Banking security law - Norton Rose Fulbright

Transcription

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Banking security law
Asia Pacific
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Banking security law
in Asia Pacific
A Norton Rose Fulbright Guide
Banking security law in Asia Pacific
Acknowledgements
The chapters on Australia, China, Hong Kong, Indonesia, Singapore and Thailand have been
provided by Norton Rose Fulbright and its associate office. We gratefully acknowledge the
assistance of the law firms who have contributed to the chapters on India, Japan, Malaysia,
Philippines, South Korea and Vietnam. These firms are identified at the start of each chapter
and further details are given at the end of the guide.
Contents
Australia10
China18
Hong Kong
26
India32
Indonesia38
Japan48
Malaysia60
Philippines68
Singapore74
South Korea
80
Thailand88
Vietnam96
Contacts102
Contributing law firms
4 Norton Rose Fulbright
104
Topics
Introduction
We are pleased to present the third edition of Banking
security law in Asia Pacific. This guide forms part of our
key Asia Pacific publication series which currently includes
M&A law in Asia Pacific, Joint ventures protections for
minority shareholders in Asia Pacific and Doing business in
Asia Pacific.
The ability to take and grant effective security is an
essential requirement for financial institutions and
corporate borrowers alike as it is a keystone of secured
lending. The purpose of this guide is to provide a summary
and a comparative overview of banking security law
systems in the Asia Pacific region. We hope this guide will
be a helpful source of information.
Whilst there are many similarities between some
jurisdictions, there are surprisingly wide variations within
the region. Having said that, it is noticeable that many
countries are reforming security legislation in an effort to
improve and simplify the process of taking security. On the
other hand, although the systems for taking security may
be improved, the practical difficulties in enforcing security
in quite a number of jurisdictions only serves to undermine
the main purpose of taking security in the first place.
In an effort to encourage corporate financial transparency,
most countries operate comprehensive debtor registries and
a failure to register security may result in the security being
void as against creditors and liquidators in the event of an
insolvency. However, a number of jurisdictions do not
operate any such registries which can complicate a security
taking exercise. Most jurisdictions operate asset based
registries which will ensure priorities as between creditors
but many such registries are not centralised and can be
complex.
Some jurisdictions do not recognise the concept of private
ownership of land and instead grant land use rights. In
a surprising number of jurisdictions, a mortgage of land
will not extend to buildings on that land. A number of
jurisdictions do not recognise the concept of floating charges
which can complicate taking security over intangible and
changeable assets.
Many countries have insolvency regimes that recognise
the priority of secured creditors but others have insolvency
rehabilitation systems that can delay or prevent secured
creditors from enforcing security. It is worth noting that some
jurisdictions do not recognise trust law and security agency
concepts and this could add a layer of complexity in terms of
taking effective security in these jurisdictions.
For international financiers and corporate borrowers alike,
it is important to understand and appreciate that whether
taking or granting security in Asia Pacific requires a
specialised and customised approach for each jurisdiction.
Concepts or structures that may be effective in one
jurisdiction may prove ineffective and unworkable in others.
For that reason, it is vital to retain legal advisers who have
both international and regional law expertise in Asia Pacific.
The information contained here is as accurate and up-to-date
as possible as at 31 December 2012. The guide is simply a
summary of the key issues relevant to taking security and is
not a substitute for legal advice. If you would like to discuss
any of the issues raised here, please get in touch with us.
A number of countries in the region operate foreign
ownership restrictions in industry sectors considered to be
of strategic importance. These restrictions may adversely
affect the ability of an offshore lender from either taking
or enforcing security. This type of often fast changing
regulation is beyond the scope of this guide but it is a
noticeable aspect of many Asia Pacific jurisdictions.
Norton Rose Fulbright 5
Topics
01 Main types of corporate security provider
02 Common forms of commercial security
03 Main types of corporate security asset
04 Internal approvals required for granting security rights
05 Regulation of commercial secured lending
06 Registration and perfection of security
07 Granting guarantees
08 Prohibitions on providing financial assistance
09 Insolvency risk periods
10 Enforcement of security rights
11 Priority of secured creditors in the event of insolvency
12 Choice of governing law
13 Existence of a trust or equivalent concept
14 Exchange control on remittances
15 Withholding tax
Australia
Australia
Introduction
Australia’s banking industry is sophisticated and subject
to effective regulation and reporting requirements. The
Commonwealth of Australia is a federation comprising
six States and two Territories. Some variations in property
and security law exist between Commonwealth, State and
Territory legislation, but – in the case of security – these
have been greatly reduced since the implementation of the
Personal Property Securities Act 2009 (Cth) (PPSA). The
long-awaited “registration commencement time” for the
PPSA finally occurred on 30 January 2012, and introduced
a national system for the registration of security interests in
personal property.
The PPSA is modelled on laws in Canada and New Zealand
and has its origins in Article 9 of the US Commercial Code.
It fundamentally changes the law in Australia on security
interests in personal property and on priorities between
competing security interests. The application of the PPSA
is an evolving and largely untested area of law. This article
refers to the position as it appears from the legislation, but,
at the time of writing, there is little experience of how the law
will be applied in practice.
“Personal property” is almost all property, whether tangible
or intangible, that is not land. Fixtures and water rights are
not personal property, nor are certain statutory rights such as
mining licences and certain local government approvals. The
list of excluded statutory rights varies between jurisdictions
within Australia and continues to develop.
The PPSA takes a functional approach to security interests. A
security interest is an interest in personal property provided
for by a transaction that – in substance – secures payment
or performance of an obligation, without regard to the form
of the transaction or the identity of the person who has
title to the property. Some arrangements (“deemed security
interests”) are regarded as security interests under the
PPSA which were not previously considered to be security
interests; for example, long term leases of goods (being
known as PPS Leases), certain consignments and the transfer
of accounts and chattel paper.
The PPSA introduces new priority rules using concepts
of attachment and perfection. Registration is one means
of perfecting a security interest. The PPSA regime is not
confined to companies and extends to individuals.
The main types of corporate security provider
The Corporations Act 2001 (Cth) (CA) governs the
incorporation and registration of companies in Australia
and the registration in Australia of companies that are
incorporated outside Australia (Foreign Companies). A
company needs to be registered in Australia in order to
carry on business in Australia. Registration and regulation
of Foreign Companies are covered by Division 2 of the CA.
Companies can act as trustees of trusts and often enter into
security in that capacity.
Common forms of commercial security
The PPSA effect
The PPSA does not abolish pre-existing types of security
interest over personal property, but their distinctive features
retain little significance under the new scheme, so there will
normally be no need to identify a mortgage or a charge as such
in a security document, except if the security document covers
non-PPSA property. Document names are changing to reflect
this, so what used to be called a “fixed and floating charge” is
now known as a “general security agreement”. A security
document in respect of a specific asset is no longer called – for
example – a charge over shares, but a “specific security
agreement”. A document referring to a “charge”, a “legal
mortgage” or an “equitable mortgage” over personal property
will be read as creating a “security interest”. The features of
different types of security are set out below in case it is
necessary to consider them in relation to property that is not
personal property under the PPSA (fixtures, for example), but
they will be irrelevant where security interests in personal
property are concerned.
New and deemed security interests
The PPSA covers not only interests that would have been
recognised as security interests before the legislation came
into effect, but also a variety of interests that would not.
Particular examples of the types of arrangement that may
now give rise to security interests are conditional sale
agreements, retention of title terms and many leases. The
consequence of these arrangements creating a security
interest is that, if registration requirements are not complied
with, the legal owner of the property may find that other
creditors’ rights rank ahead of the owner’s own rights to “its”
property. For most security interests, failure to perfect the
security interest will result in the security interest vesting
in the grantor of the security interest if certain insolvency
events occur (for example, if an administrator or liquidator
is appointed).
Transitional issues
Caution is required during the transition from the old system
to the new. For example, a holder of a security interest that
Australia
was registered under the old system is generally protected
under the new system, but needs to re-register its interest
within two years of the registration commencement time,
unless the security interest was migrated from an existing
register to the new PPS Register. Generally, security interests
that were registered as company charges on the register
of charges maintained by the Australian Securities and
Investments Commission were migrated to the new PPS
Register. Not all existing registers were migrated. Secured
parties need to claim migrated securities as their own if they
have not already done so.
A creditor under an arrangement that was not treated as a
security interest pre-PPSA (see “new and deemed security
interests” above) must register its interest as soon as
possible, if it has not already done so, to protect its priority
against its counterparty’s other creditors.
Land mortgage by way of statutory charge
A mortgage may be created over Torrens Title Land (Torrens
land). Torrens land mortgages are a form of statutory charge
because there is no transfer of title. However, they are
commonly referred to as legal mortgages. The Torrens system
is a particularly effective form of asset registration which
facilitates taking security over real property. Each Australian
State and Territory has its own real property legislation, title
registration offices, prescribed form and requirements for
mortgages and dealings over Torrens land.
Legal mortgage
A legal mortgage can be taken over assets to which it is
possible to have legal title, including land (other than
Torrens land), intellectual property rights, plant and
machinery, other tangible property (including ships and
aircraft), shares, financial instruments, choses in action
(such as debts or rights under contracts, effected by way of
assignment). In most of these examples, the PPSA concept
of a security interest makes it unnecessary to consider the
features of a legal mortgage.
Equitable mortgage
An equitable mortgage can be created in circumstances
where there is a legal assignment of an equitable interest,
an equitable assignment of a legal interest or an equitable
assignment of an equitable interest. Generally, an equitable
mortgage will exist where the full legal formalities have not
been satisfied to effect a legal transfer but will nevertheless
be recognised by equity, or where there is an agreement
to create a legal mortgage over future assets. Again, the
PPSA concept of a security interest now renders this level of
analysis unnecessary in most cases.
Fixed charge
A fixed charge can be taken over present and future assets
in circumstances where the chargor retains control and
possession of the charged asset and the chargee obtains
a right to secure payment of the debt from realising the
charged property. The PPSA does not distinguish between
the features of a fixed charge and a mortgage, whether legal
or equitable. The important distinction is between a security
interest in circulating assets and a security interest in noncirculating assets.
Circulating assets and the floating charge
As a result of the PPSA, the notion of a fixed and floating
charge has been discarded in favour of a charge over
circulating and non-circulating assets. The concept of
crystallisation relevant to floating charges is redundant for
personal property under the PPSA. However, the priority
consequences of taking security over circulating assets are
similar to those under a floating charge – security over
circulating assets will rank behind preferred claims. The
factors that denote a circulating asset – possession and/or
control – are the same as those that characterised a
floating charge.
Possessory security
Pledges are not commonly used in Australian corporate
financing transactions given the need for the transfer of
actual or constructive possession and availability of other
types of security interest.
Main types of corporate security assets
Land and improvements
Land in Australia is predominantly Torrens land. The Torrens
system of land registration can be described as a system
of title by registration rather than a system of registration
of title. Each Australian State and Territory has its own
legislation governing real property and mortgages over land
and prescribing the form of mortgage to be registered in that
State’s or Territory’s land titles.
A register of titles is maintained by each State or Territory
separately and legal title to the land is only acquired upon an
actual recording of a transaction being made in that register.
Registration itself creates the title and, except in certain
limited circumstances, the rights of the registered title holder
are not affected by any person claiming any earlier interest
in the land. However, it is important to appreciate that the
indefeasibility of title established by the system does not
exclude the possibility of a right of action for a personal
remedy as between the original parties to a transaction.
A mortgage of Torrens land does not involve a transfer of
ownership of the land in question. Despite this, mortgagees
are generally granted the same rights as general law
mortgagees (such as the remedies of sale and foreclosure)
and, practically, the mortgage operates as a general law legal
mortgage (discussed above) does. A mortgage needs to be
registered in order to be an effective “legal mortgage” and to
ensure priority.
A Torrens title mortgage may be created over freehold
or leasehold interests or over the rights under another
mortgage. Additionally, the mortgage itself can be dealt
with as a separate interest in land so that it can be assigned,
transferred or mortgaged.
Some land continues to be held under the general law rather
than under the Torrens system and such land is termed
“general law” land or “old system” land. An old system
transaction requires the examination of documents and
deeds relating to all historic dealings in the land the subject
of the transaction to establish an unbroken chain of title (or
the “good root of title”) to that land.
The PPSA does not currently cover fixtures, although it is not
clear whether “fixtures” as referred to in the PPSA are the
same as fixtures in general law.
Personal Property Securities
Everything that is not either land or excluded property
is “personal property” for the purposes of the PPSA.
Although, in most cases, it is no longer important whether
a security interest is a mortgage, a charge or something
else, it is necessary to be aware of considerations that affect
attachment and perfection of security interests over different
types of property. Without attachment and perfection, a
security interest cannot be enforced.
Shares/marketable securities
Unlisted shares are “investment instruments” under the
PPSA. Listed shares are “intermediated securities” and not
investment instruments. It is possible to perfect a security
interest in either by exercising control over the collateral.
What amounts to “control” is described in detail in the
PPSA – for example, in relation to investment instruments,
the secured party could be registered on the share register of
the relevant company as the holder of those shares or (more
usually) hold the share certificates and transfer form allowing
the shares to be transferred into its name upon enforcement.
When taking security over shares, it is advisable to review
the constitution of the company whose shares are being
granted as security to ensure that there are no restrictions on
the transfer of shares. Restrictions can be overcome by
appropriate amendments to the constitution. The transfer of
shares while a company is in administration or after a winding
up has commenced may be restricted by the CA.
Intermediated securities listed on the Australian Stock
Exchange commonly use a scripless clearing and settlement
system known as the “Clearing House Electronic Subregister
System” (CHESS). The legal title holder appears on the
register. To achieve control of intermediated securities
which are subject to a security interest, lenders usually
take a security interest in conjunction with a sponsorship
agreement (which is effectively a direct agreement (known
more commonly in Australian as a “tripartite agreement”)
between a grantor, a secured party and the entity that is a
CHESS participant).
Intellectual property
The most common types of intellectual property in Australia
are trade marks, patents, registered designs, plant breeders’
rights and copyright. It is possible to create a security interest
in any of these, or in a licence of them. The important point
to bear in mind when registering a security interest in
intellectual property is whether the property is identified
by serial number. If it is, and it is consumer property, the
registration details must include the serial number(s) in the
description of the collateral. If the property is commercial,
it is possible but not essential to describe it by reference to
serial number(s), in order to perfect the interest. However,
it is still prudent to describe it by serial number, because
a buyer or lessee can take intellectual property free of a
security interest in the intellectual property if the property
may be identified by a serial number, and a search of the
register by reference to the serial number immediately
before the sale or lease of the property would not disclose a
registration that perfected the security interest.
Bank accounts
The PPSA has removed the doubt that previously existed
about whether a bank can take a security interest over an
account held with itself. This is now expressly permitted.
Rights of set-off are not treated as personal property and
are therefore not regulated by the PPSA. A flawed asset
arrangement, on the other hand, may be a security interest
and, therefore, registrable.
Receivables or book debts
An issue with security interests in receivables is the
interaction between a purchase money security interest
(a “PMSI”) and what is described in the PPSA as a “non-PMSI
in accounts”. Despite the super-priority enjoyed by a PMSI in
other circumstances, if the criteria set out in the legislation
Australia
are met for a security interest arising out of a receivables
financing arrangement, the non-PMSI may take priority.
generally may transfer (and, therefore, grant a security
interest in) the right to recover the proceeds under the policy.
Additional factors to consider include whether the
receivables can be identified, whether the terms of the
relevant agreement permit assignments or security to be
granted, rights of set-off and retention of title issues.
Internal approvals required for granting security
rights
Contractual rights (including insurance policies)
Whether a security interest can be granted over contractual
rights requires a review of the nature and terms of that
contract and of sections 78 to 81 PPSA.
The following are important considerations when deciding
whether rights under a particular contract can be the subject
of a security interest:
• the nature of the contract and in particular, whether it is
of a personal nature and whether an assignment would
change the nature of that contract
• whether the contract includes any prohibitions on
assignment or the granting of security
• if a prohibition exists, whether consent can be obtained
from the other party.
Even if the contract contains a prohibition or restriction on
assignment, it may be possible to take a security interest,
depending on the application of sections 78 to 81 PPSA. If the
contract is covered by those provisions, a restriction or
prohibition on transfer is not enforceable against a third party
transferee. The relevant provisions are thought to be aimed at
factoring and some securitisation arrangements, but the drafting
may be wide enough to affect other situations. A transfer in
breach of a restriction or prohibition would render the transferor
liable to the counterparty for breach of contract. Since it might be
open to the counterparty to terminate the contract as a result of
the breach by the transferor, it is unlikely that would-be
transferees of valuable contracts will simply choose to ignore
restrictions or prohibitions.
If a financier wants to ensure that the contractual rights are
able to be dealt with effectively once the security is enforced
(for example to ensure it can effectively utilise “step-in”
rights, a direct agreement with the counter-party to the
relevant contract may be required.
Subject to any specific legislation relating to the particular
type of insurance to be offered as security and any term of
the insurance contract to the contrary, an insured person
In determining whether a corporate security provider will be
bound by its security, it is important to consider matters
such as:
• whether the company has the capacity to enter into the
transaction
• if so, whether the directors have authority to bind the
company under its constitution
• if so (i) whether the directors would be in breach of
their fiduciary duty to the company by entering into the
transaction (ii) whether the financier has notice (including
constructive notice) of this fact (commonly referred to as
the “commercial benefit” issue).
Directors of Australian companies have duties both under
the CA and at law to act in good faith, in the company’s best
interests and for a proper purpose.
If a transaction is not for the benefit of the company, then it
may amount to exercise of a power for an improper purpose.
A financier with actual or constructive notice that a director
is in breach of his or her fiduciary duties to the company
runs the risk that the security may be set aside, leaving the
financier holding the secured assets on trust for the company
and its creditors.
This is particularly important where a subsidiary or an
associated company gives either a guarantee or a security
over its assets for the borrowings of another member of its
group of companies. Corporate benefit is a question of fact
not of law. To reduce the risk of a transaction being found
to be voidable, ratification by the directors and members
should be obtained, although member ratification will not
rescue the guarantee if the company is insolvent when the
guarantee is given.
In the case of a wholly owned subsidiary, s.187 CA provides
that a director of such a subsidiary (with an appropriate
provision in its constitution expressly authorising that
director to act in the best interest of the holding company)
is taken to act in good faith and in the best interests of
the subsidiary if he or she acts in good faith in the best
interests of the holding company and the subsidiary is not
insolvent at the time of acting and doesn’t become insolvent
because of the director’s act. However, this leaves open the
issue of whether the acts of the directors are vulnerable to
challenge as not being for a “proper purpose” irrespective of
ratification by the members.
It should also be noted that a public company cannot provide
financial benefit to its related parties unless the giving of that
benefit falls within applicable exemptions under the CA or is
approved by that company’s members and is provided within
15 months of the approval.
Regulation of commercial secured lending
In general, there is no regulation of commercial secured
lending in Australia. However notification or registration
procedures may apply under the Banking Act or the
Financial Sector (Collection of Data) Act. There is no approval
or regulation that applies to the taking of commercial
security, except in certain circumstances, lenders may have
to comply with disclosure requirements when seeking to take
guarantees from individuals.
A foreign lender should be aware of the application of the
Foreign Acquisition and Takeovers Act 1975 (Cth), which
may require the foreign lender to lodge a statutory notice
with the Australian Treasurer if it wishes to take security
over certain types of Australian property. The Australian
Treasurer has around 40 days from receipt of the statutory
notice to make a decision on the matter and the security
should not be taken before that decision is made. There are
statutory exemptions for security taken “for the purposes
of a money lending agreement”, but the exemption will not
apply if a foreign government owns 15 per cent more of the
foreign lender, in which case taking security will require
the Australian Treasurer’s prior approval. The examination
of foreign government transactions is a matter of policy
rather than law, and there is no timeframe for the Australian
Treasurer’s decision.
A foreign lender may need to seek APRA’s authorisation to
engage in “financial business” (which includes lending) in
Australia if it is not an authorised deposit-taking institution
and its name includes the word “bank”.
Lending to small businesses may also be subject to the Code
of Banking Practice (for banks that subscribe to it).
Granting guarantees
In commercial finance transactions, it is possible for
companies to provide upstream, downstream and crossguarantees.
Financiers almost always obtain an indemnity in the same
document as the guarantee which (unlike a guarantee) has
the benefit of being a primary obligation and is generally
enforceable even if the obligation being “guaranteed” is
not. Guarantees may be “all moneys” or limited to specific
obligations, a specific amount or a particular asset.
If the guarantor is a company, issues of “corporate benefit”
should be considered and, if it is a public company, the rules
on “related party” transactions may apply.
A guarantee is not in itself a security interest that ought to be
registered on the PPSR. However, guarantees often include
other clauses – especially suspense account provisions and
turnover trusts – that may give rise to a security interest.
Prohibitions on providing financial assistance
There are restrictions on a company providing financial
assistance (which may include finance, loans or guarantees)
for the acquisition of shares in itself or its holding company.
This applies even if the holding company is incorporated
outside Australia. Companies can give financial assistance if
they comply with the procedure prescribed in the CA (known
as the “whitewash procedure”), if they are exempt or if the
giving of assistance does not materially prejudice interests
of the company or members or the company’s ability to pay
its creditors. The whitewash procedure involves getting a
resolution from members of the relevant companies pursuant
to the CA.
The notice of members’ resolutions must be lodged with ASIC
at least fourteen days before the financial assistance is given.
Insolvency risk periods
In any insolvency, there are a number of issues to be taken
into account, which may affect the rights of both secured and
unsecured creditors. The exact extent of a secured creditor’s
rights will depend on the nature of the security held by the
creditor and the type of insolvency proceeding. Failure to
register a security interest that is required to be registered
under the PPSA will result in the collateral over which the
security interest was granted vesting in the grantor on the
grantor’s insolvency.
In some circumstances, an external administrator of an
insolvent company may seek to avoid transactions entered
into by that company. Also, restrictions may apply to
taking proceedings or enforcing rights against a company
in administration or liquidation. Security taken over an
insolvent company’s assets may be subject to challenge
by an administrator or liquidator – for example – for
Australia
lack of registration within required time limits; absence
of consideration; lack of corporate benefit; inadequate
execution; the security being regarded as a “voidable
transaction”; and the security not being provided with the
company’s authority.
Two common types of voidable transactions are described
below.
An uncommercial transaction, according to s.588FB CA,
is one entered into when the company was insolvent and
that a hypothetical reasonable person in the company’s
circumstances would not have entered into. Regard may
be had to the benefits and detriments to the company of
entering into the transaction, and benefits to other parties.
The appropriate test is to examine whether there was a
bargain of such magnitude that it could not be explained
by normal commercial practices. A liquidator may set aside
this type of transaction if it is entered into within six months
of the appointment of the liquidator, or within four years if
the transaction was with a related party. It is a defence if the
creditor had no reasonable grounds for suspecting that the
company was insolvent at the time the benefit was received.
An unfair preference, under s.588FA CA, is a transaction
between an insolvent company and a creditor, by which the
creditor receives more for an unsecured debt than would
have been received if the creditor had had to prove for it
in the winding up. As with uncommercial transactions, a
liquidator may set aside such transactions if entered within
six months of the appointment of the liquidator, or within
four years if the transaction was with a related party. Also, as
with uncommercial transactions, it is a defence if the creditor
had no reasonable grounds for suspecting that the company
was insolvent at the time the benefit was received.
Enforcement and priority of security rights
Enforcement is largely a matter governed by the agreement
between the debtor and the creditor, and it is possible to
contract out of certain of the enforcement provisions in
the PPSA unless the collateral is used predominantly for
personal, domestic or household purposes. In the absence
of enforcement provisions in the security document, the law
provides standard remedies for the creditor if the security
needs to be enforced. However, as there are invariably
limitations with standard statutory remedies, effective
enforcement often depends on the terms of the security.
The enforcement provisions of the PPSA supplement
the remedies already available to secured parties. To be
enforceable, a security interest in personal property must
“attach” to the collateral. In order to attach, the grantor must
have rights in the property or the power to transfer rights
in the property to the secured party, and the secured party
must provide value, or the grantor must confer a security
interest though its actions. Enforceability against third
parties requires possession or control by the secured party or
a written agreement signed or accepted by the grantor. The
type of security interest is irrelevant to the means by which
a security interest may be enforced under the PPSA. This
represents a significant departure from the pre-PPSA regime.
Outside the PPSA regime, the availability of different
methods of enforcement depends on the type of security
interest. Enforcement methods – principally relevant to
security interests in land – include possession, sale and
foreclosure, although foreclosure is rarely used in practice.
The issue of enforcement often arises in the context of a
corporate insolvency procedure.
Receivership is by far the most common procedure used as
a vehicle for enforcement. It involves the appointment of
an insolvency practitioner by the holder of an enforceable
security interest either privately or by a court.
Voluntary administration is typically commenced by the
directors of a company on the grounds that the company is
insolvent, but it may also be commenced by a creditor that
holds enforceable security over the whole or substantially
the whole of the company’s property.
Priority of security interests under the PPSA
The PPSA introduces new priority rules for competing security
interests, based on the concept of perfection. The new rules
are so far untested. Perfection is a process which requires
that the security interest is attached to the collateral and is
enforceable against third parties. Registration is one way to
finalise perfection of a security interest. The other ways to
perfect a security interest are by possession or control.
Perfection is most important if the grantor of a security
interest becomes insolvent. In Australia, with some
exceptions, personal property subject to an unperfected
security interest will “vest” in the grantor if certain insolvency
events occur – for example, if the grantor is wound up or
made bankrupt, or an administrator is appointed. In other
words, unless the financier has registered its interest on the
PPS Register or taken possession or control of the secured
assets, the financier’s security will not be enforceable against
a liquidator or administrator of the grantor.
Special rules about priority apply in some cases, for example:
• The PPSA gives a “super-priority” for registered purchase
money security interests (PMSIs). A PMSI is a security
interest in collateral that secures the purchase price for
collateral, or secures the finance enabling the acquisition
of the collateral. A lessor or bailor of goods under a PPS
Lease and a consignor under a commercial consignment
will also have a PMSI. However, there are very tight
timeframes for registering a PMSI to get the benefit of this
super-priority.
• The PPSA contains special rules about agricultural
interests, accessions, processed or commingled goods,
intellectual property and debt factoring.
• A security interest in some types of property (such as
shares – whether certificated or dematerialised – and
ADI accounts) can be perfected by control. If the security
interest is perfected by control, it will take priority over
security interests in the same property that are perfected
by other means.
The Commonwealth or a State or Territory may declare that
the priority of certain statutory interests is to be determined
under the law of the Commonwealth, that State or Territory
rather than under the PPSA, effectively displacing PPSA
priority rules. This has been done in relation to many
statutory liens and charges in the various jurisdictions, and it
is not consistent between jurisdictions.
Priority of secured creditors in the event
of insolvency
A secured creditor with a perfected security interest will
normally be entitled to enforce its security, even if a judicial
winding up order has been made. Circulating assets,
however, will usually be first used for distribution to certain
preferential creditors such as employees. A holder of a
security interest in circulating assets should still take priority
over the general body of unsecured creditors.
Choice of governing law
Parties to a contract are free to choose any governing
law they wish so long as it is in good faith, legal and is
not against public policy. The choice must be clear and
unambiguous. It will only affect the contractual aspects of
a document. The law that governs a security interest will
generally be determined according to where the collateral
is located in the case of goods, and where the grantor is
located, in the case of intangibles. The PPSA contains rules
to help identify where personal property is “located” and the
applicable governing law.
Existence of a trust or equivalent concept
The use of private and commercial trusts is well established
in Australia. Security trusts are also commonly used in
multi-lender financing transactions as a mechanism to hold
security for the common benefit of secured creditors.
Exchange control on remittances
While technically still regulated, in a practical sense
Australia’s foreign exchange system has minimal restraint.
The currency was floated in 1983 and, generally, banks
are authorised to deal in foreign exchange and can operate
foreign currency accounts. Apart from matters such as taxscreening, the remaining exchange controls are generally
concerned with foreign investment in Australia, the export of
notes and coin, anti-money laundering and enforcement of
financial sanctions against particular countries or persons.
Withholding tax
Subject to certain exemptions and any applicable doubletax treaties, withholding tax is generally payable at the rate
of ten per cent on the gross amount of “interest payments”
made by an Australian resident (including an Australian
based permanent branch of a non-resident) borrower to a
non resident (including an overseas based permanent branch
of a resident) financier.
Mortgage duty
New South Wales is the only remaining Australian state to
impose mortgage duty on secured lending arrangements.
Mortgage duty is expected to be abolished on 1 July 2013.
China
China
Introduction
A relatively comprehensive legal framework for the
regulation of taking security in the People’s Republic of
China (PRC) was established with the introduction of the
People’s Republic of China Security Law in 1995 (SL). Since
then, security law in the PRC has steadily evolved, with
the implementation of the PRC Property Law in 2007 (PL)
and various other regulations governing foreign security
(see details below). A regulatory regime has grown up
administered by a range of government bodies, including
the Ministry of Commerce and its local approval authorities
(MOFCOM), the State Administration for Industry and
Commerce (SAIC), the housing and land administration
authorities and the State Administration of Foreign Exchange
(SAFE, the major regulator of the foreign exchange control
regime of China). The types of asset that can be secured have
increased and the processes for perfection and enforcement
of security have increasingly become well-regulated and
harmonised with international practices and norms.
Main types of corporate entity
Domestic companies and Foreign invested enterprises are the
two main types of corporate entity groupings.
Domestic companies
Limited liability companies: in these companies investors
assume liabilities towards the company but only to the
extent of their respective capital contributions. The
company is liable, to the extent of all its assets, for its
debts. Significantly, although investors are referred to as
“shareholders”, the company does not issue or allot any
shares. Instead, the investor’s equity interest in the company
is represented by its percentage holding in the registered
capital of the company. The company is required to issue
to each investor shareholder an investment certificate
indicating the capital contribution and the total registered
capital of the company. However, there is no standard form
of investment certificate.
Companies limited by shares: corporate vehicle in which
share capital is issued and allotted by using share certificates
and where a shareholder’s liabilities is limited to the extent
of the shareholding and the company is liable, to the extent
of all its assets, for its debts.
PRC Company Law (CL) regulates domestic companies.
Establishing either a limited liability company or a company
limited by shares requires registration with the national or
local SAIC.
Foreign invested enterprises (FIEs)
By definition, FIEs are PRC incorporated enterprises
with foreign investment. Most FIEs are “limited liability
companies”. However, given that FIEs are additionally
regulated by a set of PRC foreign investment laws, they
are, for these purposes, treated as a separate sub-set. PRC
Company Law applies to FIEs where the foreign investment
laws are silent. However, the foreign investment laws take
priority where there is any conflict between the two sets of
laws.
There are three main types of FIE:
• Equity joint venture (EJV): an enterprise established
in the PRC through the joint investment of at least one
Chinese party and at least one foreign party. The ratio for
distribution of profits and sharing of losses is dependent
upon each partner’s respective equity interest in the
registered capital of the EJV.
• Cooperative joint venture (CJV): a cooperative enterprise
set up in the PRC also through the joint investment of at
least one Chinese party and at least one foreign party. It
can either be a separate legal entity, separate from the
partners; or it may be structured with no separate legal
entity, each partner being responsible for the profits
and losses of the CJV in accordance with the terms and
conditions previously agreed upon in contract between
the partners. The major difference between an EJV and a
CJV is that a CJV offers greater flexibility for the parties to
decide the terms of the investment and the distribution of
profits to investors.
• Wholly foreign-owned enterprise (WFOE): an enterprise
set up in the PRC and wholly-owned by one or several
foreign investors. A WFOE, in most cases, is a limited
liability company. The liability of foreign investors will be
limited to their subscribed capital.
Mortgage
Must be in writing and the mortgage agreement must specify
the type and amount of the underlying obligation secured;
the mortgage term, particulars of the mortgaged property
and its use rights; and the scope of the security covered by
the mortgage. Although default enforcement provisions can
be included, the agreement should not expressly provide for
the transfer of legal ownership in the event of default.
China
Pledge
Must be in writing and the pledge agreement must provide
for the type and amount of the underlying obligation
secured; a term for performance of the debtor’s obligations;
particulars of the pledged property; the scope of the security
covered by the pledge; the time for delivering the pledged
property and other consensual matters. As with mortgages,
a pledge agreement should not provide for transfer of legal
ownership in the event of default.
