balances and receivables isalso possible, but lenders usually prefer assignments.

The assignment of an insurance policy requires the handing-over of the pol-icy to the security agent and a written notification to the insurer.

Security taken over real estate that serves primarily as living accommodationand in certain cases of assignment or pledge of mortgage, certificates maybe limited. There are formalities, which must be observed, but the qualityof the security is usually worth the extra effort.

The assignment or a pledge of IP rights may provide additional security.However, since a pledge or a security assignment of trade marks and designsmay only be invoked against a non-bona fide third party, registration is ad-vised.

Perfection of Swiss security is usually subject to the transfer of title or pos-session. Therefore, subsequently-acquired property will generally require anamendment of the existing security document, with the exception of the as-signment of future bank account balances and receivables.

Floating charges are not available in Switzerland.

It should be noted that there are several ways to create security interest overintermediated securities. So far, this type of security is not very importantin the Swiss market. However, it may become more common in the futureto take security over intermediated security in safe keeping accounts by wayof a control agreement.

3.2 Highlight any issues with securing obligations that may arise inthe future.Generally none.

3.3 Can a universal security agreement be used to grant securityover all assets in this jurisdiction?In order to obtain security over all assets of a Swiss company, a combinationof a share pledge agreement and of security agreements over the company’sassets is required.

3.4 Can security be granted for the benefit of different classes ofcreditors under the same security agreement and if so, are thereany issues that creditors should be aware of in adopting thisapproach?Generally, this is possible. In case of a security assignment, the facilitiesagreement or the intercreditor agreement can provide for a waterfall thatmirrors the different classes of creditors. A pledge agreement can providefor a priority pledge for senior creditors and a lower-ranking pledge for mez-zanine creditors.

3.5 Can security trustee or security agent structures be used in thisjurisdiction to secure obligations that are owed to fluctuatingcreditor classes?Security trustee or security agent structures can be used to secure obligationsthat are owed to fluctuating creditor classes, provided that the security istaken by way of a security assignment.

Because of the principle of accession (Akzessorietätsprinzip), which is appli-cable to pledges, each of the secured parties would need to be a party to therelevant pledge agreement. In order to facilitate changes to the secured par-ties, the underlying pledge agreements frequently provide for parallel-debtstructures. However, the validity of pledges granted under a parallel-debtstructure is not court tested. Therefore, Swiss pledge agreements provide ad-ditionally that the secured parties – represented by the security agent or thesecurity trustee – are also parties to the agreement.

3.6 Briefly, outline any issues that need to be considered whentransferring loans and accompanying security interests betweenlenders.No transfer tax applies to the transfer of loan shares, but Swiss withholdingtax at 35% on interests may become due, if the number of non-bank lendersexceeds the 10 or 20 due to the transfer.

3.7 Can security be granted by third parties? Are there any rights ofcontribution, subrogation or similar that might arise as a result ofgranting/enforcing third party security that ought to be/can bewaived?Generally yes – to both questions. However, the significance of security pro-vided by third parties (that is companies, which are not members of the bor-rower’s group) is very limited.

3.8 Briefly, outline the registration requirements, if any, applicableto security interests in this jurisdiction including any practicalconsiderations such as the time or expense associated withregistration.Except for certain types of real estate securities, there are no registration re-quirements. However, since the assignment or pledge of intellectual propertyrights may not be invoked against a bona fide third party, registration is ad-vised.

3.9 Briefly outline any regulatory or similar consents that arerequired to create security (other than board/shareholderapprovals)?In the course of enforcement against Swiss real estate held by the securitygrantor or against the shares in a Swiss company, a confirmation of non-ap-plication of the relevant rules by the relevant Swiss authorities may be re-quired. Confirmation must be given as to the extent that excessive reservesof undeveloped land exist or that the property at issue is partly used for res-idential purposes, if foreign secured lenders were to take possession or if therelevant assets were to be sold to other persons domiciled abroad.

3.10 Briefly, explain the rules governing the priority of competingsecurity interests.Secured creditors rank before unsecured creditors to the extent that theirclaim is covered by the security. Creditors secured by a pledge will usuallytake priority according to the sequence in which their pledges have beenperfected. Generally, there can be no priority conflicts with regard to securityassignments, because the security grantor may not transfer more rights thanit is entitled to. However, if assigned assets were pledged, the pledge wouldusually take priority. General terms and conditions of banks usually containpledges and rights to set-off in their favour. If a Swiss bank account is as-signed or pledged to a third-party, the lenders should ensure that the localbank which holds the account waives its security rights. It should also benoted that Swiss liquidators might disregard relative subordination (subor-dination of a claim against specific senior debt) under the relevant financedocuments in the course of the insolvency proceedings of the securitygrantor. In a worst case scenario, creditors of senior debt would have to lit-igate against creditors of relatively subordinated debt. This issue can beavoided by using security trustee and security agent structures.

SWITZERLAND



4.1 Briefly explain the downstream, upstream and cross-streamguarantees available, with reference to any particular restrictions orlimitations. Are there any techniques typically used to enhancecredit support/guarantees that might otherwise be limited?Under Swiss law, upstream and cross-stream guarantee payments are con-sidered to be constructive dividends and they are therefore limited to theprofits and reserves freely available for distribution in the guarantor’s balancesheet. Swiss guarantor limitation language usually contains the obligationof the guarantor to maximise the available assets for distribution. In orderto enhance the proceeds from the guarantee, it is standard to combine aguarantee with a pledge over the shares in the Swiss guarantor. It shouldalso be noted that upstream and cross-stream guarantee payments are subjectto 35% withholding tax.

4.2 What regulatory or other consents are required for the grantingof downstream, upstream and cross-stream guarantees?None, but in recent years, the Swiss Federal Tax Authority has tended to re-quest that the Swiss company providing a guarantee to its parent companyreceives an appropriate remuneration for the guarantee (guarantee fee).

4.3 Briefly, outline any enforceability concerns associated with thegranting of downstream, upstream and cross-stream guaranteesthat lenders should be aware of (eg any exchange controls orsimilar obstacles.A Swiss guarantor’s articles of association should allow the company to grantsecurity within the group. If required, the necessary changes to the articlesof association can usually be made within two weeks.

Since upstream and cross-stream payments are considered as a distributionof dividends, the rules in connection with the distribution of dividends haveto be observed. This includes the preparation of an up-to-date balance sheetby the guarantor and an approval of the resulting distribution by the share-holders’ meeting.

In addition, dividend payments are subject to 35% Swiss withholding tax.Therefore, it is required to include language in the finance documents toaddress the issue.


5.1 Do the local courts generally recognise and enforce foreign-lawgoverned contracts?Yes.

5.2 Will the local courts generally recognise and enforce a foreignjudgment that is given against a domestic company in foreigncourts (particularly the New York or English courts) without re-examining the merits of the decision?Provided that the prerequisites for recognition and enforcement accordingto the Swiss Federal Code of Private International Law (for New York deci-sions) or, in the case of decisions by a Lugano Convention contracting state,according to the Lugano Convention (for English court decisions), are met,Swiss courts will not re-examine the merits of a foreign decision.

5.3 Will the local courts recognise and enforce an arbitral awardgiven against the company without re-examining the merits of thedecision?Yes, Swiss courts will recognise and enforce foreign arbitral awards underthe New York Convention without re-examining the merits of the case.

5.4 When enforcing security, what factors significantly impact thetime such enforcement takes and the value of the proceedsreceived from such enforcement? For example, are there anystatutory requirements such as (a) holding a public auction; (b)court involvement; or (c) obtaining regulatory consents?If the underlying security agreement is properly drafted, no public auction,court involvement or regulatory consents are required to enforce security.It may be agreed that the security is enforced by way of private sale or self-sale.

5.5 Are there any restrictions that apply specifically to foreignlenders when taking enforcement action?Generally no. However, the sale of Swiss real estate that is partly used forliving accommodation purposes is limited. This can result in additional en-forcement costs, because a split of ownership may be required.


6.1 Briefly, outline the main bankruptcy/insolvency processes inthis jurisdiction, including any control or influence that creditorscan exert on the process, the timeframes usually involved and anymandatory filing requirements.Swiss bankruptcy and reorganisation proceedings are generally governed bythe Swiss Debt Enforcement and Bankruptcy Law.

If a creditor initiates enforcement proceedings and the debtor, subject todebt collection under bankruptcy (companies), fails to pay the debt within20 days, the creditor can request that the judge declares the debtor bankrupt.During the bankruptcy proceedings, an inventory of the debtor’s assets isprepared and the creditors will be requested to file their claims. A scheduleof claims is drawn up. Creditors whose claims were not included or whowant to contest the admittance of other claims can file a claim within 20days after the schedule of claims is published. Once the schedule of claimsis final, the proceeds from the realisation of the company’s assets are distrib-uted among the creditors. It takes approximately one year until the scheduleof claims is published (it may also take longer than this, in case of complexbankruptcy scenarios). The overall duration of bankruptcy proceedings islonger than, for example, in the UK or the US. However, interim paymentsmay be made before the schedule of claims becomes final.

6.2 Are there any preference, fraudulent conveyance, claw-back,hardening periods or similar issues or preferential creditor rightsthat lenders should be aware of?Yes, the enforceability of any contract may be limited under the rules of theSwiss Debt Enforcement and Bankruptcy Act.

In particular, the following transactions may be fully or partially voidable:(i) transactions carried out during the year prior to the bankruptcy or in-solvency decree, in which the Swiss security grantor accepted to receive noconsideration at all or a consideration out of proportion to its own perform-ance; (ii) certain financially inadequate transactions, if carried out duringthe year prior to the bankruptcy or insolvency decree and if the Swiss secu-rity grantor was at the time of the transaction already insolvent; however,the transaction is not voided if the recipient proves to have been unawareof the security grantor’s insolvency; and, (iii) all transactions which the Swisssecurity grantor carried out during the five years prior to the bankruptcy orinsolvency decree with the apparent intention of disadvantaging its creditorsor of favouring certain of its creditors to the disadvantage of others.

Since January 1 2014, the burden of proof for preference claims accordingto (i) or (iii) above has been changed. Close third parties (for example, re-lated companies) will need to substantiate that they have not received anyundue advantages or did not know about the disadvantage.

SWITZERLAND


6.3 Do bankruptcy/insolvency processes provide for any kind ofstay/moratorium on enforcement of lender claims? If so, does thestay/moratorium apply to the enforcement of security interests?During a debt-restructuring moratorium, enforcement proceedings can nei-ther be initiated nor continued. However, enforcement proceedings for therealisation of collateral for claims secured by a mortgage of real estate maycontinue, but the property may not be realised during the moratorium. Inaddition, with the granting of the moratorium, interest ceases to accrueagainst the debtor for all unsecured claims, unless the composition agree-ment stipulates otherwise.



7.1 Are there any restrictions in place on locally incorporatedcompanies in assisting the acquisition of shares in itself, its sistercompanies or in its holding companies? Do these prohibitionsapply to all forms of company, to companies being acquired whichare incorporated outside this jurisdiction and indirect holdingcompanies?Apart from upstream and cross-stream limitations there are none.

7.2 Are there any exceptions to these restrictions? Are there anystructuring techniques that can be employed in order to achievetarget collateral support? Not applicable.

About the authorDaniel Hayek is a partner and member of the management committeeof Prager Dreifuss, an integrated law firm in Switzerland with a stronginternational focus. As the head of Prager Dreifuss’ corporate and M&Ateam, he specialises in mergers and acquisitions (mainly strategicbuyers), corporate finance, banking, restructuring and bankruptcyproceedings as well as general corporate matters. Together with histeam, Hayek advises business clients in all types of domestic and cross-border transactions and represents creditors, some of which are banks,hedge funds or other financial institutions, in insolvency andrestructuring proceedings. In these fields, he also represents clients incourt and before arbitrational tribunals. Lately, Hayek’s practice hasinvolved acquisitions of Swiss targets for major strategic buyers from avariety of industries, such as chemical, automotive, transport, as well ascomplex insolvency litigation matters.