Assignment
Assignments of contract are not expressly provided for as a
way of security under the SL. However, contractual rights
may be assigned under the PRC Contract Law (Articles 79
and 80), which provides that a party may assign some or
all of its rights under a contract to a third party by notifying
the obligor of such assignment. The parties may agree that
such assignment may only come into effect subject to certain
conditions including, amongst others, occurrence of any
events of default by the obligor under any other documents,
such as a facilities agreement. This conditional transfer
of contractual rights may work in a similar manner as an
agreement to assign rights under a contract under HK law or
English law.
Assignments are not straightforward. Firstly, an assignment
by a domestic entity to a foreign entity may cause problems
with SAFE and liaison with SAFE is required at the outset
of a transaction. Secondly, certain contractual rights may
not be assignable depending on the type of contract,
legal restrictions or the contractual terms. Accordingly,
legal advice should always be taken prior to agreeing an
assignment.
Other security
Although the PL introduced a form of floating mortgage,
that can be taken over future production equipment, raw
materials and semi-finished products, it does not operate in
exactly the same manner as a conventional floating charge
in common law jurisdictions. Proprietary liens and security
deposits are widely used in the PRC but they are not often
encountered in a corporate lending scenario.
Main types of corporate security asset
Land and buildings
Stated-owned land use rights: generally speaking, land in
urban areas is owned by the State, whilst land use rights can
be owned individually. Significantly, land ownership rights
cannot be mortgaged whereas land use rights can.
There are two types of state-owned land use rights
• Granted land use rights: these may be granted by the
State on payment of a premium. Once granted, they may
be sold, leased or mortgaged upon satisfaction of certain
conditions. Granted land use rights are evidenced by a
Land Grant Contract and a Land Use Rights Certificate
issued by the local Land Bureau (LB). The title document
for a building is a Property Ownership Certificate issued
by the Real Estate Administration Authority (REA). In
certain places of the PRC, the functions of the LB and the
REA are consolidated within one governmental authority.
• Allocated land use rights: these rights are allocated to
the user by the State (in most cases for public interest
purposes) and no payment of premium is involved.
Significantly, allocated land use rights may not be
mortgaged unless various conditions are satisfied and
approvals obtained from the LB and/or the REA.
Although security can be taken by way of mortgage over
some immoveable property, such as buildings and other
attachments to land, there is a prohibition on mortgaging the
following rights and assets:
• land ownership rights
• land use rights relating to collectively owned land
• educational, medical and other public welfare facilities
of non-profit making organisations, such as schools,
kindergartens, hospitals and other social organisations
• property to which the ownership is unclear or in dispute
• property that has been sealed up, seized or is subject to
supervision and control and
• other unmortgageable property.
Building and land use rights should be mortgaged together.
If not, they should be deemed to have been mortgaged
together. Buildings that are newly constructed on land after
the mortgage of the land use right will not be included in the
security.
Tangible moveable property
Security can be taken over moveable property either by
mortgage or pledge. The effectiveness of a mortgage of
moveables is not dependent upon registration.
Generally speaking, pledges over moveables are comparatively
easy to perfect. Physical delivery of the moveables to the
pledgee and a contract in writing are all that is required. The
cooperation of the pledgor is not needed on enforcement. The
pledgee has the right and ability to sell the pledged goods
in the event of default, and the pledgor has little chance
of preventing this. In practice, the pledgee will appoint a
collateral manager to take possession of the moveables on his
behalf in order to address the inconvenience of possessing and
retaining the moveable assets.
Shares and equity interest
Pledges over shares, fund units or equity interests are widely
used in the PRC. However, care must be taken to ensure
that shares or an equity interest are transferable without
restrictions; that equity interests in an FIE to be pledged have
been capitalised; and that the registration requirements and
necessary approvals are obtained from the competent local
counterparts of MOFCOM and SAIC.
Security over intellectual property rights can be taken by
pledge which will be effective as from the date of registration
with the relevant administration authorities.
Bank accounts
Security can be taken by way of a pledge. Under the SL,
funds in the account for a pledge over a bank account must
be ascertained and identified at the time of perfection of
the pledge which precludes a pledge over future funds. In
consequence, most commercial banks will seek to take a
pledge over a special account in conjunction with a pledge
over receivables. The special account will be set up for
the specific purpose of receiving income generated from
the business operation of the pledgor and will be in the
possession of and under the effective control of the creditor
bank. Taking a pledge over a special account does not have
an explicit regulatory basis. However, taking a pledge over
receivables in accordance with the PL will provide a lender
with more definitive rights to future funds.
Receivables
The Measures for the Registration of Pledge over Receivables
defines “receivables” as the right of a party (usually the
borrower) to ask a third party to make payments as a
consideration of offering goods or services by the borrower,
including existing and potential money claims and the
proceeds thereof, but not including the right to claim
payment due under bills or other negotiable securities. The
borrower may pledge its rights over such receivables in
favour of a creditor as a security.
Since the PL came into force, the Credit Reference Centre
(CRC) of the People’s Bank of China (PBOC) has been
operating an online registration system for pledges made
over receivables. Examples of receivables include those
arising from: the sale of goods; the supply of water, power,
gas and heat; the leasing of moveable and immoveable
property, the provision of services; and the fees charged
for the use of transportation routes such as highways and
bridges.
There is an increasing trend amongst banks to register
receivable pledges with the CRC, even when using special
account pledges for the greater protection that it affords.
However, a problem identified with pledges over receivables
is that registration with the CRC, which is key to their
efficacy, is dependent on the pledgee providing it with
accurate and, where necessary, updated information of the
pledgor. Failure to do so will lead to the pledge registration
becoming ineffective. For instance, there is a clear danger
of a pledgor recklessly or intentionally failing to notify a
pledgee of its change of name, leading to the pledge falling
away. In addition, pledges over receivables automatically
terminate at the end of an agreed registration period up
to a statutory limit of five years. The pledgee has the right
to extend a pledge over receivables by another five years.
However, considering that a pledgor may naturally be
unwilling to extend a pledge after the initial five years have
elapsed, there is an inherent weakness in any pledge over
receivables that is intended to attach to any mid-term to longterm obligation of the debtor.
Contractual rights
Security may be taken by way of assignment or mortgage but
as mentioned above, assignments are not straightforward.
Mortgages can be created over certain contractual operation
rights in land, such as waste disposal land which has been
obtained by way of an invitation of bids, auction, public
consultations, etc. This is a mortgage similar to the mortgage
over land use rights as discussed above.
Other intangible rights
A pledge can be created over intangible rights such as bills
of exchange, cheques, promissory notes, bonds, certificates
of deposits, warehouse receipts and bills of lading and will
become effective either on delivery of the title certificate
or where there is no title certificate, on registration at the
relevant administrative department.
China
rights
The legal representative (LR) of a company is the responsible
person who has the power, as a matter of law, to represent
the company in various activities of the company, and
the LR’s name is required to be shown on the company’s
Business Licence. The LR may be the chairman of the
board, an executive director or the general manager of the
company. Generally speaking, a contract signed by the
LR binds the company, unless the counterparty knows or
ought to know that the LR has exercised rights beyond
that authorised by the company. In short, an LR is the
“alter ego” of the company and has wide powers to enter
into contracts binding the company. The LR may also
authorise another person, such as a general manager, to
act as his representative by a written power of attorney.
Notwithstanding the powers of the LR, the legal contract
entered into by a PRC company should also be affixed with
the official stamp of the company in order to avoid any
dispute over authorisation.
Providing security for third parties will require board
resolutions or, as the case may be, a shareholders’ resolution
depending on and in accordance with the articles of
association. Where a third party is an existing shareholder
then shareholder approval must be obtained but excluding
any votes that might be exercisable by that third party
shareholder.
A Chinese entity receiving foreign loans (Foreign loans) or
granting security for the obligations of a foreign entity or in
favour of a foreign entity (Foreign security), is subject to
extensive legal regulation including the latest SAFE Notice
Concerning the Administration of Foreign Security Provided
by Chinese Institutions (New regulation) coming into force
on 30 July 2010, which introduced significant changes to the
previous regulatory regime governing Foreign security
granted by Chinese institutions.
Financing and non-financing foreign security
Foreign security is categorised to include foreign security of
a financing nature (Financing foreign security) and foreign
security of a non-financing nature (Non-Financing foreign
security), which are treated differently in many respects.
Financing foreign security is defined to mean the foreign
security provided in respect of an underlying contract
which is of a debt-financing nature, which includes but is
not limited to the security provided for loans, the issue of
bonds and financing lease. Non-Financing foreign security
is defined to mean any foreign security other than Financing
foreign security, including, for example, quality guarantees,
project completion guarantees, tender guarantees, advancepayment guarantees, deferred payment guarantees and
performance guarantees under a contract for the sale and
purchase of goods.
Foreign security provided by banks
Chinese registered banks may provide Financing foreign
security within the annual foreign security balance quota
approved by SAFE (Quota) without being subject to a
case-by-case approval. Chinese registered banks are free
to provide Non-Financing foreign security without being
subject to any Quota or SAFE approval provided that
• they comply with the overall regulatory risk control
requirements and
• either the secured party or the beneficiary is a Chinaincorporated enterprise or a foreign entity set up or owned
(directly or indirectly) by Chinese-registered institutions.
Chinese-registered banks must conduct monthly filings with
their local SAFE for foreign security they provide. Such filings
will be regarded as due registration of the foreign security
concerned and SAFE will not provide any additional foreign
security registration certificates.
Foreign security provided by non-bank financial
institutions and ordinary enterprises
Non-bank financial institutions and ordinary enterprises
may apply for the Quota (covering both Financing and NonFinancing foreign security) by following the same Quota
application procedures as banks provided they qualify the
various requirements under the New regulation. Non-bank
financial institutions and ordinary enterprises that do not fall
under the Quota administrative regime mentioned above are
subject to case-by-case approval from SAFE for each foreign
security it wishes to provide.
Chinese-registered non-bank financial institutions
and ordinary enterprises shall conduct a case-by- case
registration with their local SAFE within 15 days of the
execution of the relevant foreign security contract. From
a legal perspective, relevant approval and registration
certificates issued by a local SAFE should be effective
documents to evidence that the foreign security has been
duly provided.
Registration and perfection of security
The registration and perfection requirements for security
interests set out below are additional to, and do not replace
SAFE’s registration and approval requirements.
Mortgage over a land use right (land with no structures or
buildings): must be registered with the local LB. A mortgage
over real property, (land with buildings or structures), must
be registered with the local REA. A mortgage over woodland
must be registered with the local Forestry Administration
Authority. In each case, the mortgage will only come into
effect when it is duly registered. A mortgage over contractual
operation rights in land should be registered with the
competent LB or REA.
Mortgage over tangible moveable property may be registered
as follows:
• equipment and other moveable property (including raw
materials, semi-finished products, products): with the
local SAIC
• vehicles: with the vehicle registration authority
• aircraft (including aircraft under construction): with the
Civil Aviation Administration of China
• vessels (including vessels under construction): with the
Administration of Maritime Safety where the vessel’s
register is held.
Although the effectiveness of a moveables mortgage is not
dependent on registration, without such registration the
mortgagee will not be able to challenge the interest of a bona
fide third party in the mortgaged assets.
Pledges over the following assets should be registered and
perfected as follows:
• moveables: registration not required and will take effect
on transfer of possession
• shares in a listed company: must be registered with the
Securities Depository and Clearing Institution
• shares or equity in a non-listed company: must be
recorded in the register of shareholders and must be
registered with the SAIC
• equity in an FIE: must be approved by the other investors
of the FIE; approved by MOFCOM and registered with the
local SAIC.
All the above pledges (other than moveables) will come into
effect when they are duly approved and registered.
• bank accounts: notice must be given to the bank with
which the pledgor opens the bank account
• receivables: must be registered with the CRC and will only
come into effect when registered
• bills of exchange cheques, promissory notes, bonds,
money orders, warehouse receipts or bills of lading: will
take effect on transfer of possession of the relevant title
certificate or otherwise should be registered with the
relevant administrative departments where there is no
title certificate in which case the pledge will take effect
when registered
• fund units: should be registered with the Securities
Depository and Clearing Institution and will take effect
when registered.
Granting guarantees
There are two types of guarantee:
• Ordinary guarantee: the guarantor assumes the guarantee
responsibility when the debtor fails to pay the debt.
Significantly, the guarantee cannot be enforced until a
creditor first exhausts its remedies against the principal
debtor.
• Joint and several liability guarantee: in contrast to an
ordinary guarantee, both the guarantor and the debtor
assume joint and several liability over the debt so that
a creditor can enforce the guarantee as soon as the
principal debtor is in default and does not have to exhaust
its remedies against the principal debtor. Wherever a
guarantee is silent as to liability, it will automatically be
deemed to be a joint and several liability guarantee.
Generally speaking, there is no regulatory restriction on a
PRC enterprise providing downstream, upstream or crossstream guarantees for a domestic debt. However, restrictions
do exist in respect of providing upstream or cross-stream
Foreign security. A Chinese-registered enterprise (referring to
either a domestic enterprise or an FIE which is not a financial
China
institution) may not issue a guarantee in respect of a Foreign
loan borne by its parent company (regardless of whether the
parent company is a PRC-incorporated entity or a foreign
company) or by an unrelated third party, in favour of a
foreign creditor.
Notwithstanding the above restrictions, New regulation
provides that counter-security provided by a Chineseregistered institution in favour of another Chinese-registered
institution that is the security provider of a Foreign security
will not be subject to the Foreign security-related regulations.
In other words, such counter-security will not be treated as a
Foreign security. It seems that a domestic enterprise or a FIE
would not be prevented from providing a counter-security to
a Chinese-registered bank which in turn provides a
Financing foreign security for the obligations of the onshore
or offshore parent company or an unrelated third party.
Chinese-registered banks are granted flexibility to provide
Foreign security (especially Financing foreign security)
under the New regulation whilst others do not enjoy the
same level of freedom. As a result, Chinese-registered
banks have actively participated in cross-border financing
structures and there is a strong need of Quota by Chineseregistered banks.
The common law concept of “corporate benefit” has no
equivalent in PRC law. However, the CL recognises that the
directors, supervisors and senior management have fiduciary
duties to their company. There are restrictive control
measures for listed companies in relation to the provision of
security by them.
There are no specific financial assistance rules. However, PRC
law strictly prohibits providing security for the purpose of
funding the registered capital of an FIE. When the company
is providing security for the benefit of a shareholder or a
third party which has actual control over the company, the
granting of that security must be submitted to the
shareholders to discuss and vote on it. The direct shareholder
concerned or the shareholder under the control of the
relevant third party controller must be excluded from voting
for such matter.
Transactions for no consideration or at an undervalue,
granting security for unsecured claims, payment of undue
obligations and waiving creditor’s rights may, if conducted
by the company within one year preceding the start of a
court bankruptcy liquidation procedure, be voidable upon an
administrator’s application to the court.
Enforcement of security rights
Enforcement of most types of security will largely be a
matter governed by the agreement between the parties.
Generally speaking, the creditor may either take the property
at a value agreed with the security provider, or realise the
security through auction or sale procedures. Approval
and/or registration procedures may also need to be fulfilled
for enforcement of certain types of security such as an
equity pledge.
In the case of mortgages over real property or moveable
assets enforcement will either involve the lender taking the
mortgaged property at an agreed value (upon enforcement of
the mortgage) or if the mortgagor agrees, realising it through
auction or sale procedures. If agreement cannot be obtained,
the lender will have to make an application to the People’s
Court to auction or sell off the security mortgaged.
In the case of a pledge of moveable assets: enforcement will
either involve the lender taking the pledged property at a
value agreed with the pledgor (upon enforcement of the
pledge) or realising the pledged property through auction or
other sale procedures.
Priority of secured creditors in the event of
insolvency
As a general principle, the beneficiary of a security shall have
priority rights over secured assets so far as the security has
been created and perfected in accordance with applicable
laws and regulations. Such secured assets are not available to
general creditors if the security provider becomes insolvent
or bankrupt.
The governing law of a contract made between two PRC
individuals or enterprises which does not have any “foreign
element” must be governed by PRC law. A “foreign element”
will exist if at least one party to the contract is a foreign
individual, stateless person or foreign enterprise, or the
object of the contract is located outside of the PRC, or any
part of the contract will be performed outside of the PRC.
If a security document is governed by a foreign law justified
by some “foreign element”, the validity of the security
concerned is determined by such foreign governing law.
However, failure to comply with PRC law in respect of
perfection of the security would, in the cases where the
security property or security provider is located in the
PRC, prejudice enforcement of such security. In cases
where Foreign security is involved, performance of security
obligations by a PRC security provider is subject to the
control and supervision of SAFE irrespective of the governing
law. For instance, no payment out of the PRC would be
permitted without complying with SAFE’s approval and/or
its registration requirements and any non-compliance with
PRC law will ultimately prejudice any enforcement action
within the PRC. It is advisable to provide for arbitration
provisions, which will be enforceable under the New York
Convention on Recognition and Enforcement of Foreign
Arbitral Awards.
PRC law recognises the concept of a “trust” and defines it
as “a legal action whereby an authorising party entrusts the
authorised party to manage or dispose of the authorising
party’s rights over certain assets (Trust assets) in the name
of the authorised party; the authorised party must manage
or dispose of the Trust assets for the benefit of the authoring
party or for the purposes prescribed by the authorising party.”
The establishment of a company for the purpose of
undertaking trust business in the PRC must first be approved
by the China Banking Regulatory Commission (CBRC).
Significantly, Chinese banks are not permitted to conduct
trust business falling within the regulatory ambit of PRCtrust law.
In respect of the syndicated lending practice, syndicate
banks will normally authorise a bank to deal with the
perfection of security and other administrative matters as
an “agent bank” subject to the creditors’ agreement. There
have been some concerns as to whether an agent bank
(even if being named as an agent) might be regarded as
conducting trust business and so fall within the regulatory
regime. However, such concerns have not materialised so
far and CBRC does not seem to be concerned by the practice.
Presumably, this is on account of the fact that an agent bank
does not conduct business as such or on its own account and
will be appointed by other syndicate banks on a case by case
basis consistent with an agency entrustment relationship as
distinct from a trust business. Nevertheless, it is important to
stipulate exhaustively the rights and obligations of an agent
bank in the relevant documentation.
A Foreign loan made to a PRC entity is considered to be part
of that entity’s existing foreign debt.
The PRC Interim Regulations on the Management of
Foreign Debt and other regulations impose the following
requirements
Use of Foreign loans
A Foreign loan of a PRC enterprise with a term of over one
year may only be used within the purposes as approved by
SAFE. A short-term (one year or less) Foreign loan may only
be used to finance the working capital of a PRC-enterprise
and must not be used for any fixed assets investment or other
midterm or long term use.
Where a Foreign loan denominated in a foreign currency
(eg, US dollars) borrowed by a FIE needs to be converted
into RMB and used in the PRC, local SAFE approval will
be required on a case-by-case basis before handling the
exchange matters at the relevant bank designated for
foreign exchange business. For any conversion of an amount
exceeding US$0.2 million, the FIE must submit a written
payment order to the local SAFE stating the usage for the
funds to be converted from the Foreign loan. For conversion
of lesser amounts such a payment order is not required
but the applicant must provide a list of the usages of funds
received from the preceding conversion of Foreign loan. A
Chinese domestic enterprise may not covert proceeds of a
Foreign loan into RMB.
In order to obtain SAFE’s approval for the purchase of foreign
exchange in connection with the repayment of a Foreign
loan, SAFE’s original approval/registration certificate for the
relevant Foreign loan or Foreign security must be produced.
With the internalization of RMB, Foreign loan denominated
in RMB becomes feasible, which is in principle subject to
the same regulatory regime governing foreign currency
denominated Foreign loans, other than that no currency
conversion is needed for RMB denominated Foreign loans
and a registration with local PBOC should be conducted.
Withholding tax
In accordance with Enterprise Income Tax Law and
Regulations on the Implementation of the Enterprise Income
Tax Law of the PRC, both of which came into effect on 1
January 2008, and a series of bilateral treaties with some
countries, the rate of PRC withholding tax is, in most cases,
ten per cent. Individual treaties, such as those with Hong
Kong and Singapore, may reduce that headline rate.
Hong Kong
Hong Kong
Introduction
Banking security law in Hong Kong is highly advanced
and flexible. Security transactions are straightforward and
transparent largely on account of comprehensive asset
and debtor registries, effective regulation and reporting
requirements.
However, the law relating to the registration of securities
and financial assistance will be changed when the new
Companies Ordinance comes into effect in 2014. A
comprehensive exercise to rewrite the Companies Ordinance
(Cap. 32) (CO) was launched in Hong Kong and the
Companies Bill was passed by the Hong Kong Legislative
Council in July 2012. However, the regulations set out in
the old CO still apply until the implementation of the new
Companies Ordinance.
The law sets out below is the law existing at the time of
this Memorandum before the implementation of the new
Companies Ordinance.
Main types of corporate security provider
There are three different types of corporate entities: Hong
Kong registered companies, non-Hong Kong companies
which have a place of business in Hong Kong and non-Hong
Kong companies with Hong Kong assets but with no place of
business.
The CO governs the incorporation and registration of
companies in Hong Kong and also companies that are
incorporated outside Hong Kong (non Hong Kong companies).
Non-Hong Kong companies establishing a place of business
in Hong Kong must be registered under Part XI of the CO
and have a business licence issued by the Inland Revenue
Department. Many non Hong Kong companies, incorporated
in the PRC, the BVI, Bermuda and Cayman may not have
a place of business in Hong Kong. However, if there is any
doubt about whether a company has a place of business in
Hong Kong, it is advisable to register under Part XI given
the draconian consequences of non registration of security.
Mortgage by way of legal charge
Used in respect of land situated in Hong Kong. By virtue of
the Conveyancing and Property Ordinance Cap 219 (CPO)
must be made by way of deed.
Legal mortgage
Can be taken over assets with legal title, including registered
intellectual property rights, plant and machinery, other
tangible property (including ships and aircraft), shares and
other financial instruments.
Fixed charge
Will generally be used in respect of all other moveables or
fixed assets. To create a fixed security, the security document
will usually prohibit dealing with any interest in the tangible
moveable property or moving the charged assets without
prior consent.
Equitable mortgage or charge
Can be taken or created in circumstances where full legal
formalities are not complied with, or, in respect of an
agreement to create a legal mortgage over future assets, or, a
mortgage of intangibles.
Floating charge
Can be taken over present, future and changeable assets that
can continue to be used in the ordinary course of a chargor’s
business until the occurrence of a specified event.
Pledge
Can be taken over property that is capable of being delivered
(including documents of title to property, such as bills of
lading and bearer securities).
Assignment
Both statutory and equitable assignments by way of
security can be created. To effect a statutory assignment,
the assignment must be absolute, in writing and signed by
the assignor with notice given to the debtor or counterparty.
Non-compliance with any of these requirements may
give rise to an equitable assignment. The main practical
advantage of a statutory assignment over an equitable one is
that the assignee may sue the counterparty in its own name
without joining the assignor.
Land and buildings
Land in Hong Kong is virtually all leasehold and granted by
the Government. Security is usually taken by a mortgage by
way of legal charge but equitable mortgages may be created
either by depositing deeds or by way of deed.
Hong Kong
Security can be taken usually by a legal or equitable
mortgage; or by a fixed or floating equitable charge; or by
way of pledge in the case of chattels or documents of title.
A fixed charge will normally be taken over tangible moveable
property and future tangible moveable property. Floating
charges can be taken over stock-in-trade or work in progress.
To create a fixed security, the security document will usually
prohibit dealing with any interest in the tangible moveable
property or moving charged assets without prior consent.
Shares and investments
Security can be taken by a legal mortgage; or an equitable
mortgage or a fixed or floating equitable charge. Scripless
shares held in the Central Clearing and Settlement System
(CCASS) and the contractual rights against CCASS or other
custodian will usually be secured by an equitable charge or
by an assignment by way of security.
A pledge can only be used in respect of bearer shares/
securities. In cases where shares have restrictions on
transfer, it is advisable to obtain undertakings from directors
to register shares on enforcement of security and letters of
resignation for non compliance with such an undertaking.
However, the efficacy of such undertakings has not yet been
tested.
Security can be taken by mortgage; fixed charge; or
assignment. It is usual to take a fixed charge. A single
document can be used for various types of intellectual
property which should identify specific intellectual property
rights, and use general language purporting to charge a wide
range of intellectual property rights arising or subsisting
anywhere in the world, whether registered or unregistered
and whether existing or subsequently acquired.
Bank accounts
Security can be taken by a fixed or floating charge or by way
of an assignment by way of security. An equitable charge
can extend to future deposits as they are made. For a fixed
charge, the right to withdraw funds must be subject to
permission of the chargee. Rights to deal with the account
generally must also be prohibited.
Receivables and contractual rights including insurance
policy
Security can be taken by a fixed or floating charge or by way
of assignment which is commonly used in respect of future
receivables.
rights
Overview
In determining whether a corporate security provider will be
bound by its security, three matters need to be considered:
• Does the security provider have the capacity to enter into
the transaction under its constitutional documents?
• If the security provider has the capacity to enter into the
transaction, do the directors have authority to bind the
company under the CO and its constitutional documents
without seeking the approval of the company in general
meeting?
• If so, (i) would the directors be in breach of their
fiduciary duty to the security provider in entering into the
transaction and (ii) does the lender have notice of this
fact? This is what is normally known as the “commercial
benefit” issue.
The Companies (Amendment) Ordinance 1997 (Ordinance
No. 3 of 1997) provides that companies are no longer
required to set out objects in their memoranda although
they may still do so (unless the relevant company intends to
dispense with the use of the word “Limited” in which case it
must set out the objects of the company in its memorandum)
and also abolishes the former common law rule of deemed
or constructive notice of constitutional documents. However,
a third party with actual knowledge that a transaction
is in excess of the directors’ authority may be unable to
enforce a transaction without the consent of shareholders.
Accordingly, it is advisable to ensure that a transaction falls
within the directors’ powers.
When establishing the authority of the individuals concerned
to enter into the transaction, it would be normal to trace their
authority from the company’s articles of association through
board minutes of the directors authorising the entry into of
the transaction.
The directors must act bona fide in the best interests of the
company which is a question of fact not of law. The test is
whether an intelligent and honest man in the position of a
director of the company concerned could, in the whole of
the existing circumstances, have reasonably been believed
that the transaction was of the benefit of the company. It is
not difficult to establish corporate benefit in a downstream
guarantee (or security) as a holding company would benefit
from a subsidiary’s financial well being. With an upstream
guarantee (or security) it is more difficult to justify benefit
for the grantor company. Where there is any uncertainty on
the issue of benefit, a shareholders’ resolution should be
obtained. However, this is not a complete solution as the
possibility of a liquidator’s challenge will remain.
A lender who has actual or constructive notice that a director
is in breach of these duties runs the risk that the security
provider may be entitled to set aside the security, leaving the
lender holding the secured assets on trust for the security
provider and its creditors.
No approvals or regulations apply to taking security other
than the Money Lenders Ordinance Cap 163 (MLO). The
MLO, which requires a licence in respect of making loans,
does not apply to authorised institutions under the Banking
Ordinance and exempts national regulated banks, banks
making loans to listed or major capitalised companies, inter
company group loans, or loans secured by a mortgage or
charge subject to registration under the CO.
Security created by companies
Hong Kong maintains both debtor and asset registries. In
general, non-registration at the debtor registry, within the
stipulated time, will render the security void as against
creditors and a liquidator in the event of an insolvency.
S. 80 of the CO requires every relevant corporate charge to
be registered at the Hong Kong Companies Registry (HKCR)
within five weeks from the date of its creation. S. 80(2)
of the CO lists the charges which must be registered and
includes floating charges on the undertaking or property of
the company and certain fixed charges. Although charges on
shares are not registrable, it is good practice to register in
any event.
The consequences of not registering within the five week-time
limit are serious for in the event of an insolvency the charge
will be void as against creditors and liquidator. Nevertheless
the obligation to repay the loan is not prejudiced (and in fact,
the debt automatically becomes due under s. 80 of the CO
as a consequence of failing to register) and the charge will
therefore only be partially void but it remains valid between
the parties and against a third party who later purchases the
property from the company subject to the charge.
S. 91 of the CO also provides that particulars of security
created over assets in Hong Kong by a non Hong Kong
company registered under Part XI of the CO must be
delivered together with the original security document
within five weeks to the Registrar of Companies for
registration.
The asset registration requirements for security interests set
out below are additional to, and do not replace, the debtor
registration requirements imposed by the CO.
Land
Non-registration of a security interest created over land in
Hong Kong at the Land Registry will render the relevant
security interest null and void against any subsequent bona
fide purchaser or mortgagee for valuable consideration
(s. 3 of the Land Registration Ordinance (Cap. 128)). The
document creating a security interest over land must be
registered at the Land Registry within 30 days of its creation
in order to preserve its priority. Retaining a priority period
during the search process (which is available in the UK land
registration system) is not available. Accordingly, in the case
of registration within one month of execution, priority will
be determined according to the date of execution. Outside
that period, priority will be determined according to the date
of registration.
A ship registered under the Merchant Shipping (Registration)
Ordinance Cap 415 (MSRO), whether permanently or
provisionally, can be subject to security under a Hong Kong
ship mortgage. Hong Kong ship mortgages must be registered
at the Hong Kong Shipping Registry. Mortgages will rank
in priority according to the date and time when they are
presented and accepted for registration, and not according to
the date of the actual mortgage instrument. Any supporting
collateral deed of covenant should be registered at the HKCR
along with the mortgage.
There is no register of aircraft mortgages in Hong Kong.
However, notification of a security interest should be given
to the Civil Aviation Department and details recorded in the
plane’s nameplate.
There is no registration requirement for pledges.
Hong Kong
Shares
Although registration is not required for a mortgage or charge
over shares, the practice is to register in any event and a
charge over dividend income may be registrable under the CO.
criminal sanctions, loans and guarantees that constitute
unlawful financial assistance will be rendered void and
unenforceable.
Security over certain intellectual property is subject to
additional registration requirements. The charge or mortgage
must be in writing and registered with the Trade Marks
registry, or filed with the Hong Kong Patents or Designs
Office. Although there is no specific time limit for the
registration of a charge over intellectual property rights, it
should be registered no later than six months from the date
of the charge, otherwise no damages or account of profits can
be claimed in respect of any infringement occurring after the
date of the charge and before the particulars of the charge
are registered. Best practice would suggest registration of the
charge as soon as possible. Copyrights may also be assigned
by way of security.
Overview
As Hong Kong’s insolvency regime is largely derived from
the UK’s pre-1986 insolvency regime, the emphasis remains
on the realisation of assets for the benefit of creditors
rather than the rescue of companies. The law in this area is
somewhat fragmented. There is no equivalent of insolvent
administration procedures or Chapter 11 protection.
Bank accounts, receivables and contractual rights
(including insurance policy)
No registration requirement exists other than that prescribed
under the CO.
Granting guarantees
Companies may give upstream, downstream and crossguarantees. Directors have a duty to ensure that a
commercial benefit accrues, directly or indirectly, to the
company granting the guarantee. It may be considered that a
parent company benefits from guaranteeing the obligations
of a subsidiary because it will directly or indirectly hope
to receive dividends from the subsidiary but that is not
so certain in cases of upstream or cross-guarantees. Even
where shareholders may have ratified the Board’s decision
to grant an upstream or cross guarantee, the possibility of a
successful liquidator’s challenge will remain in cases where
it can be demonstrated that the granting company did not
benefit from the transaction. Hong Kong companies are in
general prohibited from granting guarantees and loans to its
directors or persons connected to such directors.
There remains a general prohibition on all Hong Kong
companies granting financial assistance, in the form of
finance, loans or guarantees, for the acquisition of its own
shares. Unlisted companies can give financial assistance
if they comply with the “whitewash procedures” under
the CO which involves obtaining a shareholder’s special
resolution, a certificate of solvency and sufficient net assets
or distributable profits. On top of corporate and individual
Unfair Preference
Under s. 266 and s. 266B of the CO a transaction may be
invalid if a company has given a preference to any person
within six months of its liquidation (or in the case of an
“associate”, within two years) provided that there was a
desire to put a creditor in a better position than a general
creditor and the liquidator can show that, at the time the
preference was given:
• the company was “unable to pay its debts” or
• the value of its assets is less than the amount of its
liabilities (including contingent and prospective
liabilities).
In such a case, both fixed and floating charges will be invalid
if made within six months (or two years for associates) before
the commencement of insolvency proceedings. The purpose
of the provision is to prevent transactions which have the
effect of defeating the proper distribution of the assets of an
insolvent company upon its liquidation when all its creditors
are entitled to a pari passu distribution.
To counter the risk of an unfair preference, a lender
may require an auditor’s solvency certificate which may
evidentially assist in rebutting the suggestions that the
lender had knowledge of the unfair preference but will not
be conclusive rebuttal evidence.
Avoidance of floating charge
Under s. 267 a floating charge created within 12 months
of the commencement of insolvency proceedings is invalid
except to the extent of any cash paid to the company at or
after the time of creation unless the chargor was solvent
immediately at the time of creating the charge.
Fraudulent conveyance
Security with the intention of defrauding other creditors can
be set aside and there is no time limit on this.
Enforcement is largely a matter governed by the agreement
between the debtor and the creditor. Although debenture
holders have a raft of enforcement remedies, receivership
is the most popular method of enforcement of a security
interest on account of the fact that the receiver, may take
control of and run the debtor’s business with a view to
realisation of the security without directly exposing the
creditor to liability to the debtor. The remedy of sale can
also be useful, particularly, in the case of ships where a
mortgagee of a registered ship has power absolutely to
dispose of the ship and to give effectual receipts in respect of
the disposal under the MSRO.
insolvency
Secured creditors are entitled to enforce their security
despite a voluntary or a compulsory winding up order of the
company. This is true insofar as the assets covered by fixed
charges are concerned. However, assets covered by a floating
charge will first be used for distribution to preferential
creditors such as employees, statutory tax debts and small
bank depositors. The fact that the floating charge may have
crystallised or a receiver appointed under the debenture
creating the floating charge will not affect the rights of such
preferential creditors. Although the claims of the debenture
holders will be postponed to the preferential creditors,
they enjoy priority of their claims over the general body of
creditors.
Parties are free to choose any law they wish so long as it is
bona fide, legal and is not against public policy. However,
Hong Kong law would apply in determining the validity or
effectiveness of any security interest taken or created over
property located within Hong Kong. In general, it is advisable
to make the governing security law the same as that of the
jurisdiction in which the asset is located.
The use of private and commercial trusts is well established
under Hong Kong law. Therefore, in a syndicated transaction,
it is administratively easier to create, discharge or enforce
security (especially if it involves registration on an asset
register) if only one entity is the mortgagee or chargee. A
further and possibly greater benefit is the way in which
the facilities can be transferred. Security created in favour
of a security trustee can remain in place, undisturbed by
changes to the participants in the facility, regardless of the
means by which transfer takes place. This carries not only
administrative benefits, but also reduces the extent to which
the security may be vulnerable if the person granting the
security becomes insolvent. In the absence of a security
trustee, if a transfer is effected by novation, the security for
the loan would be discharged and need to be re-created every
time a portion of the loan was transferred to another lender.
None.
Withholding tax
There is currently no withholding tax payable on interest
payments made by a Hong Kong borrower regardless of
where the payee is situated.
India
India
Contributed by J Sagar Associates
Introduction
Commercial lending in India is regulated by the Reserve
Bank of India (RBI). The RBI regulates: (i) domestic Indian
Rupee denominated borrowings by Indian companies from
Indian lenders; and (ii) foreign currency borrowings by
Indian companies from foreign lenders. Under the external
commercial borrowing guidelines updated by the RBI on
1 July each year (ECB Guidelines), Indian borrowers may
raise funds from foreign lenders for specified end-uses only.
Funds raised from foreign lenders (commonly known as
external commercial borrowings or ECB’s) cannot be used
for on lending domestically or investment in capital markets
in India, for the real estate sector or for working capital and
general corporate purposes.
Corporate security providers in India will primarily be
companies incorporated under the (Indian) Companies Act,
1956 (Companies Act) and will be private companies or
public listed and unlisted companies. Companies in India are
most commonly limited by shares although companies can
be limited by guarantee.
Legal mortgage
A legal mortgage must be made by way of a registered deed.
A legal mortgage is preferred by lenders as it transfers all
rights of the mortgagor in the mortgaged property to the
mortgagee and gives the mortgagee the right to foreclose on
the mortgage without the intervention of the courts. Physical
possession of the assets remains with the mortgagor. A legal
mortgage is taken over immoveable property (usually land)
but can also include moveable property such as intellectual
property rights, plant and machinery, receivables, rights
under contracts and other tangible property excluding
shares. The mortgage deed can only apply to existing
immoveable property. Any future acquired immoveable
property must be mortgaged under a separate deed. However
it should be noted that in most States in India, a legal
mortgage deed attracts very high rates of stamp duty which
often makes execution commercially unviable.
Equitable mortgage
Commonly referred to as a mortgage by deposit of title
deeds. This mortgage is created by a delivery of title deeds
by the mortgagor to the mortgagee. The asset class cannot
be anything other than immoveable property. An equitable
mortgage creates a charge on the property. Enforcement of
such a mortgage can only be through a court process. It is not
necessary to execute any document to evidence the creation
of this mortgage. Typically, the mortgagee will take a written
declaration from an authorised person (preferably a Director
or some other senior official) of the mortgagor confirming
the mortgagor’s intention to mortgage the property. The
mortgagee may make an internal recording of the acceptance
of the title deeds (referred to as a “memorandum of entry”). In
some States in India such a memorandum of entry is subject to
stamp duty though the stamp duty payable is usually capped
or nominal. Many States in India are now making registration
of equitable mortgages with the applicable land registry
mandatory.
Charge (whether fixed or floating) over moveable assets
Usually created under a deed of hypothecation. A charge can
be taken over present and future moveable assets, whether
fixed or current assets, intellectual property rights, receivables,
bank accounts, assignment of rights under contracts and any
other moveable properties whether tangible or intangible. The
charge may be enforced without the intervention of the courts
so long as the deed of hypothecation expressly provides for
such rights. In some States in India a deed of hypothecation is
subject to stamp duty though the stamp duty payable on such a
document is usually capped or nominal.
Pledge
Usually taken over assets such as shares or other securities
under a pledge deed. A pledge gives the pledgee the right to
retain the pledged assets till the time of realisation of debt
and the right of sale with notice. The assets are delivered
to the pledgee. In terms of the pledge deed, the pledgee
typically has the right to initiate sale of the securities without
the court’s intervention. Typically, the pledgor executes
an irrevocable power of attorney in favour of the pledgee,
permitting the pledgee to deal with the securities and
exercise the same rights the pledgor would have had over the
pledged assets. The power of attorney may be used by the
pledgee upon the occurrence of a specified event, such as an
event of default. However, it is mandatory for the pledgee to
duly and specifically notify the pledgor before effecting any
sale of the pledged assets.
It should be noted that the power of attorney needs to be
notarised. In case the power of attorney is executed outside
India, then the same should be consularised or apostilled in
order to be valid under Indian law.
India
Main types of assets provided as security
Land and buildings
Land in India may be freehold or leasehold. Leasehold land,
particularly in the case of industrial companies, will typically
be leased from government authorities and hence there can
be restrictions on transferability. Also the lessor’s permission
is usually required to create a mortgage of leasehold land. In
cases where the lessor is a government entity, obtaining the
necessary approvals may be time consuming.
Moveable property
Moveable property includes plant and machinery, stockin-trade or work in progress, cash or cash equivalents,
bank accounts, receivables, intellectual property, goodwill,
uncalled capital or rights under contracts and any intangible
rights, which will generally be secured by a floating charge.
Indian law also recognises charges over ships and aircraft.
Aircraft are typically charged under a deed of hypothecation.
Security over ships are taken under a deed of mortgage. High
Courts in India have separate admiralty jurisdiction. However,
there is no specific jurisdiction in the case of aircraft.
Securities
The securities most commonly provided as collateral are
shares. Shares may be in physical form or dematerialised.
Listed shares have to be in dematerialised form. India has
a central depository system, regulated by statute, and
recording of pledges of dematerialised shares is fairly simple.
The RBI prefers that all banks in India should only take
pledges of dematerialised shares. It should also be noted
that Indian banks are generally prohibited from granting
loans against the security of shares or debentures and cannot
hold, whether as pledgee or as legal owner, more than 30
per cent of the share capital of a company. Other securities
may include mutual fund units, pass through certificates, etc
though pledges of these forms of securities is not common.
rights
A security provider (being an Indian company) will need the
following corporate authorisations:
• Where the security provider is also the borrower the
approval of its Board of Directors (as authorised by the
company’s Articles of Association) must be obtained
under s. 292 of the Companies Act, accepting the terms
of the borrowing, authorising the execution of the facility
agreement and security documents and the creation of the
security.
• In the case of a public company or its private
subsidiary company, the approval of its
shareholders must be obtained under s. 293(1)(a) and
s. 293(1)(d) of the Companies Act for the creation of
security over all or substantially all of its assets and the
proposed borrowing respectively. It should be noted that
for administrative ease, most companies usually have
shareholder approvals for securing a specified amount
of debt and borrowings. Where the shareholder approval
is dated, it is common practice to obtain an auditor’s
or Director’s certificate confirming that the creation of
the security and borrowing is in accordance with the
shareholder approval.
• Where the security provider is a company other than the
borrower the approval of its Board of Directors (as
authorised by the company’s Articles of Association) must
be obtained under s. 292 of the Companies Act, accepting
the terms of the borrowing, authorising the execution of the
security documents and the creation of the security.
• Where the security provider is a public company or the
subsidiary of a public company and subject to certain
exemptions, the approval of the security provider’s
shareholders must be obtained under s. 372A of the
Companies Act. This approval will be required for any
form of security including corporate guarantees and also
for inter-group loans and deposits.
• Where the security provider is a public company or the
subsidiary of a public company and subject to certain
exemptions, approval of the Central Government may also
be required under s. 295 of the Companies Act, 1956, if
there are common directors on the boards of the borrower
and the security provider or if the security provider
exercises certain prescribed levels of control over the
borrower.
In the case of ECBs, and pursuant to the ECB Guidelines, an
Indian corporate borrower must obtain a loan registration
number from the RBI. This involves making an application
to the RBI, and the registration is usually issued as a matter
of course unless the borrower has investigations pending
against for or has to show cause in respect of exchange
control violations. It takes about four weeks to obtain the
loan registration number. Upon the loan registration number
being obtained, the borrower can apply to its authorised
dealer bank (an Indian bank authorised to deal in foreign
exchange by the RBI) or the RBI, as may be applicable, for
approval to create the proposed security. It should be noted
that such borrowings cannot be secured by guarantees or
letters of credit from Indian banks or financial institutions.
It should also be noted that an Indian entity cannot maintain
bank accounts overseas, except for certain limited purposes
as specified under Indian exchange control laws3. For
instance, Indian borrowers cannot maintain debt service
reserve accounts offshore, unless they have obtained
approval from the RBI and the RBI does not issue such
approvals as a matter of course.
There are no specific regulatory approvals required for
domestic borrowings.
However, where a mortgage or charge is created over assets
(being land,building, machinery, plant, shares, securities
and fixed deposits in banks to the extent to which any of
the said assets do not form part of the stock-in-trade of the
business of the security provider ), the security provider
should obtain an approval from the income tax authorities
under s. 281 of the Income Tax Act 1961 of India. As per
a recent circular, the security provider should approach
the Income Tax department for obtaining the permission
in the prescribed form at least 30 days prior to the date
of the proposed security creation. After the making of the
application, the Income Tax department is required to
convey its decision in a time bound manner. In case there is
no tax demand outstanding or any undisputed outstanding
tax demand has been paid together with interest, and
there is no likelihood of a tax demand arising in the next 6
months, then the Income Tax department is required to grant
permission within 10 working days from the date of receipt
of application or the payment of undisputed tax demand as
the case may be.
India maintains both debtor and asset registries. Nonregistration at the debtor registry within the stipulated
time will render the security void as against creditors and a
liquidator in the event of an insolvency of the debtor/security
provider.
Mortgages of immoveable assets and charges over
moveable property created by companies registered under
the Companies Act have to be filed with the Registrar of
Companies under the prescribed Form 8 (or Form 10 in case
the charge/mortgage is to secure debentures) within a period
of 30 days of creation of the mortgage/charge.
3
Please note that as specific exceptions, companies in the business of shipping and airlines
have been allowed to open and maintain accounts with overseas banks for the purpose of
undertaking transactions in the ordinary course of their business.
The filing has to be made by the security provider. If the
required form(s) are not filed, the charge/ mortgage will
be void against the liquidator in the event of a winding
up of the security provider. The mortgage/charge is filed
electronically. It is necessary for both the security provider
and the mortgagee to have digital signatures in order to be
able to file the mortgage/charge electronically. Hence foreign
lenders usually prefer to appoint an Indian security trustee to
hold the security on their behalf. A legal mortgage deed also
needs to be registered with the appropriate land registry. The
mortgagor and mortgagee are both required to be present
for the registration. As per statute, the registration must
be completed within a period of four months from the date
of the deed. However, lenders prefer that the registration
be completed promptly upon execution of the deed as the
mortgage is not perfected until it is registered.
Though possible, it is not common practice to file Form 8
in respect of a pledge of shares and hence typically there
are no filings made under the Companies Act for a pledge.
In the case of a pledge of share certificates there is no filing
requirement. The pledge deed is the only recording of the
pledge and does not need to be perfected.
As stated earlier, creation of charge on certain classes of
assets in favour of for the benefit of offshore lenders will
require the prior approval of an authorised dealer bank or
the RBI.
A central registry named the Central Registry of
Securitisation Asset Reconstruction and Security Interest
of India has been set up under the Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interests Act, 2002 for maintaining a record of
securities provided to a bank or a financial institution.
Details of charges and securities granted in favour of a bank
or a financial institution in India are required to be filed
with this Registry in certain specified forms. The records
maintained by the Central Registry are available for search
by any lender or any other person desirous of dealing with
any property. This arrangement has been put in place for
preventing frauds involving multiple borrowings by any
entity against the security of the same property as well as
fraudulent sale of property without disclosing the existing
security interest over such property.
Land
A mortgage deed must be registered with the sub-registrar
of assurances of the State in which the immoveable property
is situated. There are no other registration requirements,
whether the mortgage deed relates only to immoveable
India
property or immoveable property together with moveable
property such as intellectual property rights or plant and
machinery.
Moveable property (including aircraft and ships)
Aircraft: the deed of hypothecation must be filed with the
Directorate General of Civil Aviation. Along with the security,
the lender would also obtain a de-registration power of
attorney to enable the lender to de-register the vessel in case
of an enforcement event.
Ships: the deed of mortgage must be registered with the
Mercantile Marine Department, Registry of Ships in India.
Shares
A pledge of shares held in dematerialised form needs to be
recorded with the depository. There are separate statutes that
apply to the depository system in India. There are certain
forms that need to be filed with the depository once the pledge
deed is executed. The form is filed by the pledgor. Upon filing
the required form, the pledge gets recorded in the depository
system and the pledgor will be unable to transfer the pledged
shares without the pledgor’s cooperation. It is also necessary
for the pledgee to have a dematerialised account in India.
Hence foreign lenders usually prefer to appoint an Indian
security trustee to hold the pledge on their behalf.
When taking and registering security over already
encumbered assets that is intended to rank pari passu with
an existing charge or mortgage, pari passu letters or intercreditor agreements must be produced for the purposes of
registration.
be established that the transfer of property was not giving
preference to any one creditor or class of creditors.
The company would need to prove that the transfer was
bona fide and the borrowings made in the ordinary course of
business.
Any transfer of property made by a company, not in the
ordinary course of its business or in good faith and for
valuable consideration, will be void against the liquidator if
made within a period of one year prior to the presentation
of a petition for winding-up or the company passing a
resolution for winding-up.
As stated above, a legal mortgage, a charge created under a
deed of hypothecation and a pledge may be enforced without
the intervention of the courts. The mortgagee or chargeholder
also has the right to appoint a private receiver. An equitable
mortgage can only be enforced through judicial process.
However, it should be noted that enforcement actions in
India invariably do go through a judicial process on account
of borrower’s obtaining injunctions against an enforcement
claim. Even though banks in India have special debt recovery
tribunals for their claims, the process, though quicker than
the High Court, can still take at least three to four years.
Claims made through High Court often take seven to ten
years to be settled.
insolvency
The granting of guarantees is contractual and must be
supported by consideration. Indian law recognises that the
grantee has the same rights against a guarantor as it would
have against the primary debtor.
Under the Companies Act, a secured creditor has the right to
realise its security despite the making of a winding up order.
However, amounts due to a secured creditor will rank pari
passu with preferential debts of the company (amounts owing
to workmen of the company) and these amounts are payable
in priority to all other debts of the company.
Granting guarantees
There is a general prohibition on a company providing
financial assistance, in the form of finance, loans or
guarantees, whether directly or indirectly, for the acquisition
of its own shares or for the acquisition of shares of its holding
company.
Any transfer of property by a company made or agreed to
be made within six months prior to the commencement of
a winding-up will be deemed a fraudulent preference of
the company’s creditors and will be invalid, unless, it can
Indian Courts have upheld the freedom of the contracting
parties to select the governing law of a transaction. The
choice of law must be express and it should not be contrary
to public policy. However, it is a generally accepted principle
that the choice of law should also have some connection
with the transaction and hence a contract between Indian
parties for a loan taken in India would be governed by
Indian law. Also, if the contract (such as mortgage deeds or
pledge agreements) concerns Indian assets, it is advisable
to have the contract subject to Indian law as there could be
statutory requirements that need to be followed at the time
of enforcement. It should also be noted that banks in India
cannot agree to arbitration clauses in their loan agreements
as any claim by a bank has to be made before the Debt
Recovery Tribunal, a special tribunal set up with the intent
of processing bank claims on a fast track basis. Further, in
the case of Booz Allen and Hamilton Inc. v SBI Home Finance
Ltd. & Ors4 the Supreme Court of India has held that matters
arising from a mortgage of immoveable property is not an
arbitrable dispute and therefore, cannot be settled by way of
arbitration. The same has to be adjudicated upon by a court
of law.
The use of private trusts particularly for syndicated loan
transactions is a commonly adopted practice and the law
governing trusts is well developed. Therefore, in a syndicated
transaction, it is administratively easier to create, discharge or
enforce security if only one entity is the mortgagee or chargee.
A further and possibly greater benefit is the way in which the
facilities can be transferred without requiring individual
novations. Security created in favour of a security trustee can
remain in place, undisturbed by changes to the participants in
the facility, regardless of the means by which transfer takes
place. This carries not only administrative benefits, but also
reduces the extent to which the security may be vulnerable if the
person granting the security becomes insolvent.
India is subject to exchange control regulations, which are
encapsulated in the Foreign Exchange Management Act,
1999 (FEMA) and all notifications and circulars issued
in relation thereto from time to time. Remittances out of
India if not specifically provided for under the FEMA and
extant rules are not permissible unless the RBI’s approval is
obtained. Payments to foreign lenders for ECBs and under
certain kinds of guarantees are generally permitted under the
automatic route. Remittance of funds pursuant to indemnity
obligations would require the RBI’s approval as would
remittance of enforcement proceeds.
4
Reported in AIR 2011 SC 2507.
Withholding tax
There are no withholding taxes payable on interest payments
made by an Indian company to a bank in India. Withholding
taxes with respect to interest payments made by an Indian
company to a payee situated outside India will need to be
determined in accordance with tax treaties (if any) between
India and the country of residence of the payee.
Indonesia
Indonesia
Contributed by Susandarini & Partners in
Association with Norton Rose Fulbright Australia
Introduction
The Indonesian legal system is based on a civil law
system and comprises modern Indonesian law, the Civil
Code and customary laws referred to as adat. Indonesian
banking and lending is regulated under Law No. 7 of 1992
regarding Banking Law as amended by Law No. 10 of 1998
(Indonesian banking law). The granting of commercial
security in Indonesia is regulated under the specific law
applying to each type of security. It can be complex but
amendments have been made to the respective security laws
under the Indonesian Civil Code (ICC) in order to produce a
modern and more flexible security law system.
Indonesian law generally recognises four types of
companies:
• general Indonesian companies (Perseroan Terbatas Biasa)
(PT Biasa)
• domestic capital investment companies (Penanaman
Modal Dalam Negeri) (PMDN)
• foreign investment companies (Penanaman Modal Asing)
(PMA)
• public companies which have a minimum paid-up capital
of IDR3 billion and at least three hundred shareholders
(Perseroan Terbatas Terbuka) (PT Tbk)
• PT Biasa and PMDN companies must be wholly owned
by Indonesians but it is possible to convert each of them
into a PMA company (if their businesses are open for
foreign investment). Foreign investors may only invest
in PMA companies with the prior approval of the Capital
Investment Coordinating Board (Badan Koordinasi
Penanaman Modal) (BKPM).
For certain business sectors, such as banking and nonbanking financial institutions, foreign investors are
permitted to invest in joint venture companies, subject to
the approval and supervision of the relevant Government
authority. Indonesian non-banking financial institutions
(securities companies, insurance companies, pension funds,
and finance companies) are regulated and supervised by
the Capital Market and Financial Institutions Supervisory
Agency (Badan Pengawas Pasar Modal dan Lembaga
Keuangan – Bapepam-LK) of the Ministry of Finance (MOF),
and banks are regulated and supervised by Bank Indonesia,
the Central Bank of Indonesia. Following the enactment
of Law No. 21 of 2011 regarding the Financial Services
Authority (Otoritas Jasa Keuangan – OJK) on 22 November
2011, the supervisory authorities of Bapepam-LK and Bank
Indonesia will be shifted to the OJK effective on 31 December
2012 and 31 December 2013 respectively. However, the
authority to supervise monetary and payment system policy
will remain with Bank Indonesia.
Banking and non-banking financial institutions with foreign
investment are not considered as PMA companies under
the jurisdiction of BKPM and are generally referred to as PT
Joint Ventures (PTJV). When PMA companies invest in other
companies, this is treated as foreign investment, but PMA
companies and PTJV are otherwise treated as Indonesian
companies.
A foreign company without a presence in Indonesia may
hold shares in PMA companies and PTJV but cannot
generally hold any other assets located in Indonesia.
Security rights over land (Hak Tanggungan atas Tanah)
Security rights over land (HT) are governed by Law No. 4 of
1996 regarding Security Rights on Land and Land-Related
Properties (HT law). An HT is a security right over the title to
land, with or without buildings, fixtures or goods attached to
the land, for the purpose of securing repayment of a specified
debt. The HT provides the holder with priority over other
creditors and it will follow the collateral assets regardless of
any transfer of title to the land.
The HT regime replaced the previous security right available
over land title, called “Hypothec” and governed by Law No. 5
of 1960 regarding Basic Principles on the Agrarian Law.
Pledge
Pledges are governed under Articles 1150 to 1160 of the
ICC. A pledge (pandrecht) is security over moveable assets to
secure a specified debt, granting the pledgee priority over
other creditors in respect of that asset. Apart from tangible
moveable property, a pledge may also be vested in respect of
intangible moveable property, such as shares.
A pledge gives the pledgee a preference right over other
creditors by permitting the repayment of a debt from the sale
proceeds of the pledged object.
Indonesia
Although it is not expressly provided in the ICC, some scholars
are of the view that pledged assets are subject to “droit de
suite”. In this regard, the pledgee may exercise its rights
against the pledged property even if the property is found to
be in the hands of third parties in the event that the pledgee
has been involuntarily dispossessed of the property.
Fiduciary security
Under Law No. 42 of 1999 regarding Fiduciary Security
(Fiduciary Security Law), a fiduciary security is a security
right over immovable and moveable goods, whether tangible
or intangible, where the goods are not subject to:
requires the security grantee to possess the warehouse
receipt or, in the case of a scripless warehouse receipt, the
security grantee must control the warehouse receipt, to
ensure that no other security can be established over the
same warehouse receipt.
Main types of security asset
Land and buildings
An HT may be granted over a parcel of land in respect of any
of the following interests:
• Right of Ownership (Hak Milik)
• HT
• Right to Cultivate (Hak Guna Usaha)
• hypothec over registered ships with a minimum gross
tonnage of 20 metric tons
• Right to Build (Hak Guna Bangunan)
• hypothec over aircraft or
• a pledge.
Other than inventories (where the security grantor is required
to replace inventories to ensure the quantity of the collateral
assets remains the same), the fiduciary security will follow
the collateral assets regardless of any transfer of title to the
collateral assets. The fiduciary security grantee has priority
over other creditors in respect of collateral assets.
Hypothec
Hypothec is a form of security over immoveable assets,
including ships with a minimum gross tonnage of 20 metric
tons.
Security over Warehouse Receipts
Security can be established over commodities (ie, moveable
goods that can be stored for a certain period of time in a
warehouse and are generally tradable) by establishing
security rights over the warehouse receipts for the relevant
commodities (the title documents). The security grantee has
priority over other creditors in respect of the commodities. It
is important to note that:
• this security may only secure the security grantor’s debt
(not third parties’ debt) payable to the security grantee
(elucidation of Article 16 paragraph 1 of Government
Regulation No. 36 of 2007, which is the implementing
regulation of Law No. 9 of 2006 (as amended)
• the commodities can only be encumbered by one security
over warehouse receipts and therefore this security
• Right to Use (Hak Pakai) over State Land (Tanah Negara).
Tangible moveable property (including ships, aircraft
and commodities with warehouse receipts)
Tangible moveable property can be encumbered by fiduciary
security, pledge or security over warehouse receipts.
Shares
Law No. 40 of 2007 regarding Limited Liability Company
(Company Law) provides that shares can be secured by way
of pledge or fiduciary security provided that the articles of
association of the company do not stipulate otherwise.
Given that enforcing fiduciary security is a less cumbersome
process than enforcing a pledge, then provided the security
grantor is an Indonesian party, fiduciary security over shares
will be preferable to a pledge. Unlike the case for fiduciary
security, no specific procedures are prescribed by law for
enforcing a pledge. The current practice to enforce a pledge
is that the pledgee will need to file a normal civil procedural
action. This process would normally take three to five years if
appealed as far as the Indonesian Supreme Court.
The proper form of security to be established over intellectual
property under Indonesian law is fiduciary security.
Bank accounts
Bank accounts can no longer be the object of a fiduciary
security. In this regard, only objects with proprietary rights
(hak kebendaan) can be subject to a fiduciary security. To
replace fiduciary security, the form of security that is normally
established over bank accounts is a pledge. However, note
that the validity, effectiveness and enforceability of a pledge
over bank accounts is still unclear under Indonesian law,
since: (i) it is unclear whether a bank account constitutes
an asset or claim upon which a valid pledge may be granted
under Indonesian law, and (ii) if the pledgor is permitted
to retain control over the bank accounts except in an event
of default, then this may be deemed inconsistent with the
nature of a pledge under Indonesian law.
Although it is possible for a creditor and the debtor to enter
into an assignment of bank account agreement, such an
assignment does not create a security interest capable of
surviving insolvency or bankruptcy.
Receivables
The proper form of security to be established over receivables
and future receivables (including insurance proceeds) is a
fiduciary security.
Contractual rights
Other than rights to receive payment, a security may not be
taken over contractual rights under Indonesian law. As an
alternative, in practice, conditional assignments (and “stepin” rights) are often used. However, a conditional assignment
is not considered a security under Indonesian law, but a
contractual agreement.
rights
Articles of association for Indonesian companies typically
provide that the board of directors of the company must
obtain the prior approval for granting of a security interest
from either the board of commissioners of the company
or the general meeting of the company’s shareholders.
If security is established over the company’s substantial
assets (ie, more than 50 per cent of the total net assets of
the company in one transaction or a series of transactions),
then unless the articles of association require higher quorum
and voting requirements, the establishment of the security
requires the approval of a general meeting of shareholders
with a minimum quorum of 75 per cent of the issued shares
with valid voting rights, and the resolution must be approved
by at least 75 per cent of the votes legally cast.
In the absence of a binding precedent or specific provisions
under law, it is possible that an Indonesian court may
require that a certain commercial interest exist or corporate
benefit be derived before a company can issue a guarantee or
provide a security interest over its assets to a third party, or
before a company undertakes to indemnify a party for losses,
costs, expenses, and the like caused by a third party.
The Company Law, following the Dutch Civil Law concept,
adopts a two-tier management structure, comprising:
• a Board of Directors (Direksi) and
• a Board of Commissioners (Dewan Komisaris).
The Board of Directors is responsible for the day-to-day
management of the company. The Board of Commissioners
is responsible for supervising the operations of the company
by the Board of Directors and providing advice to the Board
of Directors. It is common practice that certain extraordinary
decisions of the Board of Directors require the approval of the
Board of Commissioners, such as granting security over the
company’s assets.
Banking in Indonesia is currently regulated by the
Indonesian banking law, which applies to Indonesian banks
and foreign banks that have a presence in Indonesia (in the
form of either a branch office or a representative office). The
banking law regulates banking activities, such as:
• business activities of banks
• licensing, form of legal entity and ownership of banks
• supervisory requirements
• board of directors and board of commissioners of banks
and
• treatment of confidential information.
Separate banking regulations are also published under
government regulations and/or by Bank Indonesia. However,
it is important to note that by 31 December 2013, the OJK
is expected to regulate, all banking activities other than
monetary and payment system policy.
Indonesian law security other than pledges must be
registered in order to be effective. While pledges do not
generally require registration, a pledge of shares must be
registered in the relevant company’s shareholders’ register.
HT
An HT can be established by executing a deed of granting
security right over a land title (Akta Pemberian Hak
Tanggungan) between the land titleholder, who acts as the
grantor, and the creditor, who acts as a grantee, before a
Indonesia
Land Deed Official (Pejabat Pembuat Akta Tanah or PPAT)
(Deed of HT). The Deed of HT must be executed in the
Indonesian language using the standard form regulated by
the State Minister of Agrarian Affairs/Chairman of National
Land Agency, which can be amended by the parties to reflect
more accurately the rights and obligations of the grantor and
grantee under the HT.
Registration is essential in order to create valid security, as
the fiduciary security rights will only be established upon
their registration, and for the purposes of enforcement.
An asset may only be subject to one fiduciary security. For
a fiduciary security over receivables, the relevant account
debtors must be notified or acknowledge the fiduciary
security in order for it to become effective against them.
A Deed of HT must be registered at the Land Office where the
land is located by the relevant PPAT who prepared the Deed
of HT. Security rights only become effective after registration.
The Land Office will issue a certificate of security rights
(Sertifikat Hak Tanggungan) noting the lender as a secured
party over the land. Priority depends on the ranking of
security rights. The certificate is made in a “grosse akta” or
a deed having court executorial power. Under the HT law,
parcels of land can be encumbered with more than one
security right. The ranking of securities is determined based
on the date of registration of the securities. If a debtor is in
default, the first rank holder has priority to take the proceeds
from the sale of land to recover the debt.
Under Police Head Regulation No. 8 of 2011 on Executing
Fiduciary Security Pacification (22 June 2011), an
application can now be made to the police office in the
location where the fiduciary is executed in order to have the
execution ”pacified”. However, it is not yet clear how this
new rule will operate in practice.
Fiduciary security
Under the Fiduciary Security Law, the grant of a fiduciary
security must be made under a Deed of Grant of Fiduciary
Security which must be made in the Indonesian language
and before an Indonesian notary and contain the following
information:
A pledge is often made together with a Power of Attorney in
favour of the pledgee authorising it to sell the collateral assets
in the event of the pledgor’s default. In practice, to avoid any
challenge to enforcement, the pledgee may need to obtain a
court order through normal civil procedures before exercising
the Power of Attorney to sell the collateral assets privately.
• the identity of the grantor and the grantee of the fiduciary
security
A pledge over shares must be noted in the register of
shareholders. The Company Law requires that any security
over shares be noted in the register of shareholders, including
the name and address of the security grantee, and the date of
establishment of such security. In the case of scripless shares,
the shareholder must notify the account holder to block the
relevant share account with Indonesia’s central securities
repository (PT Kustodian Sentral Efek Indonesia).
• a reference to the underlying agreement
• a description of the object
• the secured amount and
• the value of the object.
Each fiduciary security (including any amendments that
will result in a change to the fiduciary security certificates)
must be registered with the Fiduciary Registration Office
having jurisdiction over the grantor’s place of domicile.