Daniel Hayek Partner, Prager Dreifuss

Zurich, SwitzerlandT: +41 44 254 55 55 E: [email protected]: www.prager-dreifuss.com

About the authorAlexander Flink is a senior associate in the Zurich office of PragerDreifuss and member of the firm’s corporate and M&A team. Hefocuses mainly on restructuring transactions and financing. He hassignificant experience in representing lenders and borrowers in thenegotiation of credit facilities regarding leveraged finance and projectfinance, as well as in acquisition finance for private equity companiesand providers of senior and mezzanine debt. Flink’s recent practice hasinvolved the representation of major banks in domestic and cross-border transactions, including corporate finance and real estate andintellectual property transactions.

Alexander FlinkAssociate, Prager Dreifuss

Zurich, SwitzerlandT: +41 44 254 55 55 E: [email protected]: www.prager-dreifuss.com

UK



1.1 What licences or approvals do lenders need to have if lendingto a borrower in this jurisdiction if (a) the lender is a bank or (b) thelender is not a bank? No licences or approvals are generally required irrespective of whether ornot the lender is a bank. However, activities involving residential real estateand consumer lending (where the borrower is an individual, a sole trader, apartnership with no more than three partners or an unincorporated associ-ation) are subject to regulatory regimes.

1.2 Are any exemptions available and/or are any techniquestypically used to structure around such requirements?Depending on the nature of the arrangement, various exemptions are avail-able for consumer lending activities.

Section 2 – Taxes

2.1 Are there any requirements to make deductions or withhold taxfrom payments made to domestic or foreign lenders in thisjurisdiction? Are any techniques typically used to structure aroundsuch requirements?UK withholding tax of 20% is payable on interest payments made by a UKborrower (or the UK branch of a foreign borrower) where the loan has aterm of 12 months or more. However, no UK withholding tax is payable if,among other things, the interest is paid: (a) by a bank (in the ordinary courseof its business); (b) to a bank within the charge to UK corporation tax asregards the interest (including foreign tax resident banks lending through aUK office); (c) to a UK tax resident company; (d) to a foreign tax residentcompany operating through a permanent establishment in the UK whichtakes account of the interest in calculating its chargeable profits for UK taxpurposes; (e) to a partnership all of whose partners are companies within(c) or (d); or (f ) a building society.

As with many other jurisdictions, the UK has a network of double taxtreaties under which UK withholding tax may be eliminated or reduced onpayments of interest to entities resident in another contracting state.

2.2 Is interest on debt tax deductible for borrowers incorporated inthis jurisdiction? Generally yes, although exceptions may apply where the loan has equity-like features and to protect against avoidance. There is also a worldwide debtcap that may restrict the amount of interest which a UK tax-resident bor-rower can deduct from its taxable profits where it is part of a multi-nationalgroup. The cap depends on the amount of finance costs incurred across thewhole group, such that the borrower cannot claim a disproportionateamount of deduction in the UK.

2.3 Are there any thin capitalisation rules in effect in thisjurisdiction which would impact the amount of debt that can beborrowed/guaranteed by entities incorporated there?Generally no, provided the lender (and those with whom it is acting to-gether) do not control the borrower, and the lender and the borrower arenot under common control.

2.4 Are there any other important tax concerns that lenders toborrowers incorporated in this jurisdiction should be aware of?No.



Security can be taken over all the above asset classes. To create security, thesecurity agreement needs to be in the form of a deed. Other formalities mayapply which vary depending on the type of security taken and the assets se-cured. To ensure it is created properly, the floating charge will typically bedrafted to cover all the assets of the chargor and by reference to certain pro-visions of the Insolvency Act 1986.

In England and Wales, the main perfection requirement is registration ofthe security at the appropriate registries (see section 3.8). Where security istaken over bank accounts, receivables, contractual rights and insurance poli-cies, notice of the creation of that security is typically given to the relevantthird party. It is desirable to receive an acknowledgement of the notice fromthe third party. Where security is taken over shares, share certificates evi-dencing ownership and stock transfer forms executed in blank will typicallybe delivered to the secured party to enable an effective transfer of the shareson enforcement. Where security is taken over real property, it is commonfor the title deeds or land certificates relating to the real property to be de-livered to the secured party.

3.2 Highlight any issues with securing obligations that may arise inthe future.A security agreement can secure future obligations, provided those obliga-tions are identifiable at the time of entering into the original securityarrangements and it can be established that it was the contractual intentionof the parties for the security to cover both the original and future indebt-edness. If the original contractual effect was only to create security to coverindebtedness within particular parameters and the future obligations areoutside those parameters, those future obligations will not be secured by theoriginal security.

If the security is an all-monies security, it will secure all indebtedness owedto a bank from time to time. As the parties’ contractual intention at the out-set was for the security to cover all indebtedness, any future obligations willbe secured.

UK

Kirsty Thomson and Caroline Chapman of Linklaters

www.linklaters.com

UK


3.3 Can a universal security agreement be used to grant securityover all assets in this jurisdiction?Yes. The security agreement will identify the types of asset secured and mayinclude a floating charge over all the assets of the chargor.

3.4 Can security be granted for the benefit of different classes ofcreditors under the same security agreement and if so, are thereany issues that creditors should be aware of in adopting thisapproach? Yes, although subordination provisions determining priority between thedifferent classes of creditors would need to be set out either in the securityagreement or, more commonly, a separate intercreditor/subordination agree-ment.


3.6 Briefly outline any issues to consider when transferring loansand accompanying security interests between lenders.There are no particular issues in respect of English obligors and English law-governed agreements. The loan agreement will usually set out the loan trans-fer procedures, which may include a requirement to obtain consent. Issuesmay arise if there are foreign parties incorporated in a jurisdiction whichdoes not recognise the concept of a security trust or if security is not heldby a security trustee or agent.