This also applies to fiduciary objects that are not located
in the territory of the Republic of Indonesia. The Fiduciary
Registration Office then issues a copy of the registry book
posting in the form of a certificate of registration (Sertifikat
Jaminan Fidusia) that notes the lender as the secured party
and constitutes evidence of the registration.
Pledge
A pledge in respect of tangible property will become effective
upon the possession or control of the property by the pledgee
and, in respect of intangible property, a notice of the pledge
must be served to the relevant parties, eg, the company (for a
pledge of shares) to make the pledge effective against them.
Hypothec
Under the Shipping Law, ships that have been registered in
the Indonesian Ships Registry (Daftar Kapal Indonesia) can
be secured as a security by way of hypothec. The security is
made by executing a Deed of Hypothec by the Registrar and
Recorder of Changes of Names of Ships (Pejabat Pendaftar
dan Pencatat Balik Nama Kapal) at the domicile where the
ship is registered, and noting this in the Master List of Ship
Registration.
Following the enactment of Law No. 1 of 2009 regarding
Aviation, which contains the implementing provisions of the
Convention on International Interests in Mobile Equipment
(Cape Town Convention), subject to the satisfaction of certain
requirements under the law, an Indonesian law hypothec
should now create security rights over aircraft following the
registration of the hypothec with the International Registry.
The law also provides that Indonesia will also recognize the
International Interests established over aircraft under
a security agreement governed by foreign law, without
any nexus.
It is also necessary for the aircraft security grantee to obtain
Irrevocable Deregistration and Export Authorization (IDERA)
and have the IDERA registered with and acknowledged by
the Ministry of Transport.
Security over warehouse receipts must be made in an
Indonesian notarial deed. The deed must contain, among
other things, the specification of the warehouse receipt to
be encumbered, the secured amount and the market value
of the commodities as at the loading in the warehouse.
Although the law is silent on the language of the notarial
deed, given the requirement to use the Indonesian language
in agreements entered into by Indonesian parties (under Law
No. 24 of 2009 on the National Flag, Language, Emblem,
and Anthem), the notarial deed should be executed in the
Indonesian language or in a dual language form.
The security must be registered with PT. Kliring Berjangka
Indonesia (Persero), which will issue a confirmation of the
registration to the security grantee, the security grantor and
the warehouse management. By Government Regulation No.
36 of 2007, this confirmation will be issued within one day
after the Registry receives the complete documents.
Granting guarantees
An Indonesian company may issue an upstream or
downstream corporate guarantee to the extent that the
guarantee is for the best interest of the company and subject
to the Board of Directors obtaining the necessary approvals
under the company’s articles of association. However, note
that the position concerning the giving of guarantees by
public companies is more complicated.
Offshore loans and guarantees
The Indonesian Government has regulated the use of
offshore loans and guarantees for such loans by Indonesian
companies since 1972. Through Presidential Decree No. 39 of
1991 regarding Coordination of Management of Commercial
Offshore Loans (PD No. 39 of 1991), a coordinating team was
formed to manage all commercial offshore loans to Indonesia
that were not loans from the Intergovernmental Group on
Indonesia, Offshore Commercial Loan Team (Pinjaman
Komersial Luar Negeri) Team (PKLN Team). Loans managed
by the coordinating team include commercial offshore loans
to the Government, state-owned companies and private
companies. The loans that are required to be managed by the
PKLN Team are:
• loans related to development projects that are “nonrecourse”, “limited-recourse”, “advanced payment”,
“trustee borrowing”, “leasing” and other loans
• loans related to development projects where financing is
based on a build, operate and transfer model.
PD No. 39 of 1991 provides that any proposed borrowers of
such offshore loans must apply for approval from the PKLN
Team and submit complete information on the purpose of
the loan.
Loans that do not require prior approval or management by
the PKLN Team are as follows:
• short-term commercial offshore loans for trading
• offshore loans to private companies for financing
development projects where the companies have no
relation to the Government or state-owned companies by
way of share participation or any other form and
• other offshore loans to be determined by the PKLN Team.
However, it should be noted that although the exempted
loans are not subject to approval and management, all
offshore loans are subject to periodic reporting requirements
to the PKLN Team.
Generally, it should be assumed that a corporate guarantee
given by a state-owned company in favour of an offshore
lender(s) will be subject to the requirement to obtain approval
from the PKLN Team under PD No. 39 of 1991. The rationale
for this assumption is that, if enforced, the corporate
guarantee would trigger obligations to make repayments from
Indonesia to offshore accounts. As to corporate guarantee
provided by Indonesian private companies, the corporate
guarantee will need to be notified to the PKLN Team, the
Ministry of Finance and Bank Indonesia and will be required
to be regularly reported to Bank Indonesia when the
corporate guarantee becoming enforceable.
Indonesia
In addition, offshore loans and guarantees must be reported
to Bank Indonesia (under Bank Indonesia Regulation
No. 12/24/PBI/2010 dated 29 December 2010 regarding
Obligation to Report Offshore Loans and its implementing
regulations), the Ministry of Finance (under Minister of
Finance Decree No. Kep.261/MK/IV/5/73 dated 3 May 1973
regarding the Implementation Rules for Obtaining Offshore
Loans). Guarantees should be reported when they become
enforceable.
Bank Indonesia reporting obligations
• Prior to obtaining long-term offshore loan facilities (ie,
an offshore loan with a tenure of more than one year),
Indonesian private non-bank companies are required
to file with Bank Indonesia the following reports: (i)
financial statement, (ii) financial ratio, (iii) credit rating
report (if available), (iv) risk management analysis,
and (v) offshore loan plan for a period of one year. The
reports must be submitted at the latest by 10 March of the
relevant year. Any amendments to the latter two reports
must be submitted by 1 July of the relevant year.
• Regardless of the tenure of the offshore loans, companies
obtaining offshore loan facilities must submit semi-annual
reports on their financial statement and financial ratio on
10 June and 10 December of each year.
• a report on the signing of the loan agreement or the
corporate guarantee becoming enforceable. The report can
be submitted simultaneously with the report submitted to
Bank Indonesia
• a quarterly report on the realisation or implementation of
the loan agreement or corporate guarantee.
In practice, the report submitted to the PKLN Team will be in
the same form as those submitted to Bank Indonesia and the
Ministry of Finance.
Guarantees by public companies
Bapepam-LK requires certain procedures to be followed
before a listed entity can provide a corporate guarantee, as
stated under Chairman of Bapepam Decree No. KEP-614/
BL/2011 on Material Transactions and Change of Main
Business Activities dated 28 November 2011 (Material
Transaction Rules).
Under the Material Transaction Rules, a material transaction
includes, among others:
• offering assets as security and/or
• providing of a corporate guarantee
• A report on the signing of a loan agreement, or when
the guarantee becomes enforceable. The report must
be submitted to the Administration and Offshore Loan
Analysis Section of Bank Indonesia on the 10th day of
the month following the signing of the loan agreement or
the corporate guarantee becoming enforceable, using a
standard form issued by Bank Indonesia. This report can
be submitted in hard copies and online.
where the value of the security or guarantee is at least 20 per
cent of the company’s equity, whether given or conducted
in one transaction or in a series of transactions for a similar
purpose or activity.
• A monthly report on the realisation or implementation
of the loan agreement or corporate guarantee to the
Administration and Offshore Loan Analysis Section of
Bank Indonesia, using a standard form issued by Bank
Indonesia. This report can be submitted in hard copies
and online.
Under the Material Transaction Rules, material transactions
with a value of at least 20 per cent and up to 50 per cent
of the company’s equity require public disclosure, an
independent valuation, and a statement from the Board
of Commissioners and the Board of Directors. Material
transactions with a value exceeding 50 per cent of the
company’s paid-up capital additionally require approval
from an extraordinary general meeting of shareholders.
However, there are some exceptions to the Material
Transaction Rules, which include:
The debtor or corporate guarantor (when the guarantee
becomes enforceable) must also file a report on its foreign
exchange flow activities to Bank Indonesia. Please see the
section headed “Exchange control on remittances”.
Ministry of Finance reporting obligations
There are two types of report:
Accordingly, depending on any monetary limitations with
respect to the scope of the guarantee, the provision of a
guarantee may be considered as a material transaction.
• a material transaction carried out with a subsidiary, where
the public company or listed entity owns at least 99 per
cent of the paid-up capital of the subsidiary
• a material transaction carried out between subsidiaries,
where the public company or listed entity owns at least 99
per cent of the paid-up capital of the subsidiaries
• a public company or listed company providing a corporate
guarantee to a third party with respect to the obligations
of a subsidiary, where the listed entity owns at least 99
per cent of the paid-up capital of the subsidiary and
• loans to the public company or listed entity from a
financial institution either onshore or offshore.
Although there are no statutory prohibitions against
financial assistance, it is important to note that under the
Company Law, any corporate actions (which are broad
enough to cover financial assistance) by the company should
be for the best interest of the company.
Indonesian law acknowledges the Actio Pauliana, which is
a right granted to a creditor to apply for the cancellation or
setting aside of specific actions or transactions entered into
by a debtor during a period before the debtor’s bankruptcy
that undermine the rights and interests of the creditor. Actio
Pauliana is regulated under Article 1341 of the ICC. Further
provisions are provided in Law No. 37 of 2004 regarding
Bankruptcy and Debt Moratorium (Bankruptcy Law).
The Bankruptcy Law provides that the appointed receiver
can ask the court to cancel a debtor’s pre-bankruptcy actions
that cause losses to creditors. This request may only be made
if it can be proven that the debtor and its counterpart in
doing such action knew or were aware that the actions would
cause losses to creditors.
Under the Bankruptcy Law, the debtor is deemed to know
that any action performed within one year prior to the
declaration of its bankruptcy would cause losses to creditors
if it is an action that the creditor was not obliged to perform
or results in a transaction involving a related party.
Most security documents provide for three demand letters
to be served before a security holder can make a judicial
application for enforcement of the security.
HT and Fiduciary Security
The enforcement of HT and fiduciary security requires a public
auction or private sale of the collateral assets. If both parties
agree, the object of HT and fiduciary security can be sold
privately if this method will fetch the highest price benefiting
all parties. In a private sale, newspaper or local mass media
announcements must be made and the sale cannot be carried
out for one month after these announcements.
Pledge
Although a pledgee also has the right to instant or direct
execution, in practice, the pledgee may be required to
file a normal civil procedure action (under the Civil
Procedural Code).
Security over Aircraft
As to security over aircraft, so long as the security interest
has been registered with the International Registry, the
enforcement of security rights over aircraft will be in
accordance with the mechanism provided under the Cape
Town Convention. Indonesia has made a declaration on
Article 54 paragraph 2 of the Cape Town Convention such
that, to the extent it is agreed in the relevant security
documents, the holder of security right may exercise certain
remedies under Chapter III, Article 8 of the Cape Town
Convention without a court order.
Under Government Regulation No. 36 of 2007, the
enforcement of this security can be done without the
involvement of Indonesian courts, by a public auction or
private sale, provided that the security grantor acknowledges
enforcement of the security.
of insolvency
In the event of bankruptcy, priority of creditors is determined
in accordance with the provisions under the ICC, the
Bankruptcy Law and the tax law.
Under Indonesian law, creditors rank as follows:
• A creditor whose position is higher than another creditor
holding security over proprietary rights, also known as
Preferen creditor. This type of creditor is typically the
Indonesian Government in respect of unpaid taxes.
• A creditor who holds security over proprietary rights,
also known as Separatis creditor. These types of creditors
include those that hold the following types of securities:
—— Fiduciary security
—— HT
Indonesia
—— Hypothec over ship
—— Pledge and
—— International Interest (as defined in the Cape Town
Convention) over aircraft object under the Cape Town
Convention.
• General creditor, also known as Konkuren creditor. These
creditors comprise all other creditors of the company.
Further, Article 55 of the Bankruptcy Law provides that any
creditor who holds a pledge, fiduciary security, HT, Hypothec
or other security over proprietary rights may enforce their
rights in the event of bankruptcy. However, any enforcement
must not occur during the 90-day stay period during which
the Indonesian court determines a bankruptcy application.
Subject to that, creditors who hold proprietary security
rights must enforce their rights within two months after the
commencement of the insolvent condition (that is, after the
creditors’ meeting of the company and where no amicable
settlement is achieved). In the absence of such enforcement,
the court appointed receiver will effect enforcement.
As to a holder of International Interests in the event of
bankruptcy of the Debtor (as defined in the Cape Town
Convention), the court or the receiver (as applicable) must
transfer possession of aircraft objects which are subject
to the International Interest (as defined in the Cape Town
Convention) to the authorized Creditor (as defined under the
Cape Town Convention) pursuant to Alternative A, Article
XI of the Protocol to the Cape Town Convention after 60
calendar days.
If the object of the security is located in Indonesia, the
governing law should be Indonesian law in order to ensure
that the security can be properly enforced in the event of
the borrower’s default. An exception applies to security
over aircraft objects, which may be governed by foreign law.
Provided the security over an aircraft object is registered
with the International Registry (as defined in the Cape
Town Convention), the security interest is recognized by the
Aviation Law.
Indonesia is a civil law jurisdiction and does not recognise
the concept of trusts. Consequently, in the case of syndicated
loans, a security agent will be used or appointed to perfect,
register and administer the security. The concept of parallel
debt under trust agreement (as commonly used in the
Netherlands) is not recognised in Indonesia.
Indonesian law currently does not require governmental
approval for the transfer of US dollars (or other foreign
currency) outside Indonesia. However, the following
currency restrictions apply:
• Indonesian Rupiah cannot be transferred outside
Indonesia
• an Indonesian party that wishes to purchase more than
US$100,000 (or its equivalent in other currencies) per
month from any bank in Indonesia must submit certain
documents to the relevant bank(s) in Indonesia including
a copy of the underlying agreement (such as a loan
agreement or sales contract)
• an Indonesian party that wishes to transfer funds of more
than US$10,000 or its equivalent must, upon the request
of the relevant bank in Indonesia, provide the bank with
information and data on the amount, purpose and objective
of the payment.
In addition, Bank Indonesia Regulation No. 13/15/PBI/2011
dated 23 June 2011 concerning Monitoring the Flow of
Foreign Exchange Activities requires Indonesian residents
with a certain amount of assets/sales turnover that hold
offshore financial assets (such as receivables) or offshore
financial obligations (such as loans) to submit foreign
exchange flow reports to Bank Indonesia on their monthly
transactions as well as position reports. These reports must
be submitted by the 10th day of the following month.
Receipt of export proceeds into Indonesian bank
accounts and withdrawal of foreign exchange from
external debt
Two new regulations relating to offshore borrowings and
export proceeds came into force in January 2012, namely
Bank Indonesia Regulation No. 13/20/PBI/2011 on
Receiving Foreign Exchange from Export Proceeds (Devisa
Hasil Ekspor or DHE) and Foreign Exchange Offshore
Borrowings (Devisa Utang Luar Negeri or DULN) (as
amended) (PBI No.13/20), and Bank Indonesia Regulation
No. 13/22/PBI/2011 on the Reporting Obligation on
Withdrawal of Foreign Exchange Offshore Borrowings (PBI
No. 13/22). Bank Indonesia’s stated aim in introducing
the new regulations is to support the creation of a sounder
financial market by bringing Indonesia’s considerable export
proceeds and offshore loans into the local banking system.
In short, PBI No. 13/20 states that:
• export proceeds must be received through a local
foreign exchange bank not later than 90 days as of the
date of registration of the goods export notification
(Pemberitahuan Ekspor Barang), while if the export
proceeds are received by way of a letter of credit payment,
goods in transit, deferred payment, or collection (where
the maturity date is longer than or equal to 90 days as of
the goods export notification), this must be done no later
than 14 days as of the maturity of such payment
• DULN must be withdrawn through a local foreign
exchange bank account.
Note that contracts made before 2 January 2012 under
which the parties agree to transfer the proceeds to banks
outside Indonesia will not be subject to this Bank Indonesia
Regulation until 2 January 2013. This exception also applies
to DULN, except for DULN withdrawals resulting from an
increase in an offshore loan facility based on amendments to
facility or loan agreements signed after 2 January 2012.
Sanctions, which take effect from 2 July 2012, include a
fine of IDR10 million for each non compliant drawdown of
offshore borrowings and a fine of 0.5 of the export proceeds
that have not been received onshore, subject to a minimum
amount of IDR10 million and a maximum of IDR100 million.
It should, however, be noted that this constitutes neither a
requirement for foreign currency to be converted into local
currency nor a minimum period for which it must remain
onshore. The regulation does not specifically prohibit
transfers of funds, once made into a local foreign exchange
bank account, to an offshore bank account.
Withholding tax
Indonesian law provides a withholding tax of 20 per cent
on interest payments made to foreign lenders, subject to the
provisions of double taxation treaties.
Currency
Law No. 7 of 2011 Regarding Currency (Law No. 7/2011),
among other things, stipulates mandatory use of Rupiah
for all transactions conducted within Indonesia. The
transactions regulated by Law No. 7/2011 include the
payment and settlement of all domestic commercial
transactions and obligations, except for the following:
• certain transactions for the implementation of the
State budget
• grants from or to Indonesia
• international trade transactions
• deposits in foreign currency with Indonesian banks and
• international financing.
A circular letter issued by the Ministry of Finance in line with
Article 23 paragraph 2 of Law No. 7/2011 provides that,
to the extent agreed by the parties to the agreement, it is
possible to settle payment in foreign currency.
Language
Article 31 of the National Flag, Language, Emblem, and
Anthem Law, which was promulgated on 9 July 2009,
provides that any memorandum of understanding or
agreement that involves an Indonesian party should also be
put in the Indonesian language or in a dual-language format.
Pending the issuance of implementing regulations for this
law, in practice, commercial agreements that involve foreign
parties tend to be made either in a dual-language format or,
when they were made in English text, the parties agree to
execute the Indonesian language version of the agreement in
a form acceptable to the parties within an agreed time period
after the date of the English version or any other date as
agreed between the parties.
Japan
Japan
Contributed by Atsumi & Sakai
Introduction
The creation, perfection, registration and enforcement of
security interests in Japan are governed by a number of laws,
including the Civil Code, the Commercial Code, the Company
Law and the Civil Execution Law. Case law is also relevant
but does not provide binding precedent. Although the
creation and perfection of security interests is settled law for
the most common types of security and secured assets,
cultural influences have, until recently, restricted security
interests to individual assets so as to maintain an equitable
balance between debtor and creditor. The law has historically
been slow to adopt new concepts and asset classes. For
instance, the concept of floating security over a whole
business is not yet recognised. In addition, the absence of
comprehensive and conclusive registers of security interests
may result in a certain lack of clarity and certainty.
Revision of the law of obligations in the Civil Code is currently
under discussion at a working group at the Ministry of Justice
of Japan. The working group published an interim report in
May 2011. The interim report listed various rules in the Civil
Code regarding which the group described the basic concepts
or direction of revisions they would discuss further. Public
comments on the report were sought and provided by August
2011. The content of, and the schedule of drafting a bill for,
the revision are not yet determined except that the working
group is trying to publish the interim bill draft by February
2013. As part of the revision, rules regarding the perfection of
granting security interests, set-off and guarantee are likely to
be changed.
Corporate security is usually provided by a Kabushiki Kaisha
(KK), or joint stock company, incorporated under the Company
Law (Law 86 of 2005) (Company Law). These are by far the
most common form of corporate entities. The management
structure of a KK depends on a number of factors, including
its capitalisation and amount of debt. Larger KK’s have a
board of directors and one or more of them will be appointed
as “Representative Director”. If a KK is constituted without
a board of directors (i) each director has the authority to
represent the KK, and (ii) matters which would otherwise
require the approval of the board of directors will, in general,
require the approval of a majority of directors unless otherwise
provided in the articles of incorporation. A KK is not required
to have any general license or make any general form of
registration in order to grant security interests or security
rights to third parties. (In this section reference to a KK will
refer to an entity with a board of directors).
A Godo Kaisha (roughly equivalent to a US-style limited
liability company) is the most basic form of corporation and
is less commonly used to grant security. It is used in some
structures as a domestic holding vehicle.
Tokutei Mokuteki Kaisha, or TMKs are Special Purpose
Company vehicles commonly used in securitisations, real
estate acquisitions etc; they are not permitted to grant
security for the obligations of third parties.
A foreign company is not generally prohibited from owning
Japanese assets and may provide security over such assets.
Mortgages (teito ken)
Mortgages (sometimes called hypothecations) are consensual
security interests provided for by statute. Mortgages are
most commonly used as security over real property, but
can also be created over certain moveables, such as certain
ships, aircraft and construction equipment. The mortgaged
property is still owned, used and economically exploited
by the mortgagor and does not change possession, but
the mortgagee has priority over lower ranking creditors
as regards the income and proceeds of disposal of the
mortgaged property.
A mortgage may secure specific obligation(s) (commonly
called an “ordinary” mortgage) or be created as bracket
type security (see below). If the secured right is assigned, an
“ordinary” mortgage (though not a bracket type) will also be
transferred to the assignee unless otherwise agreed. On the
loss, damage or sale of the mortgaged property, the mortgage
will attach to the related insurance or sale proceeds.
Bracket type security (ne tampo)
Bracket security is not a security interest itself but a category
of security interest. It usually takes the form of a mortgage
and is commonly used for revolving loan facilities. It is
also known as “root”, “umbrella” and “revolving” security.
Bracket security is created where the amount of the secured
obligation may fluctuate, either up or down, and even to
nothing or a new obligation (different from the old paid one)
accrues, as long as such obligations accrue under specific
continuous transactional relationships or certain type of
transactional relationships as agreed, or based on certain
grounds as agreed. Bracket type mortgages are recognised by
statute and whilst other types of security have been effected
Japan
in bracket form, it is not clear how the statutory provisions
relating to bracket type mortgages may be applied to them.
Bracket mortgages (ne teito)
Other than the fluctuating and changing nature of its secured
obligations, most of the principles applicable to a mortgage
also apply to a “bracket” mortgage, though the agreement for
a bracket mortgage must provide for a number of additional
matters:
• the maximum amount secured
• the nature of transactions from which the obligations
secured arise and
• the identity of the obligor(s).
The mortgagor and mortgagee can vary the terms of a bracket
mortgage, but if the maximum secured amount is increased,
the change will require the consent of the beneficiaries of
lower ranking mortgages.
If the date for fixing the amount of principal secured by a
bracket mortgage has not been agreed, (i) the mortgagor and
mortgagee may agree the amount later, (ii) it may be fixed
on the demand of the mortgagee at any time, or (iii) it may
be fixed on the demand of the mortgagor not less than three
years from the creation of the bracket mortgage. Once the
amount of principal secured is fixed, the bracket mortgage
becomes an ordinary mortgage securing a specific principal
obligation.
“Provisional” mortgages
A “provisional” mortgage is not a type of security, but an
ordinary or bracket mortgage which is only provisionally
registered. It may be recorded at a fraction of the cost of
recording an ordinary or bracket mortgage and will fix the
date of priority. However, a mortgagee cannot initiate a
foreclosure action based upon a provisionally registered
mortgage and the completion of registration is required. In
practice, Japanese lenders typically do not accept provisional
mortgages as security for loans unless they are confident
that they can proceed with the final mortgage registration
without material practical difficulties.
Pledges (shichiken)
Under a pledge, the creditor (pledgee) obtains (and must
retain) possession of the property of the security provider
(pledgor) as security for the principal obligation and
receives satisfaction of that obligation out of the proceeds
of realisation of that property and in preference to other
creditors. A pledge is a possessory security and possession
of the pledged property (including possession through an
agent) is necessary to hold effectively the interest of the
pledge. A pledge can be created over any moveable property
except where there are public policy reasons not to deprive
the owner of the use of the property. A bracket type pledge
can also be created.
A moveable property pledge is created by a pledge agreement
between the pledgor and the pledgee, and the delivery of
the pledged property, the pledge becoming effective on that
delivery.
Provisional registration security (karitoki tampo)
Provisional registration security is effected by the conditional
transfer of ownership of property from the security provider
to the creditor. The transfer will be provisionally registered
with priority being effective from the date of the provisional
registration. As provisional registration is required, the
subject property must be registered in order to transfer title.
On default of the principal obligation, the registration is
completed and the property is transferred to the creditor in
satisfaction of the principal obligation.
Provisional registration is of benefit as security to the creditor
given the cost, delay and complexity of enforcement of a
formal security interest such as a pledge or a mortgage, and
may be of financial value to the creditor as it enables the
creditor to acquire an asset which may appreciate in value,
rather than the cash proceeds of disposal of the property.
If the property value is greater than the secured claim, an
amount equal to the balance must be paid to the owner,
though there is no statutory process for the valuation of
the property or timing of the payment and this should be
addressed in the agreement creating the security.
Security transfer (joto tampo)
A security transfer is a transfer of ownership in property as
security with an obligation to retransfer those rights to the
security provider on satisfaction of the principal obligation.
A security transfer can be used as security over a moveable
but unlike a pledge, the security provider (transferor) retains
physical possession and use of the subject moveable but
does so as agent of the creditor (transferee), there being a
constructive change of possession of the moveable (ie, the
transferor retains the moveable but declares it to be held
for the transferee) in order to establish the date of delivery
and so priority of security. Creditors often seek to notify
third parties of the security interest created by attaching a
label on the moveable. There is also a registration system to
perfect the security right over the moveable if the transferee
is a company, but it cannot effectively avoid a third party
acquisition.
which can be a substantial amount. As a TBI constitutes a
right and not real property itself, it cannot be the subject of
a mortgage. Accordingly, security over a TBI will usually be
in the form of a pledge (with delivery of the TBI certificate) or
security transfer.
The security transfer agreement should include the
transferor’s obligations to notify third parties that the
property is subject to a security transfer.
Moveables
Under the Japanese Civil Code, any tangible asset other than
real estate is classified as moveables. Generally, moveables
cannot be subject to a mortgage. However, ships, aircraft and
certain vehicles whose titles are registered, can be subject to
a mortgage in accordance with relevant statutes. However,
ships, aircraft and such vehicles cannot be registered whilst
under construction and so cannot be mortgaged at that time.
Set-off (sosai)
Although not always thought of as a form of security, set-off
is often used as such, especially in commercial banking.
Japanese banks usually require business customers to
execute a bank transaction agreement: this usually provides
that obligations owned by the debtor to the bank will
immediately become due and payable on the occurrence
of certain events, such as insolvency of the debtor or other
events evidencing a credit risk. A bank may set off its claim
for repayment of a loan against a deposit of the debtor with
the bank even when the deposit was attached by a third
party provided the loan was made before the attachment.
Real estate
In Japan, land and buildings constitute separate real
property or immoveables. Each has its own register as to title
and encumbrances. Security can be created separately over
land and any building standing on it. Although land and
buildings are subject to registration systems, the registers
are not conclusive of the matters stated in them nor is there
any form of state title guarantee as in some jurisdictions.
A mortgage granted by a registered owner of land who is
not the true owner is void. Accordingly, it is advisable for
creditors taking security over land or buildings to conduct a
thorough investigation of title, including a site visit to, e.g.,
verify boundaries and any tenancy rights.
A mortgage is the most common form of security taken
over real estate. Large commercial properties in Japan
are commonly held and transferred using a trust scheme
whereby the owner of the property entrusts it to a trust bank
which then issues a “trust beneficial interest” (TBI) certificate
to the owner, the owner now being the beneficiary of a trust
which holds title to the property. The trust bank will conduct
thorough due diligence on the property prior to it being
entrusted and after entrustment, transfer of the beneficial
interest in the property is effected through the transfer of the
TBI. A transfer of a TBI is far simpler than a transfer of land
or buildings and does not attract real estate transfer tax,
Other forms of security, such as a pledge or security transfer
may be created over moveables with certain exceptions. For
instance, aircraft may not be pledged. Pledges are not always
practical as security given the need to deliver the pledged
property and so deny the owner of its use.
A floating security transfer over moveables (which includes
security over a fluctuating pool of moveables (shugo dosan
joto tampo) is a popular form of security in the financing of
small to mid sized businesses, and the Supreme Court has
recognised the possibility of floating security transfers under
certain circumstances. In general, the type, quantity and
location of moveables must be certain.
Receivables
A security transfer and a pledge are the two most frequently
used forms of security over receivables.
An agreement to transfer a group of receivables as a form of
security (syugo saiken joto tampo) is generally regarded as
valid. Based on case law, creation of security over a group
of present and future receivables is possible provided the
receivables are identified by (i) the obligee, (ii) (in certain
cases) the obligor, (iii) the type of agreement pursuant to
which the receivables are created and (iv) the period during
which the receivables are to be created.
The type of security taken over shares differs depending on
whether the shares are represented by physical certificates
or by book-entry only. Share certificates for listed companies
were abolished by law on 5 January 2009, and other
companies may or may not issue share certificates, or
may only issue share certificates on request. Security over
certificated shares is usually created in the form of a pledge
Japan
or security transfer, which may be registered in the issuing
company’s share registry (kabunushi meibo) or unregistered.
In either case, the share certificates must be delivered to the
creditor. If security is registered, the name and address of the
creditor is entered in the issuing company’s share registry.
In the case of a registered pledge, the security provider and
the creditor are both registered as having interests in the
shares, the creditor’s interest being endorsed as “pledgee”,
with the security provider continuing to exercise its rights as
shareholder. In the case of a security transfer, the creditor is
shown in the share registry as sole holder of the shares and
is entitled to shareholder rights and benefits subject to any
restrictions in the security agreement. Security over shares
held by book-entry can be created in the form of a pledge
or security transfer, each of which must be registered in the
issuing company’s share registry.
Creditors taking security over shares must check that there
are no restrictions on the transfer of the subject shares and
that neither the taking or enforcement of the security will
trigger any filing or other requirement such as an obligation
to offer to acquire other shares in the issuing company or a
block shareholding report. Much the same considerations
and issues will apply to security over other forms of equity or
debt instruments issued by a company.
The nature of security over IP rights depends on whether the
rights are created by registration as in the case of patents and
trademarks or without registration such as copyright, which
is created solely by creation of the work product without
registration or any formality.
In the case of patents and trademarks, security over the
rights will usually be by way of a pledge, which is effective
only on registration in the registration system at the Patent
Office. Certain specific registrable intellectual property rights
are subject to individual statutory regimes. For instance,
the utility model rights (Utility Model Act), plant breeder’s
rights (Plant Variety Protection and Seed Act) and circuit
layout rights (Act on the Circuit Layout of a Semiconductor
Integrated Circuits).
In the case of copyright, a pledge or security transfer are the
usual forms of security. Creation of the security is effective
on agreement between the creditor and the security provider,
and the creditor may register its rights with the Agency of
Cultural Affairs to perfect its priority against third parties.
Copyright in software is handled separately by the Software
Information Centre (a non profit organisation supervised by
certain ministries). Security rights over software are widely
registered. However, it is not uncommon for security over
copyright to be left unperfected due to the attendant costs
and shortcomings of the registration system.
rights
Generally, a KK may enter into transactions:
• of a type contemplated by its objects as described in its
Articles of Incorporation (teikan) or
• which are “necessary or desirable” in relation
to such objects.
“Necessary or desirable” is interpreted widely and should
cover most grants of security. The company must also comply
with relevant statutory, regulatory, or licensing requirements.
Process
Under the Company Law, the Representative Director of
a KK has broad powers to bind the KK unless the matter
in question constitutes a disposition or taking over of
“important property” of the company or “large borrowings”
by the company. In such cases, the board of directors of a KK
cannot delegate decision making. For instance, a director
cannot be given the sort of broad authority to close the
deal within broad parameters set by the board as would be
the case, for example, for a UK company. The granting of
security would be considered a disposition of property and
the granting of a guarantee treated as a borrowing.
Whether property is “important” or a borrowing “large”
is determined in terms of each individual company by
considering matters such as, the ratios of the value of the
property against the amount of the borrowing, the total
asset value of the company, the purpose of such property or
borrowing and its trading history.
Therefore, a board resolution is required where a KK proposes
to grant a security interest over its property which is deemed
as “important property” or provides a guarantee which is
deemed as “large borrowings”. In addition, borrowings,
providing guarantees and granting security interests over
assets may be stipulated in the KK’s internal rules such as
board rules as matters which need board approval if the
value of the transaction exceeds a stated threshold amount,
even if such matters do not constitute the “disposition
of important property” or “large borrowings”. In other
cases, a Representative Director may enter into the security
agreement for the KK by using the registered corporate seal.
A Representative Director can also issue a power of attorney
for another person to use the registered corporate seal for
executing the security documents. If a board resolution
is needed, or obtained even if not needed, the board can
authorise anyone to execute on behalf of the company.
If there is any suggestion of a conflict of interest or a lack
or corporate benefit in the granting of the security, a board
resolution approving the granting should be obtained.
If a Representative Director grants a security interest or
a guarantee where a board resolution authorising the
transaction is required but is not obtained, execution by the
Representative Director binds the company if the beneficiary
did not know and could not have reasonably known that
a resolution was required but not obtained. Accordingly, a
prudent secured party should always obtain the approval of
a KK’s board when taking security.
Lending
The primary legislation governing commercial lending in
Japan is the Money Lending Business Law (MLBL). No one
may carry out a money lending business unless registered
under the MLBL, unless, it comes within one of the
exemptions from registration, such as alternative statutory
authorisation or where the lending is incidental to another
business such as the sale and purchase of goods. Institutions
licensed as banks under the Banking Law are authorised
pursuant to that law to conduct money lending business and
so are not required to obtain an MLBL license. Obtaining a
banking license is usually a long and costly process.
The MLBL defines “lending money” as, inter alia, lending
of money and providing loans on the basis of collateral
or through discounting bills or notes or “by other similar
means” on a regular basis. The general catch all language
at the end of the definition can cause problems as its
interpretation can vary from case-to-case and might catch
such activities as the purchase of bonds and other equity
interests if carried out on a regular basis and if the business
when looked at as a whole and over a period were in truth
money lending albeit in a different form. The MLBL is also
not restricted to lending as a business, so for example, a
company which makes multiple intra group loans to a sister
company may be conducting a money lending business and
require a license.
Intermediaries
Anyone engaged in an intermediary business in respect of
lending money is also required to be registered as a money
lender. “Intermediary” under the MLBL means anyone
who works between a borrower and lender and renders a
service such as completing a loan agreement between the
relevant parties. The determination as to what qualifies as an
“intermediary” is made on a case by case basis.
Interest
Interest rates are subject to restriction by the Interest
Rate Restriction Law. The legislation is primarily aimed at
consumer finance lending. A default interest clause may
be unenforceable if the default interest rate is “excessive”.
When evaluating whether an interest rate is subject to the
rate restriction law, any related guarantee fee payable by the
borrower may also need to be taken into account.
Security
Providing security is not, in itself, regulated. However,
providing guarantees as a business may be regulated
depending on how the guarantees are structured. The
provision of other forms of security for third party obligations
on a regular basis would need to be examined on a case by
case basis to determine if it constituted a regulated business
such as insurance.
Although a consensual security interest is generally effective
as between the relevant parties, registration of ownership
and the security interest will generally be required in order to
make a security interest effective as against third parties.
Unlike in certain jurisdictions, Japan does not have a debtor
registry system whereby all security interests created by a
company over its business or assets are registered against the
company in a public register. Security interests created by a
company over any of its assets are generally effective on each
individual asset or a group of assets basis.
Mortgages
Application for registration of a mortgage of real property
is made jointly by the mortgagor and the mortgagee; the
application procedure must be carefully complied with and
it is usual to engage a judicial scrivener to complete it. A
registration tax is payable. As this can be substantial, parties
often seek to avoid paying it until enforcement through the
use of provisional mortgages.
Japan
Pledges
The perfection of a moveable property pledge, or a pledge
or a security transfer of shares held as certificates requires
the creditor to obtain and retain possession of the collateral
moveable property or share certificates.
In order that a security interest in the form of a pledge of
receivables can be established against the obligor of that
receivable, notice to or consent of that obligor is necessary
and, in order to perfect such a pledge against third parties,
other than the obligor, that notice or consent must have an
authenticated date (kakutel hizuke). If the security provider is
a corporation, the security interest over the receivables may
also be perfected by registration under an act which provides
for perfection by way of registration of the assignment of
moveables and claims. The possible revision of the law
of obligations in the Civil Code mentioned above may
include changes in the rules for perfecting pledges over and
assignment of receivables.
Security transfers
The creditor in a security transfer of moveable property
does not usually take possession of the subject property
and perfection is achieved simply through the delivery of an
enforcement notice by the creditor to the security provider. It
should be noted that if the subject moveable property is held
by the security provider or by a third party and is disposed of
to a bona fide third party, that third party may be protected
and acquire good title to the property. If the security provider
is a corporation, the security transfer of moveable property
may also be perfected by utilising the registration system
referred to above in respect of pledges.
As the transferor of moveable property which is the subject
of a security transfer will retain possession of the property,
there is obviously a real risk that the transferor may deal
with that property to the detriment of the creditor. To counter
this, steps should be taken to make third parties aware of
the existence of the security transfer. This could include
attaching a notice to the property or at the premises in
which it is located. These steps may prevent a third party
from being a bone fide acquirer of the property (and thereby
acquiring title).
The issues referred to above as regards the pledge of
receivables also apply to security transfers of receivables.
Granting guarantees
A KK can grant upstream, downstream and cross-guarantees.
Although neither case law nor the Company Law requires
the actions of a company to include an element of “corporate
benefit”, directors must act prudently. Care must be taken
that guarantees are not given between companies with the
same directors without shareholders’ or board of directors’
approval (depending on the type of KK). Lack of such
approval will invalidate the transaction.
A guarantee can be a simple guarantee, a joint and several
guarantee or a co-guarantee.
A simple guarantee is the basic form of guarantee. If there
is no express wording to the effect that a guarantee is given
“jointly and severally”, the guarantee will be a simple
guarantee. The possible revision of the law of obligations in
the Civil Code mentioned above may include an additional
requirement for the creation of a joint and several guarantee
that the guarantor had the effect of the joint and several
guarantee explained to him and understood it.
A simple guarantee stands behind the guaranteed obligation
and therefore the creditor may not:
• demand payment from the guarantor without first
demanding payment from the principal obligor (though
the possible revision of the law of obligations in the Civil
Code mentioned above may include the abolition of this
limitation) or
• enforce against the guarantor’s assets without first
attempting to enforce against the principal obligor’s
assets.
A joint and several guarantee ranks parallel with the
guaranteed obligation and the guarantor(s) are therefore
jointly and severally liable for the guaranteed obligation
with the principal obligor. Therefore, on default of the
guaranteed obligation, the creditor can immediately demand
performance from any one or more of any joint and several
guarantor and/or the principal obligor, and so there is no
requirement to make demand of or enforce against the
principal obligor or its assets first.
A co-guarantee exists where there is more than one
guarantor of the guaranteed obligation, whether one or
more joint and several guarantees, more than one simple
guarantee or a combination of them. In the absence of
agreement, the liability of co-guarantors will vary depending
on whether the guarantees in question are joint and several
and whether they cover the whole of the guaranteed
obligation, so it is always advisable to document the
allocation of liability. The possible revision of the law of
obligations in the Civil Code mentioned above may include a
new rule that each guarantee obligation covers the whole of
the guaranteed obligation even without specific agreement.
The Company Law does not prohibit a company providing
financial assistance for the purchase of its own shares,
though Article 135 of the Company Law prohibits a
subsidiary from purchasing its parent company’s shares
(subject to limited exceptions).
A right of contribution exists between co-guarantors, though
the extent of such right will depend on the nature and terms Insolvency risk periods
of the guarantees given.
Japan has three principal statutory insolvency regimes
Unless otherwise limited under the terms of its guarantee,
a guarantor will be liable for principal, interest, liquidated
damages, damages and any other associated liabilities,
though its liability will not exceed that of the principal
obligor. A guarantor may invoke certain defences the
principal obligor may have in respect of the guaranteed
obligation. The current view is that a guarantor may set
off against its guarantee, liabilities or any rights it or the
principal obligor may have against the creditor.
Japanese law does not recognise “financial assistance”
as a discrete legal concept. However, general principles
of corporate law such as directors’ duties and conflicts of
interest will apply to the granting of security or in entering
into transactions which might be regarded as “financial
assistance” in other jurisdictions.
A director of a company has a duty to act with the care
of a prudent manager and the granting of security which
does not benefit the company may breach that duty and
result in the director having a liability to the company, its
shareholders and creditors.
If a transaction may give rise to a conflict of interest
between the director executing the security agreement
and the company, the transaction must be approved at
a shareholders’ meeting or board of directors’ meeting
(depending on the type of KK). If such approval is not
obtained, the transaction will be voidable as between the
company and the counterparty, though the company may
not be able to void the transaction as against a party who
did not know of the lack of approval. A common example of
this is where a person is a director of both the debtor and the
security provider and executes the security agreement for
the latter. In such a case, the execution should be approved
at a shareholders’ meeting or board of directors’ meeting of
the security provider or the agreement executed by another
director of that company authorised to do so.
Civil rehabilitation under the Civil Rehabilitation Law:
where the aim is to rehabilitate companies. The debtor is
usually allowed to manage its own operations as a “debtor
in possession” (similar to Chapter 11 of the U.S. Bankruptcy
Code), though the court may appoint a trustee in exceptional
cases.
Corporate reorganisation under the Corporate Reorganisation
Law: which is used in cases where a joint-stock company
cannot be rehabilitated. As a general rule a trustee must be
appointed and most or all of management is replaced (though
DIP type proceedings, where trustees are not appointed, have
recently been increasing). The process is lengthy and costly so
only used for large companies.
Bankruptcy under the Bankruptcy Law: a creditor, the debtor
and certain other parties may file a bankruptcy petition if
the debtor is unable to make payments when due or is at risk
of its liabilities exceeding its assets (insolvency), and if the
court approves the petition, it appoints a bankruptcy trustee
who can dispose of the debtor’s estate and distribute the
proceeds.
Certain actions of a company may be subject to avoidance
under each of the three regimes. The observations made
below in respect of Bankruptcy law will equally apply to the
other two regimes.
A bankruptcy trustee may avoid an act of the bankrupt
company where:
• it would prejudice creditors of the company and was
conducted by the company with the knowledge that the
act would prejudice creditors of the company, except
that it cannot be set aside as against a beneficiary of the
act who at the time of the act did not know that it would
prejudice any creditor or
• it was made subsequent to the company’s insolvency
and would prejudice the company’s creditors irrespective
Japan
of the company’s knowledge of the prejudice caused to
creditors, except that it cannot be set aside as against a
beneficiary of the act who at the time of the act did not
know either (i) that it would prejudice any creditor or (ii)
the existence of the insolvency.
Provided that any such act may not be avoided on these
grounds if it involves:
• the provision of security for existing debts, or
• the discharge of existing debt, unless the amount paid
exceeds the amount due in which case the excess can be
avoided.
Any disposal of property, even for fair value, may be avoided
if it gives rise to the actual risk of concealing or otherwise
intentionally endangering the company’s assets to the
prejudice of its creditors, if the insolvent debtor has the
intention of concealment and if the counterparty is aware of
the intention at the time of the disposal.
Both a gratuitous transaction and an almost gratuitous
transaction entered into by an insolvent company six months
prior to insolvency or after suspension of payment (Shiharal
teisi) are subject to avoidance.
Any transaction providing security for or extinguishing an
existing debt which is not within the scope of a company’s
obligations in terms of timing or performance and which
is conducted within 30 days before the company becomes
unable to pay its debts is subject to avoidance, provided that
such an act cannot be avoided unless the creditor benefiting
by the act did not know at the time of the act that it would
prejudice other creditors.
A bankruptcy trustee can avoid acts which concern the
provision of security for existing debts or the discharging
of existing debts after the debtor’s insolvency or petition of
bankruptcy, provided that, the creditor benefiting by the act
knew at the time of the act that the debtor was unable to pay
its debts or had suspended payments or a petition had been
filed for its bankruptcy (as applicable).
The court can extinguish a security interest in Civil
Rehabilitation proceedings or Corporate Reorganisation
proceedings if the subject matter of the security interest is
essential for the continuation of the business of the debtor
(in Civil Rehabilitation proceedings) or reorganisation (in
Corporate Reorganisation proceedings). The debtor will be
required to pay the lower of the secured amount and the
value of the collateral property to the court, the security
interest on the property then being discharged.
Any act perfecting the establishment of a security right
against third parties (such as registration or delivery)
taken after the bankrupt has become insolvent is subject
to avoidance, where approved by the court, if the act is
conducted more than 15 days after the creation of the
security being perfected and the beneficiary is aware of the
same.
General principles
The procedures for enforcing security interests other than
those “enforced” in accordance with their own terms (for
instance, by completion of provisional registration security)
are set out in the Civil Execution Law. The procedures
involve the creditor either acquiring ownership of the
collateral through completion of a security transfer or
selling the collateral and applying the proceeds of sale to
the satisfaction of the principal obligation, the latter being
more common. If collateral security has been provided
by a third party, the creditor may only claim against the
collateral, not against the third party, though the third party
may voluntarily perform the secured obligation to prevent
enforcement against the collateral.
Mortgages
Performance of the secured obligation though enforcement
of a mortgage is effected through the sale of the mortgaged
property and distribution of the proceeds of sale. The sale
can be through a court organised auction, but as these
will commonly result in a lower sale price the parties will
often opt for a voluntary sale. In making the application for
enforcement, the mortgagee must deposit funds with the
court to cover the cost of service of documents, valuation of
the property, auction costs and taxes.
If a third party has acquired the subject property the
mortgage will be extinguished if:
• the purchase price as agreed by all secured creditors with
a registered security interest in the property is paid to the
mortgagee on demand or
• the third party settles the secured obligation.
If the application is approved the court will order the
valuation of the property, set an anticipated selling price for
the auction and give public notice of the auction (including
auction details) An application to purchase at less than 80
per cent of the anticipated price would not be accepted.
The creditor should be asked to give the security provider
appropriate discretion in the sale.
Mortgages of ships and aircraft are enforced in a similar way.
A security transfer of a monetary claim may be enforced by
the transferee (security holder) directly requesting the third
party obligor of the monetary claim to repay the debt (up to
the amount of the secured claim) to the transferee.
Provisional registration security
On enforcement of provisional registration security, the
creditor acquires title to the property through perfection
of the provisional registration. To enforce the security, the
creditor must first notify the security provider (and any
third parties with a security interest in the same property)
of the amount expected to be realised on disposal of the
subject property and may only perfect its registration within
the two months after delivery of that notice to the security
provider. The security provider can discharge the principal
obligation before perfection of the transfer and have the
security released, even if the registration is perfected, so that
ownership is transferred to the creditor. The security provider
may reacquire the property from the creditor in certain
circumstances provided that the property has not been
acquired by a third party.
Security transfer
The enforcement of a security transfer is effected by the
creditor acquiring absolute ownership of the property, the
obligation to retransfer the property to the security provider
being automatically extinguished upon the debtor’s failure
to satisfy the secured obligation. The enforcement is effected
through a simple notice of enforcement sent by the creditor
to the security provider, and does not need any involvement
of the courts. The creditor may choose the time to send the
enforcement notice and may retain or sell the property in
its discretion as provided in the original agreement. If the
value of the property is more than the amount of the secured
obligation, an amount equal to the excess must be paid
to the security provider; if the property is retained by the
creditor, the value is appraised at “fair value” to calculate the
amount due to the security provider.
If the property is in the possession of the security provider,
it may refuse to deliver the property to the creditor until
such excess amount is paid in full. The creditor acquires
ownership of the property upon receipt of the enforcement
notice by the security provider, but the security provider is
entitled to recover the property before the excess value (if
any) is paid to it or the property is sold to a third party, by
paying the secured amount to the creditor.
Enforcement of a security transfer of shares is effected in the
same way, but it is preferable for the security provider to sell
the shares at a time of its choosing to ensure the best price.
Pledges
Unlike ordinary pledges, forfeiture of the pledged property is
permitted, and so the creditor can acquire ownership of the
pledged property, though it must pay the security provider
an amount equal to the excess in the value of the pledged
property over the amount of the secured obligation. The
same considerations noted above as regards enforcement
of security transfers of shares equally apply to pledges of
shares and monetary claims. A pledge of a monetary claim
may be enforced by the pledgee directly requesting the third
party obligor of the monetary claim to repay the debt to the
pledgee up to the amount of the secured claim.
insolvency
Bankruptcy and Civil Rehabilitation
Collateral subject to security interests is not included in
the estate for bankruptcy or civil rehabilitation purposes,
so secured creditors can establish their security interests
against the bankruptcy trustee or insolvent security provider
and enforce them outside the bankruptcy or rehabilitation
process in preference to the rights of unsecured creditors.
However, to prevent a secured creditor from delaying
bankruptcy proceedings, by failing to enforce its security
interest, the bankruptcy trustee or insolvent security
provider may sell a secured creditor’s collateral, reimburse
the secured creditor and extinguish the security interest.
Similarly, in rehabilitation proceedings the security provider
or trustee may extinguish a security interest by paying an
amount equal to the collateral to the court for payment to the
creditor.
Corporate reorganisation
Collateral covered by security interests is incorporated into
the estate of the insolvent security provider for corporate
reorganisation purposes and secured creditors are prohibited
from enforcing their rights or receiving payment outside the
procedure. Payment of claims is made under a reorganisation
plan that is subject to the super-majority acceptance of the
secured creditors, who vote pro rata as a class according to
the amount of secured claims held by each. A reorganisation
plan in which secured creditors postpone repayment dates
must be approved by creditors holding two-thirds of the
Japan
secured claims. A plan in which the secured creditors
waive part of their secured claims must be approved by
creditors holding three-fourths of the secured claims. It is
not uncommon for secured creditors to accept diminished
or delayed payment. Certain preferential debts, such as
reorganisation costs and employees’ claims, will be payable
outside the reorganisation plan and so rank ahead of secured
claims. In order to facilitate a corporate reorganisation,
the trustee can extinguish a security interest by making a
payment equivalent to the value of the collateral to the court
in accordance with a judgment of the court.
Japanese law does not restrict the rights of parties to a
transaction to choose the law to govern that transaction.
However, a choice of governing law will be subject to
Japanese law applying to property or assets situated or
registered within Japan, or, if the choice of governing law is
contrary to the “good order and public morals” doctrine of
Japanese law. If none of the principles above applies, and
where an agreement does not either expressly or implicitly
state the governing law, the Japanese courts would apply a
“closest and most real connection” test, looking to matters
such as the location of the parties and performance of the
obligations.
Withholding tax
Interest and other payments under a loan are not subject to
withholding tax if:
• payable to an individual resident in Japanese or a
corporation established in Japan, or
• (as regards interest only) payable to an individual not
resident in Japan or payable to a foreign corporation that
has a permanent establishment in Japan but which in
either case has obtained a tax exemption certificate and
presented it to the borrower before interest is paid, or
• (as regards interest only) payable to non-residents or
foreign corporations and is not Japan sourced income. For
instance, where a borrower does not have a business in
Japan or does not use the loan for its business in Japan.
Otherwise, interest is subject to withholding tax at 20
per cent. Tax treaties may provide for exemptions from
withholding tax or apply it at a reduced rate.
Trusts can only be established in Japan by statute, such
as the Trust Law (Law No. 108 of 2006, as amended). The
statutory regimes are very precise and only certain licensed
entities can act as trustees. It is legally possible to form
a trust in which the trustee holds the benefit of security
interests separately from the interests of a lender secured by
such security and enforces that security for the benefit of that
lender. However, in the case of syndicated loans it is more
common for syndicate banks to appoint a security agent
to deal with the perfection, registration of the security and
other administrative matters.
Japan does not impose exchange controls on remittances
except in very limited circumstances, such as where the
amount in question may cause market distortion, or one-off
restrictions such as the imposition of economic sanctions or
where restrictions on doing business with specified states
apply. Depending on how the security and its enforcement
are structured, there may be a post transaction obligation
to report certain matters. For instance, if the security or
its enforcement gives rise to the acquisition of shares in a
Japanese company by a foreign entity.
Malaysia
Malaysia
Contributed by Zaid Ibrahim & Co
Introduction
Malaysia’s banking security law is based on statute, local
case-law and the principles of English common law. As with
Singapore and Hong Kong, the banking security system here
is robust and flexible. It is also supported by debtor and asset
registries, effective regulation and reporting requirements.
The Malaysian Companies Act 1965 (Companies Act) governs
the incorporation and registration of companies in Malaysia
as well as the registration of foreign companies having
a place of business or carrying on business in Malaysia.
Foreign companies must be registered under Part XI of the
Companies Act, if such foreign companies intend to carry on
business or have a place of business in Malaysia.
In addition, Malaysian offshore companies and limited
liability partnerships may be incorporated under the Labuan
Companies Act 1990 (Labuan Companies Act) and the
recently enacted Labuan Limited Partnerships and Limited
Liability Partnerships Act 2010, respectively, in the Federal
Territory of Labuan (located in East Malaysia) which is
Malaysia’s designated international offshore financial centre.
Mortgage
Almost any asset can be secured by way of a mortgage (apart
from real property) including, intellectual property, plant
and machinery, ships, aircraft, shares, financial instruments
and choses in action. The mortgaged property can then be
redeemed by the debtor when the debt is repaid. In the case
of an equitable mortgage, the equitable interest subsisting in
the mortgaged property is transferred to the creditor.
Legal charge
Real property can be secured by a legal charge in accordance
with the National Land Code 1965 (NLC).
Fixed charge
A fixed charge is commonly created over fixed and moveable
assets of a company without any transfer of legal ownership
and it restricts dealing with the charged asset without
consent of the chargee. If the chargor defaults, the chargee
can sell the asset and assert a claim over the proceeds of sale
in priority to other creditors.
Floating charge
A floating charge can be created over the chargor’s present,
future and changeable assets. The charge does not attach
itself to a particular asset. It continues to exist even when the
collateral changes in character, classification or location. The
chargor is usually at liberty to deal with those charged assets
in the ordinary course of its business until the occurrence of
a chargor default when the floating charge crystallises and
becomes a fixed charge. The chargee has wide powers to
define events that amount to a default.
Pledge
A pledge gives a creditor a possessory right over chattels
or documents of title. The chattel or the document has to
be delivered, actually or constructively to the pledgee. This
means that the subject matter of the pledge must be capable
of actual or constructive delivery. The general property in the
chattel or document remains in the pledgor and the creditor
or pledgee only acquires a special property or interest
in it. The creditor can retain the chattel until the debt is
discharged and has a power of sale on default of payment.
The debtor retains ownership of the pledged asset and can
recover possession when the debt is repaid in full.
Assignment
Generally, the rights and benefits of a company’s rights
against a third party (a chose in action) for example, debts
and rights under insurance or other contracts may be
assigned by way of an agreement in writing between the
parties. For an assignment to be a legal assignment, the
assignment must be an absolute assignment of all rights,
made in writing and with express notice of the assignment
given to the debtor or counterparty. If these criteria are not
met, the assignment will be an equitable assignment.
The distinction between an equitable and legal assignment
is of limited practical significance as long as notice of
assignment is given to the debtor.
The giving of notice is important for the following reasons:
• if no notice is given to the debtor, the debtor is discharged
to the extent of any payment made to the assignor while in
ignorance of the assignment
• notice prevents the debtor setting up further equities
(such as rights of set-off) against the assignee other than
those arising out of the assigned contract (or closely
connected with that contract)
Malaysia
• after notice of assignment has been given, the assignor
and the debtor cannot vary the assigned contract in a
manner detrimental to the assignee or otherwise diminish
the rights of the assignee as they stood at the time of
notice and
• notice determines priority.
Lien
There are generally two forms of liens. Common law liens
give a creditor a right to retain possession of assets until
a debt is repaid. Equitable liens are not dependent on
possession but arise by operation of equity. The creditor
does not have possession of the property but can retain the
equitable interest until the debt is repaid.
Land and buildings
The Malaysian land system is based on the Torrens system
in Australia, and in West Malaysia it is governed by the NLC.
These are supplemented by the State Land Rules in force
in the respective States in West Malaysia. The land matters
in East Malaysia, Sabah and Sarawak, are governed by the
Sabah Land Ordinance and Sarawak Land Code, respectively.
Security may be created over land and buildings in any of the
following manners:
By way of a legal charge under the NLC
Where a separate document of title has been issued over
the land, a legal charge may be created over the land. A
legal charge under the NLC must be registered with the
relevant land registry/office in the prescribed charge form.
The practice in Malaysia is to include an annexure to the
prescribed charge form (known as the charge annexure) to
regulate the terms and conditions between the parties in
respect of the security which is in addition to the implied and
express provisions of the NLC.
Subsequent charges may be created over the same piece
of land with prior consent of the existing chargee. Prior
approval from the relevant state authority may also be
required in instances where the land is subject to restrictions
in interest against charging under the title to the land.
By way of an assignment of the sale and purchase
agreement
Where no separate document of title has been issued yet on
the land or title to the land is unavailable, a security interest
may be taken by way of assignment over the land owner’s
rights, title, interest and benefit in the relevant sale and
purchase agreement in relation to that land.
By way of lien-holder’s caveat
A person who has created a lien over documents of title in
respect of land may enter a lien-holder’s caveat to render the
lien a secured debt. Upon entry of the lien-holder’s caveat,
the lien-holder is entitled to a lien over the land, and if the
lien-holder obtains judgment for an amount due to it, the
lien holder is also entitled to foreclose on the land. The lien
will subsist until the lien-holder’s caveat is withdrawn.
Security over shares and investments can be taken by
mortgage (legal or equitable) or by a fixed or floating charge.
To create a mortgage over scrip shares of a limited private
company, the mortgagor intending to create a mortgage
delivers the share certificates of the shares together with
a duly executed transfer form to the mortgagee. If the
mortgagee chooses to submit the duly executed transfer
form to the company, the shares will also be registered in the
mortgagee’s name in the company’s register of members in
order to create a legal mortgage. If the mortgagee chooses
not to have the shares registered in its name, it obtains an
equitable mortgage over the shares.
In the case of a limited public company, where title to the shares
is evidenced by way of book entry securities (or scripless shares),
a security interest may be created by way of a charge and an
assignment executed by the chargor. Typically, the charged
securities will also be credited into a pledged securities account
maintained by an authorised depository agent for the benefit of
the chargee or its nominees for purposes of exercising control
over such pledged securities.
Tangible moveable property (including ships
and aircraft)
Security over tangible moveable property can be taken by a
mortgage (legal or equitable), or by a fixed or floating charge,
or by way of pledge in the case of chattels or documents of
title.
A fixed charge will normally be taken over tangible moveable
property and future tangible moveable property. Where there
is a potentially changing pool of assets in the ordinary course
of the chargor company’s business, for example, stock-intrade, a floating charge will be used.
Security may be created over ships and vessels by a statutory
mortgage. This can be done by presenting the prescribed
form for registration at the Malaysian Marine Department at
the port of registry of the vessel. A mortgage on a vessel may
be recorded in the register as soon as the vessel is registered
in Malaysia. In the case of creation of security over an
aircraft, this is achieved by way of an aircraft mortgage under
the Civil Aviation Regulations 1996.
is no requirement to lodge a security interest against any
intellectual property right, save for the general registration
requirement for charges created by a company. In fact, there
is no mechanism for recording a security interest against
any intellectual property right in any publicly administered
register for intellectual property rights in Malaysia.
Bank accounts
Security over bank accounts may be created by a charge
(fixed or floating) or a legal mortgage (by way of assignment).
In relation to a fixed charge, if the chargee does not have
total control over the bank accounts or its credit balances,
the Malaysian courts may construe that such security is a
floating charge instead of a fixed charge.
rights
An assignment of a debt or legal chose in action must be
by way of an absolute assignment in writing under hand of
the assignor and express notice in writing must be given to
the debtor, trustee or other person from whom the assignor
would have been entitled to receive or claim such debt or
chose in action. The issuance of the notice to the account
bank (the debtor) is important because the priority of
assignees of choses in action is governed by the order in
which notice is given to the debtor or whoever is entitled to
receive or claim such choses in action.
Receivables and other choses in action
Assignments may be created over legal choses in action
such as debts and receivables. Depending on the underlying
agreement of the chose in action to be assigned, consents
may need to be obtained if there are restrictions in that
agreement. As mentioned above, an assignment of a debt
or legal chose in action must be by way of an absolute
assignment in writing under hand of the assignor and
express notice in writing must be given to the debtor, trustee
or other person from whom the assignor would have been
entitled to receive or claim such debt or chose in action.
Contractual rights and insurance policies
Security may be created over contractual rights (including
insurance policies) by way of assignment, subject to
restrictions on assignments contained in the underlying
agreement. The security interest of an assignee will be
endorsed on the assigned insurance policy.
It is not common in Malaysia for security to be created
over intellectual property rights as a stand alone asset,
though these rights would be captured under any general
fixed and floating charge over a company’s assets. There
A company may grant security rights if it is permitted to do
so by its constitutional documents, the directors have the
authority to give security, and the directors have not acted
in breach of their fiduciary duties by approving or granting
the security rights. In relation to the directors’ authorisation,
the articles of association will usually authorise the directors
to exercise all the powers of the company set out in the
memorandum of association. Sometimes however, the
articles contain various restrictions on the exercise by the
directors of the company’s power to grant security. The
articles should therefore be checked to see whether such
restrictions exist.
Ultra vires
The grant of security given outside the powers of a company
is ultra vires and void. However, the fact that a company is
acting ultra vires in the broad sense is of little concern to
outsiders who act without notice of that fact because s. 20(1)
of the Companies Act provides that no act or purported act
of a company, including the entering into of an agreement,
shall be invalid by reason only of the fact that the company
was without capacity or power to do such act.
It should be noted that, by s. 20(2) of the Companies Act,
members or debenture holders (where the company has
issued debentures secured by a floating charge over all or
any of the company’s property) of the company may, before
an ultra vires act is fully performed by the company, seek a
court order restraining its performance. The court may, if it
considers it just and equitable to do so, set aside and restrain
the performance of the ultra vires transaction, and may
allow compensation to any party to the transaction for loss
or damage sustained by it by reason of the avoidance of the
transaction. It is unclear under Malaysian law as to the extent,
if any, that either party (including, possibly, a counterparty
lacking the requisite capacity) may get restitution of moneys
already paid under an ultra vires transaction. In this regard,
the up-to-date memorandum and articles of association of
the company should be checked. The equivalent provision
applicable to Labuan offshore companies is contained in s. 20
of the Labuan Companies Act.
Malaysia
Corporate benefit
The directors of a company are under a duty to act in good
faith in the best interests of the company. This means the
interests of the company itself and not the group of which
it is a member. The question of corporate benefit is one of
fact, not of law. The test is whether an intelligent and honest
man in the position of a director in the company concerned,
could, in the whole of the existing circumstances, have
reasonably believed that the transactions were for the benefit
of the company. A lender who has constructive notice of
a director acting in breach of his fiduciary duty may risk
having the security set aside. In that instance, the lender
will hold the security assets on trust for the company and
its creditors.
Commercial secured lending in Malaysia is generally
regulated by the Banking and Financial Institutions Act
1989 (BAFIA), the Labuan Financial Services and Securities
Act 2010 (LFSSA) and the Moneylenders Act 1951 (MLA).
Under the MLA, no person shall conduct business as a
moneylender unless he is licensed under the MLA. The MLA
does not apply to, amongst others:
• lenders who are licensed under BAFIA, the LFSSA and the
Islamic Banking Act 1983
• any insurance company licensed under the Insurance Act
1963 or the Takaful Act 1984
• co-operative society registered under the Co-operative
Societies Act 1948
• development financial institution prescribed under the
Development Financial Institutions Act 2001
There are also certain exchange control requirements
imposed by the Central Bank of Malaysia (Bank Negara
Malaysia) in respect of foreign credit facilities obtained by
Malaysian companies and the grant of guarantees or security
in favour of an offshore lender – see section on Exchange
control on remittances below.
Company charges
Security taken over real property must be registered in the
relevant land office or land registry where the property
is located. Mortgages created over aircrafts and vessels
are required to be registered at the Department of Civil
Aviation and the relevant Marine Department, respectively.
Transactions which are the functional equivalent of security
but are not security in form do not need to be registered.
There are additional registration requirements where the
security-giver is a company. Certain types of charges given by
companies are required to be registered under s. 108 of the
Companies Act within 30 days of the creation of the charge.