3.7 Can security be granted by third parties? Are there any rights ofcontribution, subrogation or similar that might arise as a result ofgranting/enforcing third party security that ought to be/can bewaived? Yes. Rights of subrogation arise automatically under English law where athird party discharges the debt of another entity. In those circumstances,that third party will be subrogated to the claims of the creditor whose debtis discharged. Generally, rights of subrogation are regulated contractuallyby waiving the right, typically until all the underlying debt is discharged.

3.8 Briefly outline the registration requirements, if any, applicable tosecurity interests created in this jurisdiction, including any practicalconsiderations such as the timing, expense and the consequencesof non-registration?Subject to limited exceptions, security interests created by a company reg-istered in England and Wales, Scotland or Northern Ireland are required tobe registered at Companies House within 21 days, as of the day after thedate the security is created. In addition, certain types of assets may be reg-istrable on specialist registers, for example for real property, ships, aircraftand intellectual property.

Registration requires the completion of appropriate forms and payment ofa small fee. The consequences of failing to register the security agreement atCompanies House within 21 days are that the relevant charge will be voidagainst a liquidator, administrator or creditor of the company and the debtsecured by that security becomes immediately repayable.

3.9 Briefly outline any regulatory or similar consents that arerequired to create security (other than board/shareholderapprovals)?None, except that regulated entities may be subject to restrictions relatingto the solvency of the entity and the maintenance of adequate capital.

3.10 Briefly explain the rules governing the priority of competingsecurity interests.The rules of priority are complex but generally, priority under common lawwill be determined by the order of creating the security, other than: (a) sub-sequent legal security will rank above prior equitable security where theholder of the subsequent legal security has no notice of the prior equitablesecurity; (b) the giving of notice determines the order of priority of assign-ments; and (c) the grant of a subsequent fixed charge or mortgage takes pri-ority over a floating charge unless at the time the fixed charge is created, theholder of the fixed security has notice of the restriction on creating furthersecurity. Registration of the security at Companies House may be deemedto act as sufficient notice.

Priority can also be varied contractually among creditors. This is generallyachieved through provisions in the security agreement or the use of an in-tercreditor or subordination agreement.


4.1 Briefly explain the downstream, upstream and cross-streamguarantees available, with reference to any particular restrictions orlimitations. Are there any techniques typically used to enhancecredit support/guarantees that might otherwise be limited? An English limited liability company may provide downstream, upstreamand cross-stream guarantees, subject to the company having the power togive guarantees and the directors being authorised to exercise that powerand satisfying corporate benefit requirements. Many of the duties of direc-tors were codified under the Companies Act 2006. In particular, section172 of the Companies Act provides that directors have a duty to promotethe success of the company for the benefit of its members as a whole. Ascorporate benefit may be difficult to establish, it is usual practice for up-stream and cross-stream guarantees to be approved by a unanimous share-holder resolution of the company. In certain limited circumstances, theprohibition on financial assistance may apply (see section 7).

4.2 What regulatory or other consents are required to grantdownstream, upstream and cross-stream guarantees (other thanboard/shareholder approvals)? None, except that regulated entities may be subject to restrictions relatingto the solvency of the entity and the maintenance of adequate capital.

4.3 Briefly, outline any enforceability concerns associated with thegranting of downstream, upstream and cross-stream guaranteesthat lenders should be aware of (eg any exchange controls orsimilar obstacles). None, except for: (a) capacity and authorisation issues; (b) corporate benefitissues (see section 4.1); (c) insolvency issues (see section 6.2); and (d) theprohibition on financial assistance (see section 7). In addition, if amend-ments to the underlying obligation to which the guarantee relates are beingconsidered, thought should be given as to whether the amendments arewithin the general scope of what was contemplated under the original guar-antee.


5.1 Do the local courts generally recognise and enforce foreign-lawgoverned contracts? Subject to certain exceptions, an English court will generally recognise andenforce a foreign law governed contract provided the relevant foreign law ispleaded and proved as fact in accordance with English procedural and evi-dential rules.

UK


5.2 Will the local courts generally recognise and enforce a foreignjudgment that is given against a domestic company in foreigncourts (particularly the New York or English courts) without re-examining the merits of the decision?It depends on the jurisdiction rendering the foreign judgment. If the judg-ment is rendered by a court in a country which: (a) is a party to the relevantEuropean regulations or conventions, the judgment will be enforced in theEnglish courts in accordance with the terms of that regulation or conven-tion; (b) is not party to the relevant European regulations or conventionsbut has a bilateral treaty governing recognition and enforcement of judg-ments between that country and England or is covered by a relevant Englishstatute, the judgment will be recognised and enforced in England in accor-dance with the terms of that treaty or statute; or (c) is not party to the rel-evant European regulations or conventions and there is no bilateral treatyor relevant statute in place governing recognition and enforcement of judg-ments between that country and England, fresh proceedings will need to beissued in England with the judgment forming the basis of the claim. Sum-mary judgment is usually obtainable and the judgment may be enforced asa judgment of the English court, subject to it being final and for a definitesum of money. The court will refuse to give judgment where the originalcourt lacked jurisdiction according to English conflict of law rules, was ob-tained by fraud, is contrary to public policy or natural justice, is in respectof taxes or penalties or is an award of multiple damages.

5.3 Will the local courts recognise and enforce an arbitral awardgiven against the company without re-examining the merits of thedecision?If the seat of the arbitration is situated in a New York Convention country,an arbitral award should be recognised and enforced provided the companydoes not challenge enforcement and the English courts do not refuse en-forcement, in each case on the grounds set out in the New York Convention(or the UK Arbitration Act 1996, where the seat is in the UK).