This registration requirement applies to:
• a charge to secure any issue of debentures
• a charge on uncalled share capital
• a charge on shares of a subsidiary
• a charge on land wherever situated or any interest therein
• a charge on book debts, a floating charge on the
undertaking or property of a company
• a charge on calls not paid
• any company who lends money to its related corporation
under Companies Act 1965
• a charge on ship or aircraft or any share in a ship or
aircraft
• any company who lends money to its director, officer or
employee as a benefit accorded to such person under his
terms of employment
• a charge on goodwill or intellectual property rights and
• any persons who subscribes or purchases debt securities
under Loan (Local) Act 1957, Treasury Bills (Local) Act
1946, Government Funding Act 1983 and Capital Markets
and Services Act 2007
• any company who is an issuer of a credit card or charge
card approved under the Payment System Act 2003.
• a charge on a credit balance of the Malaysian company in
any deposit account.
The consequence of non-compliance with the registration
requirement is that the security created by the charge is
void against the liquidator or any creditor of the company,
although the company’s personal covenant to repay the
money secured by the charge remains valid and enforceable.
However, pursuant to s. 108(2) of the Companies Act, the
money secured by the charge will become immediately
repayable if the charge becomes void for non-registration.
Security interest created by a Labuan offshore company
affecting property of the Labuan offshore company shall
be registered with the Labuan Financial Services Authority
within one month from the creation of the charge (s. 83 of
the Labuan Companies Act).
Power of attorney
Security documents typically contain a power of attorney
clause which must be authenticated in a manner prescribed
by the Powers of Attorney Act 1949 and presented in
the High Court of Malaya for registration of the power of
attorney, otherwise the instrument creating the power of
attorney will not be valid within West Malaysia.
Granting guarantees
A company can provide upstream, downstream and
cross-guarantees if this is permitted by its constitutional
documents, and a commercial benefit accrues from the
granting of such guarantees.
It will be difficult to justify corporate benefit for giving an
upstream guarantee unless the guarantor is itself receiving
proceeds of the loan, either directly as an obligor or
indirectly via inter-company loans. Other indirect benefits
which may flow to the subsidiary guarantor (such as
reduced cost of funding or stronger or maintained financial
capability of the parent or the provision of group services
such as management, treasury, group purchasing etc) are
factors which may be taken into account by the directors
in assessing whether there is sufficient corporate benefit.
However as stated above, it is the interests of the company,
not the group, which the directors must consider.
If the directors cause their company to enter into a guarantee
where there is no or insufficient commercial benefit for their
company, they may be breaching their duty as directors to
act in good faith in the best interests of their company, and
could be guilty of misfeasance and personally liable for any
loss sustained by the company as a result of their actions.
A Malaysian company (other than exempt private
companies) is prohibited by statute from giving guarantees
or granting security in certain circumstances. S.133 of the
Companies Act prohibits such a company from guaranteeing
or securing a loan made to a director of the company or to
a director of a related company. S.133A of the Companies
Act prohibits such a company from giving a guarantee or
granting security in connection with a loan made to another
company if a director is connected to the latter company.
Under s. 67 of the Companies Act, a Malaysian company
shall not give financial assistance to any person, whether
directly or indirectly, for the purpose of or in connection with
the acquisition of shares in the Malaysian company or shares
in its holding company.
For the purposes of s. 67 of the Companies Act, financial
assistance would include the Malaysian company providing
security or giving a guarantee for a loan made to another
person in order to enable that other person to acquire the
Malaysian company’s shares or the shares of the Malaysian
company’s holding company. A breach of this provision
carries criminal liabilities on the part of every officer of the
company involved. Although, s. 67(6) of the Companies Act
provides that the company or any person (which includes a
lender) is permitted to recover the amount of any loan made
in contravention of the financial assistance prohibition
or any amount for which the company is liable either on
account of any financial assistance given, or under any
guarantee entered into or in respect of any security provided,
in contravention of the financial assistance prohibition.
There are no “whitewash procedures” to allow for the
provision of financial assistance.
In the case of Labuan offshore companies, such companies
are permitted under the Labuan Companies Act to give
financial assistance to any person, whether directly or
indirectly, for the purpose of or in connection with the
acquisition of shares in the Labuan offshore company or
shares in its holding company, provided, that the transaction
is approved by special resolution of the company and the
directors of the company provide a solvency statement.
Liquidators can apply to set aside certain transactions that
were entered into before insolvency proceedings began,
subject to time limits. The court can, on application, make
an order as it sees fit, to undo the transaction and restore the
company to the position that it would have been in had the
transaction not been entered into. This can include ordering
the beneficiary of these past transactions to make payment to
the company to restore its position.
Transactions that can be set aside include:
Transactions at an undervalue
These are transactions where the value of the consideration
received by a company is significantly less than the value
of the consideration provided by it. Such transactions can
be challenged if the date of presentation of the winding up
Malaysia
petition was made within two years of the transaction having
been entered into (five years in the case of individuals)
unless the parties claiming under the transfer can prove
that the company was at the time of the transaction able to
pay all its debts without the aid of the property comprised in
the transaction.
Undue preferences
These involve putting a creditor in a better position than it
would otherwise have been in the event of the company’s
winding up, where the company intended to give a
preferential status to that creditor and when it was unable
to pay its debts at the time of entering into the preferred
transaction. An unfair preference can be challenged if it was
made in the six months before presentation of the winding
up petition.
In addition, a floating charge granted by a company in the
six months before the commencement of winding-up is
invalid (s. 294 of the Companies Act) unless it is proved that
the company was solvent immediately after the creation of
the charge.
Pursuant to s. 295 of the Companies Act, a liquidator can
recover excess consideration received by directors from
a sale to (or purchase from) the company of property for
consideration (other than shares) in the two years before the
commencement of winding-up.
Security over land can be enforced upon default by the
borrower by:
• obtaining an order for foreclosure by the High Court or
Land Administrator, or
• obtaining possession of the mortgaged property and
subsequently exercising the power to sell the mortgaged
property under the terms of the mortgage.
In relation to enforcement of security of property other than
land, depending on the nature of the property involved,
security over such property may usually be realised and
enforced without recourse to the court process. For example,
the appointment of a receiver under a debenture creating a
fixed and floating charge is a self-help remedy which can be
resorted to without reference to the courts. However the onus
is on the lender to ensure that the debenture was validly
given and that the power to appoint a receiver has validly
arisen. Failing which, the lender and the purported receiver
will be liable in damages to the borrower. Security over other
specific property may still require recourse to court, such as
enforcement proceedings in respect of a ship mortgage which
are commenced as an admiralty action in the High Court.
of insolvency
The assets of a liquidated company are used to discharge
its debts in accordance with the rights and interests of its
creditors in the following order
Secured creditors
These are mortgages over legal interests and fixed charges.
A secured creditor does not need to prove its debts and
can realise its security itself. If the security is less than the
debt owed, then it can claim the outstanding debt as an
unsecured creditor.
Preferential unsecured creditors
Claims by preferential creditors will include:
• the costs and expenses of the winding-up, including the
costs of the petitioner, the remuneration of the liquidator
and the costs of any audit
• all workers’ compensation legally due before the
commencement of winding up
• all amounts due in respect of contributions required by
any law for the next 12 months before the commencement
of winding up pertaining to superannuation, provident
funds or retirement benefits approved by federal law
relating to income tax and
• the amount of all federal tax assessed under any written
law before the date of commencement of winding up or
assessed at any time before the time fixed for the proving
of debts has expired.
Debenture holders under floating charge
A floating charge generally does not take priority over
preferential debts even though the charge may have
crystallised and a receiver appointed.
Unsecured (general) creditors
The remaining assets will be distributed pari passu amongst
unsecured creditors if their debts cannot be paid in full.
Shareholders
Shareholders of a company generally stand behind
unsecured creditors in respect of priority and are paid only
after the debts of unsecured creditors are settled.
Parties to a contract are free to choose the governing law of a
contract provided that the choice is made in good faith, bona
fide and is not contrary to any Malaysian public policy.
Malaysian law recognises and accepts “security trusts” where
security is granted to a “security trustee” who holds the
security on behalf of the lender or a group of lenders whose
loan is secured. No new security is required on novation,
transfer or assignment of the underlying loan by a lender if a
“security trust” is used.
Exchange control matters are governed by Bank Negara
Malaysia, as the Controller of Foreign Exchange, through the
Exchange Control Act 1953 and various Exchange Control
Notices which are issued from time to time to effect Bank
Negara Malaysia’s exchange control policies.
There are specific requirements and limits on Malaysian
companies obtaining credit facilities from offshore lenders
depending on the parties involved and the transaction
contemplated.
The provision of financial guarantees (which includes
the grant of security over any property in Malaysia) by a
Malaysian company in favour of an offshore bank would
need to be registered with the Controller of Foreign Exchange
at least seven working days prior to the issuance of the
financial guarantee or the grant of security, if the aggregate
amount of the financial guarantees issued or grant of
security by the Malaysian company exceeds RM50 million
(or its equivalent in foreign currency) in aggregate on a
corporate group basis.
Withholding tax
Payment of interest by a Malaysian resident to a non-resident
is subject to a withholding tax of 15 per cent which may be
reduced by applicable tax treaties. Interest received from a
Malaysian offshore company by a non-resident is exempted
from income tax. In addition, a Malaysian offshore company
is exempted from withholding tax.
Philippines
Philippines
Contributed by Romulo Mabanta Buenaventura
Sayoc & De Los Angeles
Introduction
Security transactions in the Philippines are broadly governed
by the Civil Code of the Philippines (Republic Act No. 386).
However, other laws may also apply, depending on the
type of the security or the manner of enforcement upon the
security.
There are three different types of corporate entities that
commonly provide security:
• domestic corporations
• resident foreign corporations licensed to do business in
the Philippines and
• non-resident foreign corporations not licensed to do
business in the Philippines but owning assets located in
the Philippines.
The Corporation Code of the Philippines (Batas Pambansa
BIg. 68), the Foreign Investments Act of 1991 (Republic
Act No. 7042), and the Omnibus Investments Code of 1987
(Executive Order No. 226) govern the incorporation and
registration of corporations in the Philippines.
Assignment by way of security
Can be taken over credits, receivables, contracts and
incorporeal rights.
Land and buildings
Private land in the Philippines can be broadly classified
into registered land and unregistered land. Registered land
denotes land that has been registered under the Torrens
system of registration.
Real mortgages must be in the prescribed form and are
given priority depending on the date of registration with the
Registry of Deeds covering the territory where the land is
located.
Unless otherwise specified, a mortgage over land includes a
mortgage of any improvements on the land. Improvements
may be mortgaged separately from the land on which they
are built, but there is no registry of improvements where
such mortgages may be recorded.
Personal property
Security over personal property can be taken by chattel
mortgage or by pledge.
Vessels, aircraft and other tangible personal property are
usually given as security by way of chattel mortgage; while
shares of stock are usually given as security by way of pledge.
Stock in trade is considered personal property and may be
subject to a chattel mortgage. The mortgage may extend to
after acquired stock in renewal of or in substitution for the
stock on hand when the mortgage was executed, subject to
the execution of a supplemental mortgage.
Chattel mortgage
Can be taken over personal or moveable property, including
shares of stock, aircraft, vessels, motor vehicles, inventory,
intellectual property rights, and choses in action.
Security over certificated shares of stock by way of pledge
can be taken by delivery of the endorsed share certificates
and the execution of a deed of pledge in the prescribed form.
Security over scripless shares can also be taken by way of
pledge, and instead of delivery of the share certificates, the
central securities depository, or the Philippine Depositary
and Trust Company, shall tag or book the relevant scripless
shares as subject to pledge.
Real mortgage
Can be taken over immoveables (including machinery and
equipment that has been immobilised by destination) and
alienable real rights over immoveables.
Pledge
Can be taken over all moveables capable of possession,
as well as over incorporeal rights evidenced by negotiable
instruments, shares of stock, bills of lading, and similar
documents.
Requires the delivery of possession over the thing pledged to
the creditor or to a third person.
rights
A corporate security provider, in order to grant such security,
must be empowered to do so by:
• law or under its articles of incorporation
Philippines
• majority vote of its directors
• if necessary, by the vote of at least two thirds of its
outstanding capital stock.
Under s. 36 of the Corporation Code, a corporation may
pledge, mortgage, and otherwise deal with real and
personal property as the transaction of the lawful business
of the corporation may require. Unless the corporation is
authorised by its articles of incorporation to provide security
for third parties, then the corporation is limited to providing
security only in connection with its own lawful business.
The grant of such security must be authorised by at least a
majority vote of the directors of the corporation.
If property constituting all or substantially all of its
property is given as security, the transaction must have
also been authorised by the vote of at least two thirds of
the corporation’s outstanding capital stock. The “all or
substantially all” threshold is met if without the property
given as security, the corporation would be rendered
incapable of continuing its business or accomplishing the
purpose for which it was incorporated. The test is qualitative,
rather than quantitative.
The Corporation Code also prescribes requirements for the
validity of contracts between a corporation and its directors
or officers (also known as self- dealing contracts), and
contracts between two corporations with common directors.
Banks are regulated under the General Banking Law of 2000.
Financing companies are regulated under the Financing
Company Act of 1998.
The Philippines maintains registries of land and
condominium units, as well as chattel mortgage registries.
Where land, condominium units, or personal properties are
mortgaged, registration in the relevant registry of deeds (for
land and condominium units) or chattel mortgage registry or
registries (for personal properties) constitutes notice to and
binds third persons.
A chattel mortgage must be recorded where the property
is located as well as in the principal place of business of
the mortgagor (if the latter is a resident of the Philippines).
Where the mortgagor is a non-resident, the chattel mortgage
must be recorded only where the property is located, and in
this case, verifying whether easily transportable personal
property is subject to a chattel mortgage is logistically
difficult because doing so would entail checking the chattel
mortgage registry in every province and city within the
Philippines.
Some uncertainty arises where unregistered land is given
as security. Security transactions over unregistered land
may be registered with the relevant registry of deeds.
While recording such transactions is intended to bind
third parties by constructive notice, the binding effect of
such notice is weakened because the recording of such
transactions is without prejudice to a third party with a
better right. A “better right” refers to a valid transaction,
even if unrecorded, that preceded the one recorded. Thus, it
has been held that an earlier instrument prevails over a later
instrument and the registration of any of them is immaterial.
Hence, unlike in cases of registered land, recording of
instruments pertaining to unregistered land provides only
limited protection.
To bind third parties, mortgages of certain types of personal
property must also be recorded with other relevant
regulators, in addition to the chattel mortgage registry. For
instance, aircraft mortgages must be registered with the Civil
Aeronautics Authority of the Philippines; ship mortgages
must be registered with Philippine Coast Guard of the port of
documentation of such vessel; mortgages over motor vehicles
must also be recorded with the Land Transportation Office;
mortgages of patents and trademarks must be registered with
the Intellectual Property Office; and mortgages of copyrights
are registered with the National Library.
Pledges, while not required by law to be recorded in any
registry, are deemed to be binding on third parties where
the pledge appears in a public instrument (ie, an instrument
acknowledged before a notary public).
Assignments by way of security are not required to be
registered but must appear in a public instrument in order
to bind third parties. If real rights are assigned as security,
however, registration with the registry of deeds is required to
bind third parties.
Real mortgages, even if not registered, and pledges and
assignments by way of security not appearing in public
documents, are valid between the parties but do not bind
third parties without knowledge. Chattel mortgages, by law,
must be recorded with the relevant chattel mortgage registry
to be valid. However, some jurisprudence would suggest
that an unregistered chattel mortgage is binding on the
contracting parties.
The execution of pledges, mortgages, and assignments by
way of security is subject to documentary stamp tax, and
the registration of security documents with the relevant
registries is subject to the payment of registration fees, both
of which are imposed on a graduated scale.
Granting guarantees
Provided they are so authorised under their articles of
incorporation, corporations can provide guarantees to
other corporations, whether related or unrelated. In line
with their fiduciary duties, directors must nevertheless
ensure that providing a guarantee is in the best interests of
the corporation.
There is no specific prohibition on a corporation providing
financial assistance. In acquiring its own shares, however,
a corporation must have sufficient unrestricted retained
earnings to fund the acquisition.
However, Philippine law has the general requirement of
a corporate benefit if a corporate act is not specifically
authorised under a company’s charter. Therefore, if minority
shareholders do not consent to an act, they may have a cause
of action against the directors as well as those perceived
to have benefited from a particular financial assistance
transaction.
Under s. 58 of the Financial Rehabilitation and Insolvency
Act of 2010 (Republic Act No. 10142) (FRIA), any
transaction entered into by the debtor or involving its funds
or assets occurring prior to the issuance by the rehabilitation
court of an order commencing rehabilitation proceedings,
may be rescinded or declared null and void on the ground
that the same was executed with intent to defraud creditors
or which constitute undue preference of creditors.
Where a debtor provides security or additional security
within 90 days prior to the issuance of the commencement
order, there exists a rebuttable presumption that the security
transaction is a fraud on creditors.
The issuance of an order commencing rehabilitation shall
also serve as the basis for nullifying any lien on the debtor’s
property perfected after the date of the commencement of
the rehabilitation.
The FRIA does not cover the insolvency of banks, insurance
companies, pre-need companies, and national and local
government agencies or units.
Real mortgage
Real mortgages may be enforced by foreclosure. The
procedure for foreclosure of real mortgages is judicial by
default. Judicial foreclosure involves trial proceedings and
can therefore be costly and time consuming.
Extrajudicial foreclosure may be resorted to where the
right to foreclose on a real mortgage is based on a special
power of attorney inserted in or attached to the instrument
constituting the real mortgage, in which case the mortgaged
property may be sold at public auction under the direction
of the sheriff of the province or of a notary public of the
municipality.
The parties may also agree that the mortgaged property shall
be sold in a private sale.
A creditor shall be entitled to recover any deficiency if the
proceeds of the sale are not sufficient to extinguish the
obligation. Similarly, the debtor is entitled to the proceeds of
the auction sale in excess of the obligation.
Chattel mortgage
Chattel mortgages may be enforced by extrajudicial
foreclosure under a procedure similar to that for extrajudicial
foreclosure of real mortgages. As with real mortgages,
personal property mortgaged under a chattel mortgage may
be sold in a private sale, with the agreement of the parties.
The rule with respect to real mortgages on deficiency or excess
of the proceeds of the auction sale generally applies to
foreclosure of chattel mortgages. As an exception, a creditor
may not be entitled to the deficiency if the chattel mortgage
was constituted on personal property sold by instalment, to
secure the payment of the purchase price.
Pledge
Pledges may be enforced by the public auction of the pledged
asset by a notary public.
The sale of the pledged asset extinguishes the principal
obligation whether the proceeds are equal to the amount of
the obligation. The parties may stipulate that the debtor shall
be entitled to any excess; but the parties may not stipulate
that the creditor shall be entitled to recover any deficiency.
Assignment by way of security
Upon default of a debtor, a creditor may proceed against the
security given through an assignment by way of security.
There is some ambiguity as to whether a creditor must first
Philippines
foreclose on an assignment by way of security and sell
the assigned rights in a public auction or if a creditor can
immediately collect on the assigned contracts.
Prohibition on automatic appropriation
A creditor is prohibited from automatically appropriating,
upon default, property given as security by way of pledge or
mortgage, and any stipulation to the contrary is void. As an
exception, the creditor may appropriate property pledged
if two auctions have been conducted with the property
remaining unsold.
insolvency
The right of a creditor to enforce its security may be
suspended during the term of the stay or suspension order
issued by the rehabilitation court upon the commencement
of the rehabilitation proceedings. The court, upon motion
or recommendation of the rehabilitation receiver, may
allow a secured creditor to enforce its security, if the said
property is not necessary for the rehabilitation of the debtor
in which case, the secured creditor shall be admitted to the
rehabilitation proceedings only for the balance of his claim,
if any.
In the event of the liquidation of an insolvent corporate
borrower, a secured creditor may:
• waive its rights under the security, prove its claim in the
liquidation proceedings and share in the distribution of
the assets of the debtor or
• maintain its rights in the security.
If a secured creditor maintains its rights under the security
• The value of the property may be fixed in a manner
agreed upon by the creditor and the liquidator. When
the value of the property is less than the claim it secures,
the liquidator may convey the property to the secured
creditor and the latter will be admitted in the liquidation
proceedings as a creditor for the balance; if its value
exceeds the claim secured, the liquidator may convey the
property to the creditor and waive the debtor’s right of
redemption upon receiving the excess from the creditor.
• The liquidator may sell the property and satisfy the
secured creditor’s entire claim from the proceeds of the
sale, or, the secured creditor may enforce the lien or
foreclose on the property pursuant to applicable laws.
The security documentation may be governed by a law other
than Philippine law but in order to bind third parties and to
enforce the security in the Philippines, the requirements of
Philippine law must be complied with.
In many syndicated secured financings, a mortgage trust
is set up in which a security trustee holds properties of the
mortgagor as security for the benefit of its creditors. The
trustee would typically be a universal bank with a trust
banking licence.
The Manual of Regulations on Foreign Exchange
Transactions requires certain loans granted by foreign
creditors to be pre-approved by the Bangko Sentral ng
Pilipinas.
In general, the loans requiring prior approval are:
• loans obtained by public sector entities
• loans obtained by private sector entities if guaranteed by
government corporations or financial institutions, covered
by foreign exchange guarantees issued by authorised
agent banks, granted by expanded/foreign currency
deposit units and specifically or directly funded from, or
collateralised by offshore loans of deposits
• loans with maturities exceeding one year to be obtained
by private non-bank financial institutions intended for
relending to public or private sector enterprises and
• loans to be serviced using foreign exchange purchased
from authorised agent banks or subsidiary/affiliate foreign
exchange corporations of authorised agent banks and
not otherwise exempted from the requirement of prior
approval.
Withholding tax
Subject to any bilateral tax treaties, there is a final
withholding tax of 20 per cent payable on interest payments
made to a non-resident foreign corporation if the same
qualifies as a foreign loan (a loan payable in foreign currency
and entered into by a Philippine resident with a nonresident).
Singapore
Singapore
Introduction
Singapore law relating to security is broadly based on
statutes and common law concepts, the combination of
which provides an advanced and flexible system. It is
underpinned by effective debtor and asset registries, effective
regulation and reporting requirements.
Main types of companies in Singapore
There are three different types of corporate entities:
Singapore registered companies, non Singapore companies
with a place of business in Singapore and non Singapore
companies with assets but with no place of business in
Singapore.
The Companies Act (Cap 50) (CA) governs the incorporation
and registration of companies in Singapore as well as
companies that are incorporated outside Singapore (nonSingapore companies). Such non-Singapore companies must
be registered under Part XI of the CA if they intend to carry
on business or have a place of business in Singapore.
The following are the traditional common law forms of
security interest under Singapore law. Each type of security
interest entails different formalities and creates different
legal rights and obligations.
Legal mortgage
A legal mortgage can be taken over land situated in
Singapore and assets with legal title, including registered
intellectual property rights, plant and machinery, other
tangible property (including ships and aircrafts), shares,
financial instruments and choses in action (such as debts or
rights under contracts) by way of legal mortgage.
Equitable mortgage
An equitable mortgage can be created in circumstances
where the formalities required to create a legal mortgage
have not been complied with, where the mortgagor’s interest
in the asset being mortgaged is itself an equitable interest,
or in respect of an agreement to create a legal mortgage
over future assets. An equitable mortgage over land may be
created by an informal deposit of title deeds coupled with
an intention to create a mortgage over the property or by
transfer of an equitable title to the property. An equitable
mortgage only transfers a beneficial interest in the asset to
the mortgagee with legal title remaining with the mortgagor.
Fixed charge
A fixed charge can be taken over other moveable or fixed
assets. Control of the secured asset is crucial to the nature of
a fixed charge.
Floating charge
A floating charge can be taken over changeable assets, both
present and future. Such assets may be and are typically
being used and dealt with in the ordinary course of the
chargor’s business until the occurrence of a specified event,
at which point the charge crystallises and becomes a fixed
charge which attaches to the assets.
Assignment
Both statutory and equitable assignments by way of
security can be created. To effect a statutory assignment
under section 4(8) of the Civil Law Act (Cap 43) (CLA),
the assignment must be absolute, not purporting to be by
way of charge only, in writing and signed by the assignor
with written notice given to the debtor or counterparty.
Non compliance with any of these requirements will mean
that the assignment may only be effective as an equitable
assignment. The main practical advantage of a statutory
assignment over an equitable assignment is that the assignee
may enforce in its own name.
Pledge
A pledge involves delivery of possession of an asset to the
creditor by way of security but with ownership of the asset
remaining with the pledgor. Only items of property capable
of being delivered (including documents of title to property,
such as bills of lading and bearer securities) can be pledged.
Land and buildings
Security over land and buildings in Singapore is generally
taken in the form of a legal mortgage which is registered at
the Singapore Land Authority. Security may also be taken by
way of an equitable mortgage which must be in writing or
by a deposit of title deeds. A charge created by a deposit of
title deeds will have no effect or priority against a subsequent
assurance for value, unless and until, a memorandum of
charge signed by the person against whom the charge is
claimed has been registered.
Future acquired land and buildings can also be used as
security, but the security will only take effect as a signed
agreement in writing to create a charge.
Singapore
Tangible moveable property (including ships and
aircraft)
Security over tangible moveable property can usually
be taken by a legal or equitable mortgage, by a fixed or
floating charge or by way of pledge in the case of chattels or
documents of title.
A fixed charge will normally be taken over all tangible
moveable property and future tangible moveable property.
Stock-in-trade or work in progress will generally be secured
by a floating charge. To create a fixed charge, control over
the secured assets is critical and the security document
will typically include prohibitions on dispositions with any
interest in the tangible moveable property or moving charged
assets without prior consent of the secured creditor.
Shares/investments
Security over shares in a Singapore company can be taken by
way of mortgage (legal or equitable) or by a fixed or floating
charge. Taking a charge over shares in a private company
will involve, amongst other things, delivery of the share
certificates, a blank share transfer form and waiver of preemption rights.
No security interest may be created over shares in a company
listed on the SGX except as provided in section 130N or
section 130P of the CA. Such shares (known as “scripless
shares”) which are deposited with the Central Depository
System (CDS) can only be deposited by a person who has
an account with the CDS or a depository agent. Lenders
could choose to take either statutory security over the
scripless shares or common law security. However, given the
restrictions and requirements for a statutory security over
the shares (ie, lender has to be a direct account holder with
the CDS or be a depository agent and the prescribed forms of
security document), many lenders choose to take common
law security pursuant to Regulation 23A of the Companies
(Central Depository System) Regulations by way of a charge
and assignment in a sub-account maintained by a depository
agent and the simultaneous opening by the lender of a subaccount with that depository agent.
In cases where shares have restrictions on transfer, it is
advisable to obtain undertakings from directors to register
shares on enforcement of security and letters of resignation
for non-compliance with such an undertaking. However,
the efficacy of such undertakings has not yet been tested.
Accordingly, if it is practical, lenders could require the
company to amend its articles of association to remove
such restrictions. However, it should be noted that this
does not prevent the company from amending its articles of
association back without the lenders’ knowledge.
Security over intellectual property can be taken by way of
mortgage, fixed charge or assignment. It is more common
to take a fixed charge. A single document can be used
for various types of intellectual property which should
identify specific intellectual property rights, and use general
language purporting to charge a wide range of intellectual
property rights arising or subsisting anywhere in the world,
whether registered or unregistered and whether existing or
subsequently acquired.
Bank accounts
Security over bank accounts in Singapore can be taken by
way of a fixed or floating charge or by a legal mortgage.
Section 13 of the CLA authorises the creation of security
over a chose in action, such as a bank account which can be
fixed or floating depending on the degree of control over the
account exercised by the creditor. An equitable charge can
extend to future deposits as they are made.
Receivables
Security over receivables can be taken by way of a fixed
or floating charge or by way of an assignment which is
commonly used in respect of future receivables.
Contractual rights including insurance policy
Security can be taken by way of an equitable charge or by
statutory assignment. However, it is important to check that
there are no restrictions against assignment or creation of
other security.
rights
In determining whether a company granting security will
be bound by its security, the following matters need to be
considered:
• Does the company have the capacity to enter into the
transaction under its constitutional documents?
• If the company has the capacity to enter into the
transaction, do the directors have authority to bind the
company under the CA and its constitutional documents
without seeking the approval of the company in a general
meeting?
• If so, (i) would the directors be in breach of their fiduciary
duty to the company in entering into the transaction and
(ii) does the lender have notice of this fact? This is what is
normally known as the “commercial benefit” issue.
Ultra vires
The concept of ultra vires is of limited significance as
section 25(1) of the CA provides that “no act or purported
act of a company … shall be invalid by reason only of the
fact that the company was without capacity or power to do
such act …”. However, the prudent view is to still ensure
that the granting of security will not be ultra vires and falls
within the directors’ authority. Accordingly, the company’s
constitutional documents should be examined to establish
whether there are express restrictions on the company’s
capacity and as to whether the directors have power to enter
into the relevant transaction.
Director’s authority and duties
When establishing the authority of the individuals concerned
to enter into a transaction, it would be usual to trace their
authority from the company’s articles of association through
to the board minutes of the directors authorising the entry
into the transaction.
The directors must act bona fide in the best interests of the
company, which is a question of fact, not of law. The test is
whether an intelligent and honest man in the position of a
director of the company concerned could, in the whole of the
existing circumstances, have reasonably believed that the
transaction was of benefit to the company.
It is not difficult to establish corporate benefit in a
downstream guarantee (or security) as a holding company
would benefit from a subsidiary’s financial well-being. With
an upstream guarantee (or security) it is more difficult to
justify benefit for the grantor company. Where there is any
uncertainty on the issue of corporate benefit, shareholders’
resolutions should be obtained. However, this is not
a complete solution as the possibility of a liquidator’s
challenge remains.
A lender who has actual or constructive notice that a director
is in breach of these duties runs the risk that the security
provider may be entitled to set aside the security, leaving the
lender holding the secured assets on trust for the security
provider and its creditors.
a licence is required to lend under the MA, exceptions are
created in respect of lenders which are otherwise regulated
by the BA and the FCA.
Singapore maintains both debtor and asset registries. Nonregistration at the debtor registry within the stipulated time
will, in the event of an insolvency of the debtor, render the
security void as against creditors and a liquidator.
Section 131(1) of the CA provides that certain security (heads
of which are set out in section 131(3) of the CA) whether
in the form of a charge or a mortgage which is created by
a Singapore company or by a non Singapore company
registered in Singapore under Division 2 of Pt XI of the CA,
must be lodged for registration with the Accounting and
Corporate Regulatory Authority in Singapore (ACRA), within
30 days of its creation (in the case where the document
creating the charges is executed in Singapore), or within 37
days of its creation (in the case where the document creating
the charge is executed outside Singapore) (section 139 of the
CA). If registration is not effected, the security will be void
against the liquidator and other creditors of the company
and leave the lender as an unsecured creditor. However, it
should be noted that non-registration does not affect the
primary contractual obligation of the borrower to repay the
outstanding indebtedness.
It is worth noting that as part of the review of and proposed
amendments to the Singapore Companies Act, the list of
registrable charges set out in section 131(3) of the CA will be
reviewed and deleted.
The registration requirements for security interests created
over the following assets are additional to, and do not
replace, any other registration requirements such as those
imposed by section 131 of the CA.
The main source of credit in Singapore is commercial banks,
although credit is also available from finance houses,
moneylenders and other organisations.
Land
Since 31 December 2002, all land has been converted to
registered land under the Land Titles System. Accordingly,
all transfers of land (which include mortgages and charges)
must be registered in the Land Titles Register and must be in
the prescribed form under the Land Titles Act. Other forms of
security over land must be registered under the Registration
of Deeds Act as priority will be determined by the date of
registration.
Such lenders are generally regulated under the Banking
Act (Cap 19) (BA), the Finance Companies Act (Cap 108)
(FCA) and the Moneylenders Act (Cap 188) (MA). Although
Security over a ship must be registered using the prescribed
statutory form and registered with the Singapore Registry
Singapore
of Ships. An accompanying deed of covenants (which is not
registrable) is usually entered into as collateral to the
ship mortgage.
Security over aircraft has to be registered with the Civil
Aviation Authority of Singapore.
Shares/Investments
Registration is not required for a mortgage or charge over shares
(other than a charge on shares of a subsidiary of a company
which are owned by that company pursuant to section 131 of
the CA). However, the practice is to register in any event and a
charge over dividend must be registered under the CA.
Intellectual Property
Registration of a security interest in a trademark can be
registered at the Registrar of Trade Marks (Trade Marks Act
(Cap 332)). Copyright can be secured but is not registrable.
Registration is also required for a charge on a patent or
licence under a patent or on a trade mark.
Bank accounts, receivables and contractual rights
(including insurance policy)
No registration requirements other than under section 131 of
the CA. However, to ensure priority, notice must be given to
the bank, debtor or counterparty, as the case may be.
Granting guarantees
borrowings (and payments made pursuant to it) may be
regarded as a distribution. Security arrangements which
amount to an unlawful distribution may be void if they
contravene the provisions of the CA.
There is a general prohibition on providing financial
assistance under section 76 of the CA in the form of finance,
loans or guarantees for the acquisition of its own shares.
Unlisted companies can give financial assistance if they
comply with the “whitewash procedures”.
The consequences of breach of such prohibition are as
follows:
• The company will be liable to a fine.
• All officers in breach will be liable to a fine and/or
imprisonment.
• The directors maybe in breach of their duty to the
company and be made liable as constructive trustee for
any loss.
• Security, loans or guarantees given as financial assistance
will be void and unenforceable. However, the courts may
consider severance of illegal parts of the transaction.
Companies can provide upstream, downstream and/or
cross-guarantees. However, sections 162 and 163 of the
CA prohibit a company from making a loan or providing
a guarantee to its own directors or directors of associated
companies, unless, it is a company with no more than 20
individual members or is wholly owned by the government
and declared to be a private exempt company.
It is worth nothing that the provisions prohibiting financial
assistance are currently subject to review and amendment.
The provisions relating to financial assistance for private
companies will be abolished and a new exception will be
introduced for a public company or its subsidiary to assist
a person to acquire shares in the company or the holding
company of the company.
Directors have a duty to ensure that commercial benefit
accrues, directly or indirectly, to the company providing the
guarantee. A parent company may benefit from guaranteeing
the obligations of a subsidiary (downstream guarantee)
because it will directly or indirectly hope to receive dividends
from the subsidiary. However, that may not be the case
in respect of upstream or cross-guarantees. Even where
shareholders may have ratified the Board’s decision to
grant an upstream or cross-guarantee, the possibility of a
liquidator’s challenge will remain in cases where it can be
demonstrated that the company granting the guarantee or
security did not benefit from the transaction.
A company may only make a distribution out of profits
available for the purpose. A guarantee of a parent’s
Undue or unfair preference: section 329 of the CA provides
for undue preference provisions, by reference to the personal
bankruptcy provisions. Essentially, a security transaction
may be void if there was a desire to put a creditor in a better
position than a general creditor and where the transaction
took place between connected persons within two years of
the presentation of petition or commencement of windingup or six months of the same date in transactions between
unconnected persons.
Transactions at an undervalue: section 98 of the Bankruptcy
Act provides for setting aside transactions at an undervalue,
where there is either no consideration or where such
consideration is significantly lower than market value.
Floating Charge: section 330 of the CA provides for the
avoidance of a floating charge created within six months of
the commencement of insolvency proceedings except to the
extent of any cash paid to the company at or after the time of
creation of the charge unless it is proved that the chargor was
solvent immediately after the creation of the charge.
Enforcement is largely a contractual matter governed by
the agreement between a debtor and a creditor. Although
debenture holders have a raft of enforcement remedies,
receivership is the most popular method of enforcement of
a security interest given that the receiver may take control
of and run the debtor’s business with a view to effecting
a realisation of the security without directly exposing the
creditor to liability to the debtor. The remedy of sale can
also be useful, particularly, in the case of ships where a
mortgagee of a registered ship has power (as opposed to
private sale) absolutely to dispose of the ship and to give
effectual receipts in respect of the disposal under the
Merchant Shipping Act. There is no requirement to hold a
public auction although that option is available. A lender
may also wish to enforce their rights by way of a court order.
of insolvency
Secured creditors are entitled to enforce their security
notwithstanding the making of a winding-up order of the
company by the court. This is true insofar as the assets
covered by fixed charges are concerned. However, assets
covered by a floating charge will first be used for distribution
to preferential creditors such as employees, statutory
tax debts and small bank depositors. The fact that the
floating charge may have crystallised or a receiver has been
appointed under the debenture creating the floating charge,
will not affect the rights of such preferential creditors.
Although the claims of the debenture holders will be
postponed to the preferential creditors, they enjoy priority of
their claims over the general body of creditors.
There is no equivalent of an insolvent administration or a
Chapter 11 protection (under US bankruptcy laws). However,
there is a concept of “judicial management”. A court may
make a judicial management order at the application of the
company, its directors or creditors, if the court is satisfied
that the company is or will be able to pay its debts and that
the judicial management would achieve the survival of the
company or its undertaking as a going concern, a scheme
of arrangement or compromise between the company
and its creditors under section 210 of the CA or a more
advantageous realisation of the company’s assets than would
occur in a winding up. A moratorium is put in place while
the judicial management is in force and the judicial manager
will manage the business and property of the company
to rehabilitate the company or preserve part or all of its
business as a going concern. If this can be done successfully,
it will avoid a firesale of the company’s assets in a forced and
premature liquidation, hence benefiting all creditors and
members of the company.
Parties to a contract are free to choose any law they wish
so as long as it is bona fide, legal and not against public
policy. The choice must be clear and unambiguous. However,
Singapore law would apply in determining the validity or
effectiveness of any security interest taken or created over
property located within Singapore. In general, it is advisable
for the governing law relating to the security to be the same
as that of the jurisdiction in which the asset is located.
The concept of a trust is recognised in Singapore. The
use of a security trustee is common in syndicated finance
transactions and it facilitates the creation, discharge, transfer
and enforcement of security.
There is currently no exchange control in Singapore.
Withholding tax
Withholding tax at the rate of 15 per cent is required to
be withheld on interest payments, commission and fees
in connection with any loan and indebtedness to a nonSingapore tax resident, subject to any bilateral tax treaties.
Stamp duty/registration fees
No stamp or other taxes is payable for the provision of a
guarantee or the granting of security over any assets other
than for dealings in land, stocks and shares. Security
documents over land, stocks and shares are subject to
stamp duty up to a maximum amount of S$500. Ad valorem
stamp duty must also be paid in respect of the transfer of
stock, shares or immovable property resulting from the
enforcement of a mortgage or charge over such stocks, shares
or immovable property. A nominal registration fee is payable
in respect of the registration of a charge with ACRA.
South Korea
South Korea
Contributed by Lee & Ko
Introduction
South Korea’s security law is broadly governed by a number
of laws, including the Civil Law, the Commercial Code and
the Civil Execution Law. Case law is also relevant but does
not provide binding precedent. Security can be classified
into immoveable property security and moveable property
security according to the characteristic of the collateral.
Traditionally, security has been taken over immoveable
property, rather than moveable security, on account of the
registration system for immoveable property. However,
this will start to change under the Security Rights on
Moveables and Claims Act (the “Security Act”) relating to
the registration system for the moveables, receivables and IP
rights, which was enacted on 10 June 2010 and which will
come into force on 11 June 2012.
There are five types of companies under the Commercial
Code (recently amended and amendments to be in effect on
15 April 2012):
• a Chusik Hoesa (a stock company)
• a Yuhan Hoesa (a closely held limited liability company)
• a Hapmyung Hoesa (a company similar to an unlimited or
general partnership)
• a Hapja Hoesa (a company similar to a limited
partnership)
• a Yuhan Chaekim Hoesa (a limited liability company).
Each type of company is treated as a legal entity that is
separate from its equity holders.
A Hapmyung Hoesa and a Hapja Hoesa are rarely used
in practice because their equity holders are exposed to
unlimited liability (in the former, all equity holders have
unlimited liability and in the latter, at least one equity holder
must have unlimited liability).
Of the five types, a stock company is the most common type
as 92.5 per cent of the registered companies in South Korea
are stock companies (as of 1 January 2010). Moreover, a
majority of the listed companies and large companies are
stock companies in South Korea.
Mortgages (jeo dang kwon)
Mortgages are most commonly used as security over
immoveable property, but can also be created over certain
moveable property, such as ships, aircraft and construction
equipment.
A mortgage may provide security not only for the principal
amount of the loan but also for any interest, liquidated
damages or default interest. However, only default interest
incurred during a one year period, following the date on
which the secured principal becomes due, can be secured,
unless, the mortgage is a “kun-mortgage” (see below).
The rankings of mortgages on real properties are determined
by the order of application for registration. Mortgage
holders are entitled to any distribution after all the holders
of mortgages senior to them have received distribution
payments up to their respective maximum repayment
amounts. For all other security interests, priority is
determined by the order of perfection.
A mortgage gives the secured creditor preferential rights over
the mortgaged property and allows the mortgagee to receive
payments from the proceeds of the mortgaged property
ahead of any unsecured creditors.
Kun-Mortgages (kun-jeo dang kwon)
A “kun-mortgage”, as distinct from a fixed amount mortgage,
is a type of mortgage which secures debts arising from a
series of transactions up to a certain fixed maximum amount
to be reached at a future date.
The kun-mortgage is distinctive in that it secures the debt
at its maximum amount without regard to any intermediate
increases or decreases in the amount of the debt.
Pledges (jil-kwon)
A pledge involves the transfer of possession of an asset to
the pledgee by way of security but with ownership of the
asset remaining with the pledgor. Moveable property that
is subject to mortgages (such as certain ships, aircraft and
construction equipment) cannot be subject to a pledge.
Security by transfer (yangdo dambo)
This is not provided in the Civil Law, but has been sanctioned
by the courts and is used widely by creditors when taking
security over moveable property.
This security interest may be taken over any moveable
property whether or not such moveable property is otherwise
South Korea
subject to a mortgage or a pledge. A security by transfer is
a transfer of ownership in the property as security, with an
obligation to retransfer those rights to the security provider
after satisfaction of the related obligations.
Security registration under the Security Act
(dambo deung-gi)
Security registration is a form of security created under the
Security Act that allows security to be taken over certain
tangible moveable property and claims and receivables
by way of registration. A security registration may provide
security not only for the principal amount of the loan but
also for any interest, liquidated damages or default interest
and the rankings on such security are determined by
the order of application for registration. Also, like a kunmortgage, security registration can secure future debts up to
a certain fixed maximum amount.
Main types of corporate security assets
Immoveable property
• Land, including any fixtures affixed to land.
• Buildings, which are regarded as independent from the
land on which they are built and which are subject to a
separate registration system.
The two most common forms of security created over
immoveable property are a mortgage and a kun-mortgage:
Any tangible item that is not immoveable property will be
classified as moveable property. Moveable properties are
given different legal treatment depending on the type of
moveable property.
In general, Civil Law provides that a mortgage cannot be
created over most moveable property. Under certain statutes
however, certain exceptions are given for construction
machinery, automobiles, aircraft and registered ships.
A pool of moveable properties is not recognised as a single
moveable property. Therefore, a single security cannot
be established over a pool of moveable properties unless
it qualifies under the following exception. The Supreme
Court has recognised that a pool of moveable properties can
be subject to a single security interest if that pool can be
identified as being separate from the other security grantor’s
moveable properties by specifying the type, location and
quantity of the moveable properties which are included
in that pool. Also, a pool of moveable properties can be
registered as a single security interest under the Security Act.
The two most common forms of security granted over
moveable property are a pledge and a security by transfer,
but for construction machinery, automobiles, aircraft and
registered ships, a kun-mortgage is the most common form
of security. As the Security Act has recently been enforced,
security can be taken over moveable property by way of the
security registration.
Claims and receivables
The most common forms of security granted over claims
and receivables are a pledge and a security by transfer. As
the Security Act has recently been enforced, security can be
also taken over claims and receivables by way of the security
registration.
For granting a security interest over shares, the following
four methods are mainly used:
•
•
•
•
an unregistered pledge
a registered pledge
an unregistered security by transfer
a registered security by transfer.
The most common form of security effected over shares is by
the registered pledge method.
The most common form of security granted over intellectual
property is by the pledge method.
rights
Subject to the mandatory provisions of the Commercial Code,
corporate matters of a Chusik Hoesa are governed by the
articles of incorporation.
A Chusik Hoesa must have at least three directors (if its
paid-in capital is less than one billion Korean Won, a
Chusik Hoesa may have one or two directors) and a board
of directors (except where the company has only one or two
directors). At least, one of the directors must be appointed as
a representative director.
The representative director is legally authorised to represent
the company in all corporate matters including entering
into contracts that are legally binding upon the company,
unless, the matter in question constitutes a disposition or
taking over of “important property” of the company or “large
borrowings” by the company. In such cases, a resolution of
the board of directors is required by the Commercial Code.
In addition, other limitations may be included in the articles
of incorporation. However, under certain circumstances,
the company may be held liable for an unauthorised act of
the representative director against a bona fide third party
that did not have knowledge of such restrictions, except for
matters requiring shareholders’ approval pursuant to the
Commercial Code.
The Commercial Code requires that certain matters such as
(i) transfer of the whole or an important part of the business,
(ii) conclusion, alteration or rescission of a contract that
(a) leases the whole business or (b) provides a mandate to
manage the business by a third party or (c) provides for the
sharing with a third party the entire profits and losses from
the business or (d) has a similar effect with (a), (b) or (c)
above and (iii) taking over of the whole or parts of a business
of another company which may significantly affect the
company’s business, should be resolved at a shareholders’
meeting by a supermajority vote, which means an affirmative
vote of the shares representing at least two thirds of the
shares present at the shareholders’ meeting and at least one
third of the company’s total issued and outstanding voting
shares.
Unless it is a financial institution that engages in the credit
business with the requisite authorisation or permission
under any other act or a subordinate statute, any person
who intends to engage in the credit business or the loan
brokerage business needs to be registered for each business
office pursuant to the Act on Registration of Credit Business
and Protection of Finance Users.
Mortgages
The creation of a mortgage is effective on:
• an agreement between the mortgagee and the mortgagor
• registration at the relevant property registry maintained
by the district court (which also perfects the mortgage).
Kun-Mortgages
A kun-mortgage is created and perfected in the same manner
as a mortgage. However, the agreement creating a kunmortgage must specify:
• the scope, or type, of claims to be secured
• the maximum amount to which the kun-mortgagee has
preferential rights.
Pledges
A pledge over moveable property is created and granted by:
• an agreement between the pledgee and the pledgor
• delivery of the subject matter to the pledgee.
Delivery includes: actual delivery, summary delivery (that
is, if the pledgee is already in possession of the moveable
property under an existing lease agreement, delivery will be
assumed to have taken place) and transfer of possession by
instruction.
However, it excludes deemed delivery. Deemed delivery
occurs when the pledgor enters into a lease agreement,
simultaneously with entering into a pledge agreement, and
is allowed to be in continuous possession of the moveable
property under that lease agreement. In that case, the
pledgee would only acquire “notional” possession of the
moveable property.
A pledge over moveable property is perfected by continuous
possession of the subject matter of the pledge.
Claims and receivables
A pledge over claims and receivables is created by a contract.
However, creating a pledge over a claim represented by a
claim instrument requires:
• delivery of the relevant instrument
• execution of the contract.
For a pledge over nominative claims (that is, claims for which
creditors are specified and no claim instrument is issued),
perfection is achieved (against the obligor of the claims (that
is, the person obligated to pay the claims)) by giving notice
to, or obtaining an acknowledgement from, each relevant
obligor.
Perfection against third parties, other than obligors of
the claims, is achieved by giving notice to, or obtaining
acknowledgement from, each relevant obligor using an
instrument bearing a fixed date stamp. A pledge over debts
payable to order is perfected by an endorsement to
this effect.
Shares
For shares in an unlisted company, a registered pledge is
created and is effective on:
• the execution of the pledge agreement
South Korea
• delivery of the share certificate to the pledge
• registration of the pledgee’s name and address
in the company’s shareholder registry.
A registered pledge is perfected through the continuous
possession of the share certificate along with continued
registration on the company’s shareholder registry.
For shares in a listed company, a registered pledge of shares
in a listed company is created and perfected through the
same procedure as shares in an unlisted company. However,
if the share certificates of the listed company are deposited
with the Korea Securities Depository (KSD), a registered
pledge over those shares is created and effective on:
Significantly, the guarantee cannot be enforced until a
creditor first exhausts its remedies against the principal
obligor.
• A joint and several guarantee: in contrast to a simple
guarantee, both the guarantor and the principal obligor
assume joint and several liability over the debt. This
means that a creditor can enforce the guarantee as soon as
the principal obligor is in default and will not be required
to exhaust its remedies against the principal obligor.
• the recording of the pledge in the accounts of the KSD.
Unlawful financial assistance
There are no financial assistance rules in South Korea.
However, if a director grants security to a creditor without
any benefit to the company in return, that director may
be in breach of its fiduciary duty and shall be liable to the
company for any damages that the company may sustain.
The director can also be prosecuted for misappropriation.
A pledge over rights to patents, trade marks, copyrights and
designs is created and perfected by:
In principle, a company is prohibited from acquiring its own
shares or the shares of its parent company (although there are
certain limited exceptions to this).
• the execution of a contract
Corporate benefit rules
It is not illegal for a subsidiary to grant in favour of its parent
a security in connection with a loan extended (whether or
not by a third party). In addition, there are no provisions
in the Commercial Code relating to corporate benefit rules.
However, if a subsidiary’s director provides security to a
creditor of its parent, with no benefit to that subsidiary in
return, that director may be in breach of its fiduciary duty
and liable for damages to the subsidiary.
• the execution of the pledge agreement
• registration of the pledge in the Korea Intellectual
Property Office or with the Korea Copyright Commission.
Security by transfer
A security by transfer is created and granted through a
contract and delivery. In contrast to a pledge, delivery of
the subject matter can take the form of a deemed delivery. A
security assignment over moveable property is also perfected
by continuous possession of the subject property.
Security registration under the Security Act
Security registration under the Security Act is created and
perfected by:
• the execution of the security agreement
• registration of the security on the relevant registry.
Granting guarantees
There are two types of guarantees but in practice, a joint and
several guarantee will always be used.
• A simple guarantee: the guarantor assumes the guarantee
liability when the principal obligor fails to pay the debt.
Where a director of a company seeks to trade or enter into
a transaction with the company in a personal capacity and
there is a conflict of interest between the director and the
company, prior approval of the proposed trade or transaction
is required from the company’s board of directors. This
applies not only to situations where there is a direct conflict
of interest between a director and the company of which he
is a director, but also where the company represented by that
director provides joint and several guarantees:
• over the personal liabilities of that director to a third party
creditor or
• over the liabilities of another company in which that
director is also a director.
The Debtor Rehabilitation and Bankruptcy Act (DRBA) is
the main legislation relating to a company’s insolvency
proceedings. Under the DRBA, a financially troubled
company can choose to apply for a court decision in relation
to either:
• rehabilitation proceedings, which prevent a secured
creditor from enforcing its security unless authorised by
the court or
• bankruptcy (liquidation) proceedings which will not affect
a secured creditor’s right to enforce its security.
In principle, the trustee appointed in rehabilitation
proceedings or bankruptcy proceedings can void the
following transactions:
• any action that the debtor takes with the knowledge that it
will cause harm to its creditors
• any action that the debtor takes following a triggering
event (see below) that:
—— creates a security interest in the debtor’s assets
—— discharges any obligation of the debtor or
—— is otherwise prejudicial to creditors.
A triggering event can be:
• an application for the start of a rehabilitation or
bankruptcy proceeding or
• a suspension of payment (where the debtor explicitly or
implicitly indicates that it is not able to make payments
for its debts generally and continuously when they
become due) or
• any action taken by the debtor after or within 60 days
prior to a triggering event (one year in the case of related
party transactions) (transactions with certain parties
that are related by blood or affinity and/or are affiliated
by equity investment or other control (including legal
ownership)), that creates a security interest in the debtor
or discharges any obligation of the debtor, where the
debtor is under no obligation to do so or
• any gratuitous act taken by the debtor after or within six
months (one year in the case of related party transactions)
prior to a triggering event.
However, these actions cannot be invalidated after the
earlier of:
• two years from the start of a rehabilitation or bankruptcy
proceeding or
• ten years from the date of the action.
A secured creditor can enforce security in circumstances
specifically agreed between the parties. Depending on
the terms of the specific agreement being made, it may be
necessary for the creditor to make a request to the debtor to
perform its obligations before the creditor is able to enforce
the security.
If the debtor has:
• damaged, diminished or extinguished the secured asset or
• failed to perform its obligation to create security in favour
of the creditor or
• been declared insolvent.
Then prior to enforcement the creditor should request
the debtor to perform its obligations (or make good any
damage). Where repayment dates have passed, enforcement
of particular types of asset will take place in the following
manner
• Registered security interests: a registered security interest
(such as a mortgage over immoveable property and
pledge of intellectual property) is enforced through a
court-supervised auction process. To start the auction
process, a creditor must submit documents evidencing the
existence of the security interest to either the courts or an
enforcement agency.
• Pledges of moveable properties: a pledge of moveable
properties can be enforced through a court auction
process. If there are justifiable reasons (for example, if the
value of the moveable property concerned is insignificant
and therefore inappropriate for an auction), it is also
possible to apply to the courts for a direct sale and a
discharge following a valuation by an appraiser.
• Pledges of shares: a pledge of shares can be enforced
through:
—— a court auction process or
South Korea
—— where the shares concerned have market value,
through a sale applying the market value on the date of
that sale;or
• the proceeds from the sale of the property securing claims
would be paid first to satisfy the claims secured by the
property.
—— the method agreed in the pledge agreement, where
the pledge has been created to the parties under a
commercial agreement and where either the creditor
has appropriated the pledged asset; or, the parties have
agreed on a realisation method.
In rehabilitation proceedings, claims rank in the following
order:
insolvency
Rehabilitation proceedings
In principle, claims incurred before the start of the
rehabilitation proceedings, whether secured or not, must be
repaid only through the rehabilitation plan.
The trustee, creditors or shareholders can submit the
rehabilitation plan. Typically, on the court’s order, the trustee
prepares and presents the plan to the court within the period
that the court prescribes.
The court then convenes meetings of “related parties”.
At the related parties’ meetings, all classes of creditors
and shareholders must approve the plan. In the secured
creditors’ class, the consent of the secured creditors holding
at least three quarters of the total amount of the secured
claims is required for approval. In the unsecured creditors’
class, the threshold is two thirds. If the debtor’s total assets
exceed its total liabilities when the rehabilitation procedure
commences, shareholders are entitled to vote (although
shareholders do not generally receive distributions, except
under extraordinary circumstances) and the threshold is 50
per cent.
After the related parties meetings, the court approves the
plan. Despite the above voting thresholds, even where all
the classes do not consent to the rehabilitation plan, the
court has discretion to approve the rehabilitation plan with
certain modifications designed to give “fair and equitable
protections” to the creditors, provided that at least one class
approved the submitted rehabilitation plan.
The claims of the secured creditors can be paid concurrently
with the claims of the unsecured creditors. However,
typically:
• the repayment ratio applicable to the secured creditors
would be higher compared to that of the unsecured
creditors
• statutory claims
• secured claims in the rehabilitation proceedings
(generally arising before the start of proceedings)
• unsecured claims in the rehabilitation proceedings
(generally arising before the start of proceedings); and
• claims arising after the start of the proceedings (except for
statutory claims).
Statutory claims are paid without any restriction under
rehabilitation proceedings. In principle, rehabilitation
secured claims and rehabilitation (unsecured) claims are
only paid through the rehabilitation plan. Other claims
arising after the start of the proceedings cannot be paid until
the expiry of the earlier of:
• the prescribed payment period or
• completion of all payments to creditors provided in the
rehabilitation plan.
Bankruptcy proceedings
Generally, the same rules apply as for rehabilitation
proceedings. However, secured creditors can enforce their
security interests without being restricted by bankruptcy
proceedings. In bankruptcy proceedings, the claims are paid
in the order of:
• estate claims (similar to statutory claims under a
rehabilitation proceeding)
• bankruptcy claims with priority
• ordinary bankruptcy claims
• subordinated bankruptcy claims.
Secured claims (which are not included among these claims)
are not subject to the bankruptcy proceedings and can be
enforced independently and separately. Estate claims, like
statutory claims, are paid without any restriction under
the bankruptcy proceedings. In principle, all three types of
bankruptcy claims listed above are claims arising before the
commencement of bankruptcy proceedings.
The parties can choose a governing law at the time of
entering into the loan agreement. However, the agreed
governing law will not be upheld in relation to property and
security rights such as:
• property rights relating to moveables and immoveables (or
other rights which are subject to registration), which must
be governed by their lex situs (that is, the law of the place
where the property is situated)
• security interests in bonds, shares or other securities,
which must be governed by the laws governing the
underlying asset
• security interests in bearer securities, which must be
governed by the lex situs of those bearer securities at the
time of the creation of that interest.
In addition, foreign law agreed between the parties will
not be applied if applying the provisions of that foreign law
would clearly violate the customs or social order of South
Korea.
A security interest is not an asset which can be placed on
trust. Korean law only recognises a creditor with a direct
interest in the debt obligation of the borrower as being
entitled to the relevant security rights over such debt
obligation. Therefore, the concept of security trust (such as
holding of security through a security trustee) does not exist
in South Korea. This gives rise to difficulties for lenders in
South Korea, because they must assign or transfer rights over
the borrower’s debt obligations together with the relevant
security rights.
Foreign currency loans: a resident must make a prior report
to its designated foreign exchange bank if the resident seeks
to borrow foreign currency from a non-resident, including
the issuance of:
• foreign currency denominated securities
• Korean Won linked foreign currency securities.
If the amount of the proposed loan exceeds 30 million US
dollars (including any amounts borrowed within one year
prior to the date of that reporting), the resident must make a
report to Ministry of Strategy and Finance of Korea (MOSF)
through its designated foreign exchange bank (instead of
making a report to its designated foreign exchange bank).
MOSF orders
MOSF can, in the event of a natural disaster, war, material
and sudden changes to the domestic or international
economy or other events which have a similar effect, order
a temporary suspension of payments or collections of the
whole or part of a loan.
Withholding tax
If the lender is a foreign corporation without a permanent
establishment in South Korea, the withholding tax rate on
the interest of a loan (regardless of the currency) is 22 per
cent (including a resident surtax of 10 per cent thereon),
unless, there is a tax treaty between South Korea and the
jurisdiction of such lender.
The withholding tax rates applicable to some of the main
jurisdictions under the relevant tax treaty are as follows:
• withholding tax exemption is offered in the case of Ireland
and Hungary
• 10 per cent in the case of England, Singapore, Belgium
and Luxembourg
• 12 per cent in the case of the USA
• 15 per cent in the case of the Netherlands.
However, where the lender is a foreign bank without a
permanent establishment in South Korea and the borrower is
a Korean foreign exchange bank (most South Korean banks
qualify as a foreign exchange bank), any corporate tax levied
on the interest of a foreign currency-denominated loan is
exempted, and consequently, the South Korean borrower
will not be required to deduct or withhold from payment of
interest.
Thailand
Thailand
Introduction
Despite being recognised, generally, as a civil law
jurisdiction, the Thai legal system contains selected features
from both the common law and civil law systems. Thai
secured lending practices are generally governed by the Thai
Civil and Commercial Code (Civil Code), which recognises
security interests by way of only mortgages and pledges. In
addition, there are a number of specific acts under which
other types of security interests are recognised.
The Civil Code and the Public Limited Companies Act B.E.
2535 (PLCA) deal with the incorporation and registration
of private limited companies and public limited companies,
respectively. Branches of companies incorporated outside
Thailand may also be registered.
The security interests traditionally taken by lenders in
banking transactions in Thailand are broadly divided into
two types:
• security which is recognised under the Bankruptcy Act
B.E. 2483 (Bankruptcy Act) (Legal Security)
• security which is not recognised under the Bankruptcy
Act, but still provides a certain level of protection for
lenders (Other Security).
Only lenders holding Legal Security (not those holding Other
Security) over the assets of a borrower (not a third party
security provider) will be recognised under the Bankruptcy Act
as secured creditors in the insolvency proceedings of that
borrower.
The two principal forms of the Legal Security which are
created by contract are mortgages and pledges.
Mortgage
A mortgage can only be taken over “immoveable” property
and certain types of “moveable” property such as machinery
or equipment which can be registered under the Machinery
Registration Act B.E. 2514 (Machinery Registration Act) and
ships which can be registered under the Thai Ship Act B.E.
2481 (Ship Act). In addition, rights under a lease agreement
in respect of immoveable property may also be mortgaged, if
the lease agreement is made pursuant to the Act on Lease of
Immoveable Property for Commercial or Industrial Uses B.E.
2542 (Leases Act). The mortgage agreement must be made in
writing and registered with the relevant authorities.
Pledge
A pledge can only be created by the physical delivery, by
the pledgor to the pledgee, of the moveable property being
pledged or documents of title by way of security. Although
it is possible to document the basis on which the security is
granted, such documents do not, themselves, create a valid
pledge. Generally, a pledge is taken over shares in a private
or public company and machinery or equipment (which
cannot be registered as “machinery” under the Machinery
Registration Act, subject to the prescribed security keeping
arrangement). A pledge will be terminated if the pledged
asset is returned to the possession of the pledgor. However,
it is possible to take a pledge over assets which are required
for the day-to-day operation of the borrower by the borrower
transferring the assets to a special purpose vehicle, which
in turn pledges the assets to the lender. In this case, the
borrower will be appointed as the security keeper to hold the
pledged assets for the lender. No registration or filing with
any governmental agency is required in respect of a pledge.
Other Security
Other Security can be created by contractual arrangements
between the lender and the borrower or the third party
security provider in a form of conditional assignments or
novations. Thai lenders generally require immediate or
conditional transfers of rights and obligations of all major
contracts as part of the security package. Under Thai law,
only rights (not obligations) may be assigned, with the
consent of or notice to the debtor. A novation is required
in the case of an assignment of obligations. However, it is
important to note that there may be practical difficulties with
the enforcement of an assignment of certain rights, such as
where rights under a licence are not transferable. Typically,
a borrower will conditionally assign (to the lender) its rights
to receive payment under a contract, which crystallises in the
event of a default. The conditional assignment must be made
in writing and will only be valid if the counterparty has been
notified in writing.
There is no equivalent of a “floating charge” or “charge”.
Land and buildings
Land in Thailand can be freehold or leasehold. In the case
of freehold land, security is taken by way of mortgages
which must be in writing and registered with the land office.
Land to be acquired in the future cannot be secured by an
existing mortgage. Although a property mortgage will secure
Thailand
buildings on the land at the date of the mortgage, it will
not secure buildings erected on the land after the date of
the mortgage, unless specifically provided for in a written
contract. Condominium units can be mortgaged under the
Condominium Act B.E. 2522.
A security interest by way of mortgage can be created over
a leasehold right under a lease of immoveable property
which falls within the scope of the Leases Act. These are: (i)
leases of immoveable property for a commercial purpose for
which there is investment of at least 20 million Baht by the
lessee; (ii) leases of immoveable property for an industrial
purpose for which the lessee has been granted investment
incentives by the Thai Board of Investments; (iii) any other
lease for a commercial or industrial purpose specified in the
notifications or regulations to be issued under the Leases
Act. So far, no such notifications or regulations have been
issued. In any case, the initial period of the relevant lease
must not be less than 30 years and must not be more than
50 years. Such lease can be renewed for another term of not
longer than 50 years.
Tangible moveable property (including ship and aircraft)
Security over moveable property can be taken by either a
mortgage (but only in respect of limited types of assets)
or pledge. A mortgage over moveables must be in writing,
identify the particular property and be registered with the
competent officer. There is no requirement to identify the
location of a mortgaged moveable property, unless it is a
registered machinery. Significantly, unregistered machinery
cannot be mortgaged. A mortgage can only be taken over
registrable property which includes: ships or vessels of
six tons or more that are registrable under the Ship Act
and machinery that are registrable under the Machinery
Registration Act. Registration of machinery involves the
fitting of identification plaques on the registered machinery.
Although, generally, the law does not require a written
pledge agreement to perfect a pledge, it is advisable to have
a written agreement to document with the details of the
pledged assets and the terms of the pledge. The security over
an aircraft can be taken by a pledge whereby the special
purpose vehicle as the owner of the aircraft would pledge the
aircraft to the lenders, and the borrower, which is normally
the operator of the aircraft, would be appointed as the
security keeper to hold the pledged aircraft for the lenders.
Shares
Security over shares can be taken by a pledge, which
must be recorded in the share register book. The share
certificate must be delivered to the pledgee. Voting rights
are not automatically passed to the pledgee but may be
contractually given to the lender by way of appointing the
lender as a proxy with a commitment not to revoke the
right while the security exists. However, under Thai law,
the pledgor may revoke its appointment and the proxy (in
this case the pledgee) may renounce its agency at any time.