5.4 When enforcing security, what factors significantly impact thetime such enforcement takes and the value of the proceedsreceived from such enforcement? For example, are there anystatutory requirements such as (a) holding a public auction; (b)court involvement; or (c) obtaining regulatory consents?Generally, a secured party is not required to hold a public auction, seek priorcourt approval or obtain regulatory consent to enforce its security althoughsome methods of enforcement, including the obtaining of a charging orderover securities or property, require an order of the court.

5.5 Are there any restrictions that apply specifically to foreignlenders when taking enforcement action? No.


6.1 Briefly, outline the main bankruptcy/insolvency processes inthis jurisdiction, including any control or influence that creditorscan exert on the process, the timeframes usually involved and anymandatory filing requirements. There are four main insolvency regimes for companies in England andWales.

(a) AdministrationAdministration is a rescue procedure for companies that are, or are likely tobecome, insolvent. The most significant feature is that it imposes a mora-torium on legal proceedings and enforcement actions (see section 6.3).

There are three routes into administration: (a) court order; (b) out-of-courtby notice filed by the holder of a qualifying floating charge; or (c) out-of-court by notice filed by the company or its directors. The primary objectiveis to rescue the company. If that is not reasonably practicable, the objectivesare to achieve a better result for creditors than on liquidation (going concernsale) or if that is not possible, to realise property for secured or preferential

creditors (asset sale) provided it does not unnecessarily harm the interestsof the creditors of the company as a whole.

The administrator is entitled to apply to the court for the termination ofthe administration which occurs automatically after one year, unless an ex-tension is agreed by the consent of the creditors (only possible once) or courtorder.

(b) Liquidation Liquidation is a termination procedure and, once completed, the companyis dissolved. A liquidator is appointed to take control of the company, tocollect and realise its assets and distribute realisations to satisfy, as far as pos-sible, the company’s liabilities. The three types of procedure are:

(i) members’ voluntary liquidation – only available to solvent companiesand initiated by shareholders passing a resolution to wind up the companyand appoint a liquidator. The directors must make a declaration of solvencystating the company will be able to pay its debts in full within a maximum12 months following the commencement of the winding-up;

(ii) creditors’ voluntary liquidation – initiated by the shareholders passing awinding-up resolution. The company is likely to either already be insolventor the directors are unwilling to make a statutory declaration of solvency;and

(iii) compulsory liquidation – a procedure made by order of the court, ini-tiated by the creditors filing a petition based on one or more specifiedgrounds, including the inability of the company to pay its debts.

(c) Compulsory voluntary arrangement (CVA)A CVA enables an insolvent company to put a proposal to its creditors fora composition of its debts or a scheme of arrangement of its affairs. A keyadvantage is the ability to bind dissenting minority creditors, although noproposal may alter the rights of secured or preferential creditors withouttheir individual consent.

(d) ReceivershipReceivership is an enforcement right for individual secured creditors. Mostcharges created under English law give the charge holder the power to ap-point a receiver. There is no court involvement and the security agreementusually states when the appointment can be made.

In all procedures, the insolvent company will be controlled by an insolvencyofficer who, other than in receivership, will be chosen by the creditors. Thecreditors can also form committees to whom the insolvency officer must re-port and whose sanction may be needed for certain actions.

Whilst there is no general duty to file for insolvency in England and Wales,a director of a company may be held liable if, prior to liquidation, he knew,or ought to have concluded, there was no reasonable prospect the companywould avoid going into insolvent liquidation or, if after that time, he failedto take every step with a view to minimising the potential loss to the com-pany’s creditors.

Arrangements with creditors can be made as schemes of arrangements whichoffer alternative methods for reaching agreements or compromises withoutneeding all creditors’ consent.

UK


6.2 Are there any preference, fraudulent conveyance, claw-back,hardening periods or similar issues or preferential creditor rightsthat lenders should be aware of? Various rules give the courts power to set aside transactions entered into byan insolvent company within a period of time before the commencementof administration or liquidation. The periods differ depending on the trans-action but include six months for preferences (two years if to a connectedperson) and two years for transactions at an undervalue. Subject to certainexceptions, floating charges created within one year (two years if to a con-nected person) may also be invalid.

Fixed charge realisations are not subject to deductions other than expensesincurred by the liquidator (and potentially an administrator) in preservingor realising fixed charge assets. Floating charge realisations are subject to thefollowing deductions: (a) liquidation and administration expenses; (b) pref-erential debts, (including employee salary and holiday claims and certainunpaid pension contributions); and (c) a prescribed part of the net propertysubject to the floating charge up to a maximum of £600,000 to be madeavailable to meet the claims of unsecured creditors.

6.3 Do bankruptcy/insolvency processes provide for any kind ofstay/moratorium on enforcement of lender claims? If so, does thestay/moratorium apply to the enforcement of security interests?Unless the consent of the court or the administrator is obtained, adminis-tration imposes a moratorium on all legal proceedings and other enforce-ment actions against the company. With limited exceptions, the restrictionstake effect when the application for an administration order is made, or thenotice of intention to appoint an administrator out-of-court by notice isfiled, rather than when the appointment is made. However, the securedparty can enforce security if the security interests fall within the scope ofthe Financial Collateral Arrangements (No 2) Regulations 2003. These reg-ulations broadly cover outright transfer arrangements and security, in eachcase, involving financial collateral (either cash or financial instruments).

There are limited provisions for a moratorium for small companies under aCVA regime.



7.1 Are there any restrictions in place on locally incorporatedcompanies in assisting the acquisition of shares in itself, its sistercompanies or in its holding companies? Do these prohibitionsapply to all forms of company, to companies being acquired whichare incorporated outside this jurisdiction and indirect holdingcompanies? Financial assistance given by the following is prohibited: (a) a public com-pany (or any of its subsidiaries) for the acquisition of shares in that publiccompany; or (b) a UK public subsidiary for the acquisition of shares in itsprivate holding company. In each case, any financial assistance given to re-duce or discharge any liability incurred by a third party or another personfor the purpose of the acquisition would be caught, as would the re-financ-ing of any acquisition loan.

Financial assistance is defined widely and includes the granting of a guar-antee, security, indemnity, release or waiver, loan, and any other assistancewhich reduces the net assets of the company giving the assistance to a ma-terial extent. If unlawful financial assistance is given, the company (and anyofficer) commits an offence and could face up to two years in prison andthe financial assistance itself (such as the guarantee or security) is void andunenforceable.

7.2 Are there any exceptions to these restrictions and/or are thereany structuring techniques that can be used to achieve targetcollateral support? There are number of technical statutory exceptions to the prohibition onfinancial assistance. If one of those exceptions cannot be used, it is legallypossible to convert a public company to a private company prior to the giv-ing of the financial assistance to provide target collateral support.

About the authorKirsty Thomson is a partner and leads the knowledge and learning teamfor Linklaters’ international banking group. Based in London, shespecialises in banking law and practice, including investment grade lending,leveraged finance and restructurings. She is a member of various Loan Market Association committees.

Kirsty ThomsonPartner, Linklaters


About the authorCaroline Chapman is a managing PSL in the knowledge and learning teamin the London office of Linklaters. She specialises in banking law and practice and focuses on drafting precedents and memoranda with a particular emphasis on leveraged finance and high yield.

Caroline ChapmanManaging PSL, Linklaters


US



1.1 What licences or approvals do lenders need to have if lendingto a borrower in this jurisdiction if a) the lender is a bank or b) thelender is not a bank?Several states impose licensing requirements on lenders that make loans toUS borrowers. Those requirements vary significantly by state, with somestates requiring licensure only for consumer loans and some states exemptingUS banks or non-US banks from the licensing requirements. Federally char-tered US banks are exempt from state lender licensing laws. There is no fed-eral licensing requirement for entities that loan money to US borrowers.

1.2 Are any exemptions available and/or are any techniquestypically used to structure around such requirements?Please see section 1.1.

Section 2 – Taxes

2.1 Are there any requirements to make deductions or withhold taxfrom payments made to domestic or foreign lenders in thisjurisdiction? Are any techniques typically used to structure aroundsuch requirements.Yes. In general, if a non-US lender does not act through its US branch, aUS federal income tax rate of 30% is generally required to be withheld fromUS-source interest payments paid to the lender. The tax may be reduced oreliminated under a double tax treaty. With certain exceptions, this 30% taxdoes not apply to non-bank lenders.

Also, under the Foreign Account Tax Compliance Act (FATCA), a 30%withholding is required on ‘withholdable payments’. This includes interestpaid by a US borrower after June 30 2014, and principal paid by a US bor-rower after 2016, to certain non-US entities unless they comply with theinformation gathering, reporting and withholding requirements of FATCA.A foreign financial institution can avoid this withholding tax by enteringinto an agreement with the IRS (Internal Revenue Service) or complyingwith local law implementing an intergovernmental agreement entered intounder FATCA. No FATCA withholding applies to grandfathered obliga-tions, which include loans outstanding on June 30 2014, unless there is amaterial modification of the loan after that date.

2.2 Is interest on debt tax deductible for borrowers incorporated inthis jurisdiction? Yes, subject to certain limitations.

2.3 Are there any thin capitalisation rules in effect in thisjurisdiction which would impact the amount of debt that can beborrowed/guaranteed by entities incorporated there?Yes, although the rules (which are not referred to as thin capitalisation rules)are rarely applied to banks lending to unrelated borrowers in the ordinarycourse of business.

2.4 Are there any other important tax concerns that lenders toborrowers incorporated in this jurisdiction should be aware of?Under US tax laws (commonly referred to as deemed dividend rules), it canbe very costly for a non-US subsidiary to guarantee or otherwise providecredit support for the obligations of its US parent. A guarantee or othercredit support may subject the borrower to extra taxes. To avoid the tax bur-den, facility agreements and security agreements that have US borrowersusually limit the pledge of non-US subsidiary voting shares to 65% and donot require such subsidiaries to become guarantors or pledgors with respectto the debt of US borrowers.



Security can generally be taken over the asset classes listed. In the US, thecreation and perfection of security interests in both personal and real prop-erty are generally governed by state laws.

In the US, the Uniform Commercial Code (UCC) is a code that covers thecreation, perfection, effect of perfection or non-perfection, and priority ofsecurity interests in most kinds of personal property and has been adoptedin each US state, with minor variations. It is important to consult the ap-plicable state’s UCC in any particular scenario. The rules, including manda-tory choice of law rules, vary by category of personal property as describedabove.

A security interest in effect attaches to collateral when it becomes enforceableagainst the debtor with respect to such collateral. Generally, a security in-terest becomes enforceable only if: (i) value has been given; (ii) the debtorhas rights in the collateral or the power to transfer rights in the collateral tothe secured party; and (iii) the debtor has authenticated a security agreementthat describes the collateral and creates the security interest.

The perfection of a security interest establishes the priority of a securedparty’s security interest against the security interests of other secured credi-tors and transferees of the debtor. In the US, there are three primary meth-ods of perfection: (i) filing a UCC financing statement (for example, forsecurities, receivables and contract rights); (ii) obtaining possession of thecollateral (eg for certificated shares); and (iii) obtaining control of the col-lateral, which may involve different steps depending on the collateral (forexample, control agreements for a deposit account).

US

Danelle Le Cren and Sabrena Silver of Linklaters

www.linklaters.com

US


Liens on real property are generally governed by non-uniform state law pro-visions outside the UCC. Depending on the state, a lien is placed on realproperty (including both fee and leasehold interests) by filing a mortgageor a deed of trust.

3.2 Highlight any issues with securing obligations that may arise inthe future.Generally no issues.

3.3 Can a universal security agreement be used to grant securityover all assets in this jurisdiction?Generally yes, with respect to security over personal property assets. Certaintypes of property may require separate agreements and filings (for instancereal property or intellectual property).

3.4 Can security be granted for the benefit of different classes ofcreditors under the same security agreement and if so, are thereany issues that creditors should be aware of in adopting thisapproach? Yes. It is critical that each class of secured creditor be granted its respectivesecurity interest under a separate granting clause. This is to reduce the riskunder US law of separate classes of secured creditors being treated as a singleclass for the purposes of voting and distributions under a Chapter 11 plan,if the grantor were to become a debtor in a US Bankruptcy Code case.


3.6 Briefly outline any issues to consider when transferring loansand accompanying security interests between lenders.Generally none, but particular rules may apply to regulated industries. Theloan agreement will usually set out the loan transfer procedures which mayinclude a requirement to obtain consent.

3.7 Can security be granted by third parties? Are there any rights ofcontribution, subrogation or similar that might arise as a result ofgranting/enforcing third party security that ought to be/can bewaived? Yes. A third party pledgor may be entitled to typical contribution and sub-rogation rights, unless waived. There may also be corporate benefit issues.

3.8 Briefly outline the registration requirements, if any, applicable tosecurity interests created in this jurisdiction, including any practicalconsiderations such as the timing, expense and the consequencesof non-registration?UCC financing statements are generally filed in the state of organisation ofthe debtor for US companies, and are quick and inexpensive. Other filings(intellectual property filings, mortgages or aircraft registrations) may requiremore time and expense depending on the state.

3.9 Briefly outline any regulatory or similar consents that arerequired to create security (other than board/shareholderapprovals)?None generally. Special rules may apply to regulated businesses (public util-ities and casinos).

3.10 Briefly explain the rules governing the priority of competingsecurity interests.The general rule for assets governed by the UCC is that the security interestthat is first to be perfected (and has continued to be perfected) will havepriority over later perfected security interests. In general, a security interestperfected by possession or control will have priority over a security interestperfected by filing, regardless of the time of filing. However, there are anumber of complicated statutory exceptions to these rules.


4.1 Briefly explain the downstream, upstream and cross-streamguarantees available, with reference to any particular restrictions orlimitations. Are there any techniques typically used to enhancecredit support/guarantees that might otherwise be limited? Downstream, upstream and cross-stream guarantees are typical in US-relatedfinancings and their enforceability varies by state. To be enforceable, guar-antees issued by a corporation must generally provide a corporate benefit,directly or indirectly, to the guarantor. This is generally not an issue withdownstream guarantees, because the benefit to the guarantor parent fromthe extension of a loan to its subsidiary is usually easily demonstrated. Withupstream or cross-stream guarantees, corporate benefit is not always evidentand some courts have found corporate benefit to be lacking. Some statesprovide statutory protections for upstream and cross-stream guarantees incertain circumstances.

Guarantees may also be avoidable as fraudulent transfers under the Bank-ruptcy Code and state fraudulent transfer laws. For the guarantee to beavoidable, it must be shown that: (i) the guarantor was insolvent (or ren-dered insolvent) at the time it incurred the guarantee; and (ii) the guarantordid not receive reasonably equivalent value in exchange for incurring theguarantee obligation. The look-back period for avoiding a guarantee underthe Bankruptcy Code is two years; it is generally four to six years under statelaw.

To mitigate the risk of a guarantee being avoided, it is customary to includecontribution and indemnification language in the guarantee documents re-quiring each subsidiary guarantor to contribute its share of the aggregateguarantee obligations to the other subsidiary guarantors. In addition, savingsclauses are also included that limit the amount each subsidiary guarantorguarantees to an amount it can afford without becoming insolvent. How-ever, recent case law has called into question whether savings clauses are en-forceable.

4.2 What regulatory or other consents are required to grantdownstream, upstream and cross-stream guarantees (other thanboard/shareholder approvals)? None generally. Certain regulated industries may have additional require-ments.

4.3 Briefly, outline any enforceability concerns associated with thegranting of downstream, upstream and cross-stream guaranteesthat lenders should be aware of (eg any exchange controls orsimilar obstacles). Generally no issues other than those referred to in section 4.1. There are noexchange controls in the US.


5.1 Do the local courts generally recognise and enforce foreign-lawgoverned contracts? Generally yes (including in New York). The analysis varies by state.

5.2 Will the local courts generally recognise and enforce a foreignjudgment that is given against a domestic company in foreigncourts (particularly the New York or English courts) without re-examining the merits of the decision?Generally yes (including in New York). The analysis varies by state.

5.3 Will the local courts recognise and enforce an arbitral awardgiven against the company without re-examining the merits of thedecision?Generally yes.

US


5.4 When enforcing security, what factors significantly impact thetime such enforcement takes and the value of the proceedsreceived from such enforcement? For example, are there anystatutory requirements such as (a) holding a public auction; (b)court involvement; or (c) obtaining regulatory consents?In the US, when a secured creditor begins to enforce, or threatens to enforce,its security, it is common for the debtor to file a bankruptcy petition underthe Bankruptcy Code to obtain the protection of the automatic stay. Theautomatic stay enjoins all enforcement actions by secured and unsecuredcreditors against the debtor or its property wherever located in the world.However, if no bankruptcy petition is filed, then a secured party may takeforeclosure actions against the debtor’s collateral once a default has occurredand any requisite notices have been given or grace periods expired. Subjectto the UCC, other state laws, and general principles of equity (includingstandards of materiality, good faith, fair dealing and reasonableness) and theterms of the security documents, a secured party generally has two main op-tions available in enforcing its security interests in collateral: extra-judicialand judicial enforcement. The mechanics of such actions may depend onthe specific types of collateral involved.

Under the UCC, a secured party may undertake extra-judicial remedies withrespect to most types of personal property collateral. A secured party maygenerally conduct a public or private sale of the collateral. The UCC requiresthat any sale or other disposition of collateral following enforcement be‘commercially reasonable’ in all respects, including notice to the defaultingparties, method, and manner.

A secured party may also use judicial enforcement mechanisms and bring aforeclosure action against the defaulting party. A judicial foreclosure maybe the only allowable means to enforce against certain types of assets in cer-tain states. Judicial foreclosure also provides certainty that the defaultingparties will not be able to claim that a secured party wrongfully appropriatedthe collateral or acted in a commercially unreasonable manner. However, ajudicial foreclosure will take longer than extra-judicial actions and involvesmore procedural requirements (such as filings and hearings).

5.5 Are there any restrictions that apply specifically to foreignlenders when taking enforcement action? Generally no. Taking title to collateral and related acts may subject a foreignlender to local business licensing requirements or tax laws.


6.1 Briefly, outline the main bankruptcy/insolvency processes inthis jurisdiction, including any control or influence that creditorscan exert on the process, the timeframes usually involved and anymandatory filing requirements. The Bankruptcy Code provides a statutory framework for most types ofcompanies that are facing financial distress either to implement a balancesheet or operational restructuring or to liquidate. Special insolvency regimesare available under federal and state law for systemically important financialinstitutions, banks and insurance companies.

Under the Bankruptcy Code, a company may file a petition under Chapter7 or Chapter 11. In a Chapter 7 case, the bankruptcy court appoints atrustee to liquidate the debtor’s assets and distribute the proceeds in accor-dance with a statutory waterfall. In contrast, in a Chapter 11 case, the debtorremains in possession of its assets while it pursues a restructuring. The re-structuring occurs as a result of obtaining bankruptcy court approval of aChapter 11 plan that establishes a new capital structure for the debtor whiledischarging all existing claims and equity interests. All stakeholders arebound to the terms of a confirmed Chapter 11 plan.

The length of a Chapter 11 case depends primarily on when the variousstakeholders are able to reach an agreement on the terms of a Chapter 11plan. In recent years, companies have attempted to shorten the time spentin Chapter 11 by reaching an agreement on the terms of a Chapter 11 planbefore filing and using the bankruptcy court approval process as a means tobind any dissenting creditors. The Bankruptcy Code provides the debtorwith a 120-day exclusive period to propose a Chapter 11 plan to its stake-holders, which may be extended up to 18 months.

Creditors may try to influence the outcome of a Chapter 11 case, as it is acourt-supervised process in which parties have an opportunity to be heardregarding actions being taken by the debtor.

Separately, Chapter 15 of the Bankruptcy Code provides for the recognitionof restructurings that occur in foreign insolvency proceedings. A foreignrepresentative may request that the bankruptcy court recognise and enforcethe terms of a restructuring in order to protect assets located in the US.

6.2 Are there any preference, fraudulent conveyance, claw-back,hardening periods or similar issues or preferential creditor rightsthat lenders should be aware of? A pre-bankruptcy transfer by the debtor may be challenged on the basis thatit constitutes a preference or a fraudulent transfer.

Under the Bankruptcy Code, a preference occurs if it can be shown that: (i)the debtor transferred property on account of pre-existing debt within alook-back period of 90 days of the bankruptcy petition (or one year if thetransferee is an insider); (ii) the debtor was insolvent at such time; and (iii)the transfer enabled the creditor to receive more than it would have receivedin a hypothetical Chapter 7 liquidation.

Under the Bankruptcy Code, a fraudulent transfer occurs if it can be shownthat either: (i) the debtor made a transfer or incurred an obligation with ac-tual intent to hinder, delay or defraud creditors; or (ii) the debtor made atransfer or incurred an obligation at a time when it was insolvent (or ren-dered insolvent) and did not receive reasonably equivalent value in exchangefor such transfer or obligation. The Bankruptcy Code contemplates a look-back period of two years for a fraudulent transfer. The elements of a fraud-ulent transfer under state law are substantially similar except that state lawgenerally has a longer look-back period (usually four to six years dependingon the state).

6.3 Do bankruptcy/insolvency processes provide for any kind ofstay/moratorium on enforcement of lender claims? If so, does thestay/moratorium apply to the enforcement of security interests?Under the Bankruptcy Code, an automatic stay is imposed as soon as adebtor files a Chapter 7 or Chapter 11 petition. Creditors can request thatthe bankruptcy court lift or modify the automatic stay under certain cir-cumstances, but such relief is not routinely granted.

US




7.1 Are there any restrictions in place on locally incorporatedcompanies in assisting the acquisition of shares in itself, its sistercompanies or in its holding companies? Do these prohibitionsapply to all forms of company, to companies being acquired whichare incorporated outside this jurisdiction and indirect holdingcompanies? No.

7.2 Are there any exceptions to these restrictions and/or are thereany structuring techniques that can be used to achieve targetcollateral support? Not applicable.

About the authorDanelle Le Cren is a partner in the New York office of Linklaters. Danellehas extensive experience in advising corporate and investment bankingclients in complex domestic and cross-border finance transactions, includ-ing leveraged buyouts and other acquisition financings, general corporatefinancings, asset finance transactions, infrastructure and project financetransactions, structured and tax-based financings, debt restructurings andwork outs. Danelle was recognised for banking and finance in the 2014edition of IFLR1000.

Danelle Le CrenPartner, Linklaters

New York, UST: +1 212 903 9045E: danelle.le_cren@linklaters,comW: www.linklaters.com

About the authorSabrena Silver is a partner in the New York office of Linklaters and hasnearly 20 years of experience in US domestic and cross-border financingtransactions. She advises financial institutions and companies on diversefinancing matters, including syndicated and bilateral loans, letter of creditfacilities, hedge fund financings, private banking transactions, debt restruc-turings, loan participations, receivables purchases and non-performing loantransactions. Sabrena was recognised for banking and finance, and struc-tured finance and securitisation in the 2014 edition of IFLR1000.

Sabrena SilverPartner, Linklaters

New York, UST:+1 212 903 9123E: [email protected]: www.linklaters.com

Documents

CROSS-BORDER FINANCING REPORT 2014 · 2014. 9. 23. · INTRODUCTION 2 IFLR REPORT | CROSS-BORDER FINANCING 2014 lite and loose loans are becoming more prevalent in Europe. According