Rights to dividends and interest do pass to the pledgee
(unless otherwise provided in contract), who is entitled to
appropriate them as payment for any overdue interest, or
if no interest is due, as repayment of the principal. Where
a pledge is to be taken over shares listed on the relevant
stock exchange in Thailand, the pledge is also subject to
the provisions of the Securities and Exchange Act B.E. 2535
(Securities and Exchange Act).
Investments
An investment, which is a right represented by a written
instrument, may be pledged under Thai law. Essentially,
the pledge of the relevant investment instrument requires
delivery of the instrument to the pledgee and a written
notification of the pledge to the underlying obligor under
such instrument. For some types of instruments, the pledge
also requires endorsement to be made on the instrument in
order to be enforceable against a third party. Also, where the
instrument is in a form of listed securities, the pledge of such
instrument will be subject to the provisions of the Securities
and Exchange Act. As with shares, the pledgee will obtain a
right to dividends and interest (unless otherwise provided in
the security document), and is entitled to appropriate them
as payment of any overdue interest, or if none is due, as
repayment of principal of the secured obligation.
Security may also be taken over investment by way of a
conditional assignment.
Security over intellectual property rights can be taken by way
of a conditional assignment or novation.
Bank accounts
Taking security over bank accounts is not straightforward
and often involves a combination of a pledge and a
conditional or an outright assignment. A Supreme Court
judgment, which has considerable persuasive authority
but is not binding on lower courts, has suggested (in a case
concerning a pledge of a bank account) that a pledge cannot
be taken over a bank account. In order to overcome this
difficulty, it is common for lenders to require that monies in a
bank account be converted to promissory notes or certificates
of deposit, which will then be pledged with the lenders.
Written notice of the pledge must be given to the issuer
and the pledge endorsed on the instrument. Given that the
pledge of a promissory note or a certificate of deposit relates
to a fixed deposit, the relevant instrument is required to be
delivered to the pledgee. A company which has granted a
pledge of a promissory note or a certificate of deposit relating
to a fixed deposit cannot deal with the secured asset until the
security is discharged.
Security over bank accounts can be taken by way of a
conditional assignment. A valid assignment must be in
writing and requires the debtor to be notified, in writing,
of the assignment.
Receivables
Taking security over receivables is complicated by the fact
that Thai law does not recognise receivables as being a
security asset. To address this difficulty, lenders resort to
conditional or outright assignments. As outright assignments
present fiscal difficulties, conditional assignments are more
commonly used. A conditional assignment must comply with
the formalities outlined above and the receivables should be
identified by attaching a list of the agreements under which
they arise. Future receivables may be secured, provided the
parties agree that in writing.
rights
The authorised directors of a company, by a board resolution,
may grant security, unless otherwise prohibited by the
articles of association. However, under the Civil Code, an
act which is performed by company outside the scope
of its objectives (set out in the company’s memorandum
of association), may not be binding on the company.
Accordingly, a lender will generally require the following
documents from the security provider as evidence of the
authority and power to grant the relevant security:
• a corporate search and constitution documents (an
affidavit, the memorandum and articles of association and
list of shareholders)
• a certified copy of the resolution of the board of directors:
—— approving the terms and execution of the security
documents
—— authorising a specified individual or individuals to
execute the security documents
—— authorising a specified individual or individuals to
sign and/or issue, on its behalf, all documents and
notices (including the drawdown notice) under or in
connection with the security documents
• a power of attorney appointing a specified individual or
individuals to execute the security documents and/or
issue all documents and notices (including the drawdown
notice) under or in connection with the security
documents.
One of the principal laws which governs commercial lending
activities in Thailand is the Financial Institutions Business
Act B.E. 2551 (FIBA) which requires any entity which carries
out “financial institution business” (defined as commercial
banking business, finance business and credit foncier
business) to obtain the relevant licence from the Ministry of
Finance. Provided international institutions do not operate
retail or deposit banking operations or other “financial
institution business” within Thailand, they may grant loans
to Thai companies without a licence. In all other cases, a
licence is required under FIBA.
Mortgage
A mortgage is the only form of security under Thai law which
requires registration. A mortgage is subject to registration
in a competent office such as the local land office (for
mortgages over land, building and condominium unit) or
the local machinery registration office (for mortgages over
machinery) or the Ship Registration Division of the Marine
Department (for mortgages over ships).
A mortgage must be for an ascertained amount and
calculated in Thai Baht (if the debt is denominated in a
foreign currency, the Baht equivalent amount must also be
stated). The official form in Thai language must be used for
registration purposes. It is, however, acceptable to draft and
file additional mortgage conditions or covenants, provided
that these are translated into Thai and also filed at the
relevant authority. Registration of a second or subsequent
mortgage is permissible, but will be subordinate to the
first registered mortgage. It is not possible to carry out a
protective search that would give priority over any other
person seeking to register an encumbrance.
Pledge
A pledge is not required to be registered with any public
authority. A pledge is often created over shares. The
Thailand
pledge of shares of a company cannot be raised against
the company or third parties unless the pledge is recorded
in the company’s share register book in accordance with
the provisions of the Civil Code. In practice, a pledgee (of
shares) would generally maintain physical possession of
the relevant share certificates and/or note the pledge on the
back of the share certificate, and obtain a confirmation of
registration of the pledge in the share register book from the
company. In addition, for listed shares, the pledge will also
have to comply with the relevant provisions of the Securities
and Exchange Act and the procedures set out by the Stock
Exchange of Thailand. There are uncertainties regarding the
validity of pledges over inventories or machinery on account
of the degree of control which the pledgor will retain over the
pledged property.
Granting guarantees
Under Thai law, a guarantee must be in writing and signed by
the guarantor. The Civil Code contains other specific provisions
relating to guarantees, some of which restrict the rights of the
beneficiary of the guarantee but which may be excluded by
contract.
Thai companies can give upstream, downstream and crossguarantees. Although there is no strict requirement to show
commercial benefit, a board resolution should contain a
statement to the effect that the directors confirm there is
adequate benefit to the company from entering into the
guarantee. Lack of commercial benefit, particularly, in cases
of upstream or cross-guarantees could lead to challenge in
bankruptcy proceedings. In addition, directors who take
actions which are not acts of prudent businessmen acting on
behalf of the guarantor company could be at risk of personal
liability from shareholders’ challenge, unless they have been
authorised or ratified. A shareholders’ resolution granting
or ratifying the giving of the guarantee would release the
directors from liability, other than for fraud, but would not
preclude a challenge in bankruptcy proceedings.
It is important to provide that a debtor and guarantor are
jointly and severally liable so that the lender can enforce
the guarantee as soon as the principal debtor is in default
without first having to exhaust its remedies against the
principal debtor.
Financial assistance is permitted and the granting of security
or a guarantee is not regarded as financial assistance under
Thai law. However, a form of prohibition exists on account
of the Civil Code and the PLCA prohibiting a Thai limited
company, whether private or public, from accepting a pledge
of its own shares.
The Bankruptcy Act covers both corporate and personal
bankruptcies. It allows creditors to file petitions for a courtdesignated agent to seize and sell assets and distribute the
proceeds. Subsequent amendments to the 1940 legislation,
in 1998 and 1999, established a legal framework for a
corporate rehabilitation procedure under which a creditor,
insolvent borrower, or government agency can file a business
reorganisation petition with the Bankruptcy Court. Such
a petition, if granted, will trigger an automatic stay on
proceedings, including the enforcement of security.
The Bankruptcy Act prescribes specific circumstances
under which the official receiver, the planner or the plan
administrator of the debtor can request the Bankruptcy Court
to revoke any transaction which is prejudicial to the creditors
or gives undue preference to any creditor over other creditors.
Transactions entered into in bad faith are open to challenge
(not necessarily under the Bankruptcy regime) within one
year from the date on which the creditor becomes aware of
the ground for challenging such transaction or ten years
from the date of the transaction.
Prejudicial transaction
A transaction may be revoked by order of the Bankruptcy
Court if undertaken by the debtor with the knowledge that
such transaction would be prejudicial to its creditors.
Where the relevant transaction was:
• undertaken within one year before the filing of
bankruptcy or business rehabilitation (as the case may be)
and thereafter
• a gratuitous act or
• undertaken at an unreasonably low consideration
the Bankruptcy Act will pre-assume that the debtor and the
person benefiting from such transaction were aware that the
transaction would be prejudicial to the creditors.
Undue preference
A transaction may be revoked by order of the Bankruptcy Court if
undertaken by the debtor within three months before the filing of
bankruptcy or business rehabilitation and thereafter and with the
intent to give undue preference to any creditor over the other
creditors. However, if the creditor who received the undue
preference is an “insider” of the debtor (for instance, an officer of
the debtor or the shareholder who holds five per cent of more of
the shares of the debtor or a connected person to the debtor), the
three-month period is extended to one year.
The revocation of any transaction referred to above will not
affect the rights of a third party who has acted in good faith and
has paid consideration before the filing of bankruptcy or
business rehabilitation. Any person who suffers a loss as a
result of such revocation will be entitled to submit a claim in
the rehabilitation proceedings of the debtor for repayment of its
original debt or the loss suffered.
Enforcement of mortgage
A mortgagee seeking to enforce a mortgage must first notify
the debtor in writing of the breach and give the debtor a
reasonable period to remedy the breach.
There is no statutory guidance as to what would be a
“reasonable” period. This will depend upon the nature of
the obligation to be performed. In a number of cases, Thai
courts have indicated that a period of seven to 15 days for
loan repayments was reasonable. If the debtor fails to comply
with such a notice, the mortgagee may bring a court action
seeking a judgment for the mortgaged property to be seized
and sold by public auction by a competent authority and
for the sale proceeds to discharge the secured debts ahead
of the unsecured debts. Significantly, any agreement made
between the parties before the debt becomes due entitling
the mortgagee to take ownership of the mortgaged assets or
to dispose of it otherwise than by public auction is invalid.
However, the parties may agree on the transfer of mortgaged
assets in settlement of the secured debts after the debt
falls due.
The enforcement of a mortgage can be a lengthy process. A
fully contested case, involving proceedings from the Court of
First Instance to the Supreme Court, may take up to five years.
Alternatively, the mortgagee may elect to initiate foreclosure
proceedings which would allow the mortgagee to take
ownership of the mortgaged property directly but only in the
following circumstances:
• the debtor has failed to pay interest for five years
• the mortgagor has not satisfied the court that the value of
the mortgaged property is greater than the amount due
• there are no other registered mortgages or preferential
rights over the same property.
In the event that mortgaged property is foreclosed or sold
by public auction, the borrower will not be liable for the
shortfall between the amount outstanding and either the
estimated value of the mortgaged property (in the case of
foreclosure) or the net auction proceeds. Accordingly, it is
common for lenders to ensure that the finance and security
documents provide for the borrower’s continuing obligation
for any shortfall after the enforcement of the security.
Enforcement of pledge
Enforcement of a pledge requires the same notification as
for mortgages. However, if the debtor fails to comply with
the notice, the pledgee will be entitled to sell the pledged
property by public auction, provided that the pledgee
notifies the pledgor in writing of the time and place of the
auction. Any agreement made between the parties before the
debt becomes due entitling the pledgee to take ownership
of the pledged assets or to dispose of it otherwise than by
public auction is invalid. However, such an agreement
would be valid and enforceable if it is made after the debt
falls due. Given that the enforcement of a pledge need not
involve the court and the pledged assets would, generally,
be in the possession of the pledgee, the process is much less
time-consuming compared to the enforcement of a mortgage.
The enforcement of a pledge by public auction (without
challenge to the enforcement) can be completed within two
months. In addition, where the pledged property is listed
securities, the pledgor may enforce the pledge by selling the
listed securities on the relevant stock exchange pursuant to
the procedures set out by the Stock Exchange of Thailand.
Enforcement of personal or corporate guarantee
Under the Civil Code, a creditor is only entitled to enforce a
personal or corporate guarantee after the debtor has failed to
discharge its obligations. However, the creditor may enforce
the guarantee without enforcing the security. The guarantee
can be enforced without making a prior demand against
the borrower, if the guarantee agreement provides for the
guarantor to be jointly and severally liable with the debtor
and includes a waiver of relevant rights under the Civil Code.
Enforcement of conditional assignment or novation of
contractual arrangement
There is no legally prescribed procedure or mechanism for
the enforcement of a conditional assignment or novation.
In practice, the enforcement of a conditional assignment or
novation will involve the lender delivering the enforcement
Thailand
notice to the counterparty to the contract that has
been conditionally assigned or novated, notifying such
counterparty of an event of default under the loan agreement
and the effectiveness of the assignment or novation. In a
case of a conditional novation, a new contract between the
existing counterparty and the bank (or its designate) will be
executed, whereby the bank (or its designate) will assume
the rights and obligations under the novated contract.
Although conditional assignments and novations have
been widely used by lenders in the Thai banking market as
security, in practice, there have not been many instances of
actual enforcement. Moreover, in taking this form of security,
the lenders should be aware that enforcement will depend on
the co-operation of the relevant counterparty to the contract.
This should be of particular concern where the conditional
assignment or novation involves a contract made between
the borrower and its group company.
of insolvency
Limitation of the right to enforce security by reason
of business rehabilitation
The right of a creditor to enforce a form of Legal Security
against a debtor which is placed under the business
rehabilitation process pursuant to the Bankruptcy Act will
require the approval of the Bankruptcy Court. If the borrower
is placed under the business rehabilitation process, the
creditors, whether secured or unsecured, will have to submit
a claim for debt repayment in the business rehabilitation
process. Payments to all creditors will be made in accordance
with the business rehabilitation plan to be prepared by the
planner (which can be either the debtor or a person licensed
to act as a planner) and approved by the creditors’ meeting
and the Bankruptcy Court. In order for the Bankruptcy Court
to approve a business rehabilitation plan, the Court must
be satisfied, among other matters, that the amounts to be
received by the creditors (including the secured creditors)
under the business rehabilitation plan will not be less than
the amounts they would have received under the bankruptcy
proceedings of that debtor.
Even though the rights of the secured creditor to enforce its
security will be restricted under the business rehabilitation
process of the debtor, the secured creditor still enjoys
certain protection under the Bankruptcy Act not accorded
to unsecured creditors. For instance, a secured creditor may
request that the Bankruptcy Court removes the restriction on
enforcement of its security if such restriction is unnecessary
for the business rehabilitation of the debtor.
Under the Bankruptcy Act
The right of a secured lender to enforce their security will
not be affected by the bankruptcy of the borrower, provided
that the relevant form of Legal Security was granted prior to
the order of receivership of the borrower’s assets. The lender
may enforce its security without having to submit a claim for
debt repayment in the bankruptcy process of the borrower
provided it allows the official receiver to inspect the collateral
assets. In the event that the realisation of the security is not
sufficient to fully repay the loan to the lender, the lender
will have to submit a claim for debt repayment with respect
to the outstanding balance in the bankruptcy process of the
borrower, and will be treated as an unsecured creditor for
such portion of debt.
Lenders holding Other Security or Legal Security provided
by a third party (ie, not the borrower) will be treated as
unsecured creditors in the bankruptcy process of the
borrower.
The choice of a foreign law as the governing law of any
of financing documents will generally be upheld and
applied by the courts of Thailand provided that the relevant
provisions of the foreign law can be proved to the satisfaction
of the Thai courts and the application of the foreign law
is not contrary to public policy. However, Thai law would
apply in determining the validity or effectiveness of any
security interest taken or created over property located
within Thailand and, in general, it is advisable to make the
governing law of the security document the same as the law
of the jurisdiction in which the asset which is the subject of
security is located.
Under Thai law, ownership is indivisible (there is no
concept of legal and beneficial ownership as separate
property rights), though leases and usufruct (life interests
or rights to the income or fruits of a property) exist. Under
Thai law, a trust is not recognised and security can only be
created in favour of a creditor, not merely a representative
or agent of a creditor. This gives rise to practical difficulties
for lenders in Thailand. Generally, security is granted to
the lenders directly. In a syndicated loan the lenders will
generally appoint (under a power of attorney) one of them
as a “security agent” for the purposes of administering and
enforcing the security on behalf of each lender.
Outbound remittances
Under the Exchange Control Act B.E. 2485, any outbound
remittance of funds from Thailand requires the approval
of the Bank of Thailand usually given via the authorised
commercial banks. Such approvals are generally granted
upon production of documentary evidence, showing the
obligation to remit funds to a recipient in a foreign country,
to the authorised commercial banks. Generally the outbound
remittance has to be made in foreign currency.
Inbound remittances
Generally, there is no limitation or retention requirement
on the remittance of funds into Thailand. However, foreign
currency remittance, subject to specific exemptions, must
be converted into Thai baht or deposited with an authorised
bank within the prescribed period.
Withholding tax
A borrower in Thailand is not required to deduct withholding
tax when it pays interest under the loan to a lender which
is a commercial bank or a finance company in Thailand.
However, payments of commitment fees, arrangement fees,
interest or other service fees made by a borrower in Thailand
to a lender outside Thailand will be subject to a deduction for
international withholding tax of 15 per cent, or such other
rate imposed under any applicable double taxation treaty.
Vietnam
Vietnam
Contributed by Vision & Associates
Introduction
Banking business in Vietnam has changed rapidly in recent
years, as foreign banks have opened new operations.
Vietnam acceded to the World Trade Organisation in January
2007. Under the WTO Schedule, foreign owned banks
are allowed to establish wholly owned subsidiaries with
Vietnamese banking licences. Several foreign banks have
established local Vietnamese banks, others have established
branches, and some have acquired minority shareholdings
in Vietnamese banks. Many foreign banks have a presence in
Vietnam through representative offices.
The State Bank of Vietnam (SBV) is the central bank and the
main banking regulator pursuant to the Law on the State
Bank of Vietnam 2010. The main legislation that regulates
banking is the Law on Credit Institutions. On 1 January 2011
a new Law on Credit Institutions came into force.
Total equity of foreign investors and related parties in
Vietnamese banks is limited to 30 per cent of a bank’s
chartered capital. Individual foreign companies which are
not credit institutions and related parties are limited to five
per cent, and individual foreign credit institutions and their
related persons are limited to ten per cent. If a foreign bank
is recognised by SBV as a strategic partner of a Vietnamese
bank, it can acquire up to 15 per cent, or 20 per cent with the
approval of the Prime Minister.
Under the Law on Enterprises there are three types of
corporations, two of which are limited liability companies
(LLCs). They are one member LLCs, two or more member
LLCs, and joint stock companies (JSCs).
JSCs are similar to companies which operate in jurisdictions
like the UK, US, Singapore, Hong Kong and Australia.
LLCs do not issue shares. Members subscribe capital to LLCs.
The capital contribution can be transferred and used as
security. Transfers of capital contributions in LLCs are subject
to statutory pre-emptive rights in favour of other members.
LLCs cannot be listed on the stock exchange.
There are some specific industry ownership restrictions,
including in banking, securities, transport, media,
mining, ports and airports, education, healthcare and
telecommunications. If a JSC is listed on the stock exchange
there is also a 49 per cent foreign ownership limit. Subject
to those restrictions JSCs and LLCs can be wholly foreign
owned, although in practice foreign investment in companies
in service industries will be limited to the minimum levels
stated in the WTO Services Schedule for Vietnam.
All rights in respect of security interests are contained
in legislative instruments. There is no concept of a
hypothecation, and there are no securities known as charges,
either fixed or floating. There is no recognition of equitable
interests or rights in equity.
The Civil Code lists the permitted types of security interests
in Vietnam as being mortgages, pledges, guarantees, escrow
deposits, performance bonds, security deposits and fidelity
guarantees. In practice, mortgages are the most common
form of security. Guarantees are also widely used. Pledges are
more widely used in Vietnam than in some other countries,
in part due to the absence of charges as permitted forms of
security. The law relating to security transactions in Vietnam
is largely set out in the Civil Code 2005; Decree 163/2006/
ND-CP dated 29 December 2006 on Security Transactions
(as amended and supplemented by Decree 11/2012/ND-CP
dated 22 February 2012); Decree 83/2010/ND-CP dated
23 July 2010 on Registration of Security Transactions (as
amended and supplemented by Decree 05/2012/ND-CP);
Joint Circular 05/2007/TTLT-BTP-BXD-BTNMT-NHNN dated
21 May 2007 of the Ministry of Justice (MoJ), the Ministry
of Construction, the Ministry of Natural Resource and
Environment (MoNRE) and SBV Providing Guidelines on
Registration of Mortgages of Residential Housing; Circular
05/2011/TT-BTP dated 16 February 2011 of the MoJ
providing Guidelines for a Number of matters on Registering
Security Transactions; and Joint Circular 20/2011/TTLT-BTPBTNMT dated 18 November 2011 of the MoJ and the MoNRE
Providing Guidelines in Registration of Mortgages of Land
Use Rights and/or Assets Attached to Land.
Land use rights and mineral exploration rights may be
provided as security along with other tangible and intangible
assets as set out below.
Security interests may be taken over future assets. A
mortgagor is entitled to sell mortgaged property which is
“goods rotating during the production and business process”.
If the mortgagor sells those goods, the mortgage affixes to
the proceeds of sale and to any assets which the mortgagor
Vietnam
has lodged under the mortgage to supplement the secured
assets. Accordingly, although floating charges do not exist
in Vietnam, it is possible to create a similar type of security.
This statutory right for a mortgagor to sell goods rotating
during the production and business process does not exist in
the case of pledges, although it is common for pledges over
commodity stockpiles to provide for a rolling stockpile by
having the pledgee or the collateral manager give consent to
the sale of stock and the submission of replacement stock.
Land and buildings
Land is owned by the people and administered by the state.
Instead of land ownership, land use rights are granted. In
some respects these are similar to 99 year leases in some
western land title systems. Mortgages of land use rights
and buildings must be notarised at the Public Notary Office
and must be registered. Notarisation is a formal procedure
in Vietnam which can be protracted. All documents to be
notarised must be in Vietnamese. Notarisation is a procedure
in which the notary certifies the authenticity of documents in
accordance with the laws of Vietnam.
The interest of a person in land is called “land use rights”.
Domestic creditors may take a mortgage over land use rights.
Security over other interests in land, such as leasehold
interests, may also be taken.
Buildings are not part of the land. Land can be transferred
separately from the buildings on the land. Accordingly,
security documents need to be drafted specifically to extend
to the buildings.
Foreign lenders may not take security over land use rights,
although this restriction does not apply to registered
branches of foreign banks or wholly owned subsidiaries of
foreign banks with Vietnamese banking licences3.
The Land Law states that mortgages over land use rights
can secure borrowings. It is not clear whether mortgages
over land use rights which secure other forms of financial
accommodation would be enforceable. It appears to be
possible for a security agent to be appointed to take security
over land use rights as an agent for a foreign lender, but
there is no legislative authority for such a structure and it is
3
At the time of writing, the National Assembly is considering amendments to the Land Law.
If passed they will permit foreign-invested companies to mortgage their land use rights to
foreign banks subject to the Government’s approval on a case-by-case basis.
subject to the discretion of the authorities, including SBV, for
any particular transaction.
All other assets may be provided as security to foreign
lenders. Tangible moveable property (including ships and
aircraft)
Mortgages over Vietnamese registered aircraft must be
registered with the Civil Aviation Administration of Vietnam.
Mortgages over Vietnamese registered ships must be
registered with the Vietnam National Maritime Bureau.
There are two types of capital ownership of companies
in Vietnam. LLCs do not issue shares. There is a concept
of capital contribution for which capital contribution
certificates are issued. A capital contribution in an LLC is
similar to a company share, although there are restrictions
on transfer of such interests due to statutory pre-emptive
rights. JSCs issue shares which have very similar features to
shares issued by companies in most developed countries.
Subject to foreign ownership restrictions in the relevant
industry, a foreign lender may take security over shares in a
Vietnamese company. It is usual for the security to be taken
by way of pledge, but it is possible for the security to be in the
form of a mortgage. The possession of the share certificate or
capital contribution certificate is commonly regarded as being
important for the better protection of the secured creditor.
A power of attorney should also be taken for enforcement
although it is not clear whether a court would recognise
the effectiveness of such a power. It is recommended that
notice of the mortgage be given to the company and that an
undertaking be obtained from the company not to register
a disposal of the shares without the written consent of the
mortgagee. A mortgagor may not mortgage to a bank shares
that the mortgagor owns in that bank.
Security interests over intellectual property are permitted
under the Civil Code. Although the law recognises copyright
and related rights, the enforcement of copyright in Vietnam
is inadequate and there would be serious doubts over the
effectiveness of any security interest taken over it.
Bank accounts
Monies held in bank accounts may be mortgaged. Pledges
over bank accounts are common, although the effectiveness
of them is not clear.
The law concerning rights of set off is also not clear. There
are provisions in the Civil Code which recognise set off. In
particular, Article 380 provides for set off where parties have
“reciprocal obligations with respect to generic properties,
when both obligations fall due”. However there is no
guidance as to how a Vietnamese court would interpret
these expressions. It would be prudent to provide notice to
the bank which holds the account. There is no law on the
question of whether a bank can take a mortgage over a bank
account held by the mortgagor with that same bank.
Receivables
Mortgages over receivables are permitted. Notice must be
given to the debtor although a written consent from the
debtor is not required.
rights
The governing constitution of a Vietnamese company is its
charter. The governing law is the Law on Enterprises 2005
and various decrees and circulars made pursuant to that
Law.
LLCs are governed by a members’ council (MC) which is
the equivalent of a company board. JSCs are governed by
a General Meeting of Shareholders (GSM) and a board of
management (BOM) which fulfils a similar role to a company
board of directors. The MC or the BOM appoints a general
director (GD), which is the equivalent of a CEO. The Law on
Enterprises and the charter set out the powers of the GSM,
the MC or the BOM, and the GD. Normally the granting of a
security interest would require the approval of the MC (in the
case of LLCs) or the GSM or BOM (in the case of JSCs).
All companies in Vietnam must appoint a legal
representative who must be a resident of Vietnam. This
person has authority to sign contracts, including collateral
security agreements, on behalf of companies. Subject to the
company charter, the legal representative in the case of a
single member LLC is the Chairman, or the GD; in the case of
a two members or more LLC is the MC Chairman or the GD;
and in the case of a JSC, is the BOM Chairman or the GD.
The legal representative may delegate the power to sign
contracts under a power of attorney, and must do so if
he or she will be absent from Vietnam for more than 30
consecutive days. However, the power must be granted for
a specific purpose and the granting of the power must be
properly recorded in the records of the company.
All formal documents, including collateral security
documents, executed by Vietnamese companies must have
the company seal affixed. In some provinces, and in respect
of some transactions, the registration authorities may require
the initials by the parties in the bottom line of all pages of the
document or the seal to also be affixed across the edge of the
pages of the document.
The requirements for giving security are the same for foreign
invested companies as they are for wholly Vietnamese owned
companies. If security is taken over personal assets from
a security provider who is married, it will be necessary to
obtain a written consent from the spouse, and in some cases,
from his/her adult children.
When taking security from a Vietnamese company, it is
prudent to commence the procedure for satisfaction of
conditions precedent as early as possible. It is also important
to determine that the person signing the security documents
is properly authorised to sign.
Vietnamese incorporated banks (including wholly foreignowned banks) and branches of foreign banks must be
licensed by SBV under the Law on Credit Institutions, and
then registered with the business registration office of
province or city where their head office is located. Although
foreign lenders (other than branches in Vietnam of foreign
banks) do not need to be licensed in Vietnam in order
to make loans to Vietnamese borrowers, all such loans
exceeding twelve months must be registered by the borrower
with SBV. They must be registered within 30 working
days of the date of signing the agreement and prior to any
drawdowns being made. Any changes to the details of the
loan must also be registered within 30 working days from the
date if signing the amendment. Failure to register a foreign
loan will result in the lender being unable to remit proceeds
of the loan from Vietnam and monetary penalties. It may also
affect the validity of the loan.
Regulations issued by SBV require lending banks to ensure
that a borrower has full legal capacity for its acts under any
relevant jurisdiction, that there is a lawful purpose for the
borrowing, that the borrower has the financial capacity to
repay the loan in accordance with the repayment schedule,
and the borrower had a feasible and effective investment
plan for production, business and services, or to service
living conditions. If the borrower is a State-owned company,
consent from the Ministry of Finance (MoF), SBV or its
Vietnam
supervising ministry must be obtained before the execution
of the loan documents.
The refinancing of loans from another credit institution is
not permitted. There are many decisions of SBV which affect
secured lending. Some of these are relatively old in terms of
Vietnam legal instruments, they can be difficult to locate,
and may not be available in English.
Security interests over land use rights, planted production
forests, aircraft and ships must be registered. Finance leasing
transactions must also be registered.
Security interests over other assets can be registered but it
is not required for enforceability unless the secured assets
are subject to more than one security interest. However, as
the priority of secured interests is established by the time
of registration and a security transaction shall be legally
valid for a third party upon being registered, it is strongly
recommended that all security instruments are registered as
soon as possible. It is not necessary for security instruments
over assets other than land use rights to be notarised.
Registration against assets:
• Land use rights: security over land use rights, including
forest rights (available only to domestic lenders), must
be registered with the Office for Registration of Land Use
Rights in the provincial Department of Natural Resources
and Environment.
• Tangible moveable property: mortgages of most other
assets may be registered with the NARST. Priority is
determined by the time of registration. If more than one
creditor has security over the same asset, the mortgage
must be registered.
• Aircraft and Ships: mortgages of aircraft are registered
with the Civil Aviation Administration of Vietnam which
will issue a certificate of aircraft mortgage. Mortgages of
ships are registered with the Vietnam National Maritime
Bureau.
Registration of security interests can be a slower and more
expensive procedure than in many other countries due to
the time it can take to prepare the required documents and
have them properly signed. It usually only takes a couple
of days for NARST to register the security documents if the
application documents are in order. For registration purposes
security documents must be in Vietnamese. If the documents
are signed in a foreign language, it is important to make
sure that the translation into Vietnamese is accurate. In the
event of realisation, Vietnamese courts and Government
authorities will only refer to the Vietnamese versions of the
security documents.
Granting guarantees
A guarantee must be in writing, although it may be included
in the principal credit document. The guaranteed obligation
can include interest, penalties and compensation for
any damage. Joint guarantees are permitted. The creditor
may demand any of the guarantors to perform the entire
obligation if the guarantee is made on a joint basis. There
is a statutory right of contribution between guarantors and
a right of indemnity from the principal debtor. Unsecured
guarantees cannot be registered.
There are no regulations prohibiting financial assistance
transactions.
Although Vietnam has a Law on Bankruptcy 2004, it is very
seldom used due to procedural difficulties and legislative
uncertainties. The following transactions will be invalid if
entered into by the debtor less than three months prior to
the date on which the court accepts jurisdiction over the
bankruptcy petition:
• donations of property
• settlements of contracts in which the debtor’s obligation is
greater than that of the counterparty
• payment of an undue debt
• providing a mortgage or pledge of assets
• other transactions for the purpose of disposing of assets.
In practice, asset stripping in the face of a potential
bankruptcy can occur. There are no restrictions on the
establishment of phoenix companies.
Inadequacies in accounting standards, the common practice
of maintaining more than one set of accounts, and the
widespread use of cash in the economy can make it difficult
to locate assets of insolvent companies.
If a mortgagee has possession of the secured property and
there has been a default giving rise to a right to exercise its
power of sale, the secured creditor need only give a seven
day notice (or such other time that has been agreed between
the parties) to the mortgagor and any other creditors with
security over the asset.
The method of realisation of the secured property can
be agreed between the parties. Usually this is done in
the security document. In the absence of agreement, the
mortgagee must sell the property at auction. If there is a
clearly identifiable market price, the mortgagee may sell
the property by private treaty at that price and notify the
mortgagor and any other parties with security over that asset.
If the mortgagee does not have possession of the secured
property, it can apply to the court for an order for possession.
Court procedures in Vietnam can be protracted, uncertain
and expensive.
If it is necessary to have the enforcement agencies obtain
possession of the secured assets, the enforcement procedure
can become very protracted and uncertain.
insolvency
Secured debts will enjoy priority over general unsecured
creditors including statutory creditors.
Choice of Governing Law
Security over land use rights and any other interests in
land must be subject to Vietnamese law. Security over other
assets can be subject to foreign law, provided that it is not
inconsistent with Vietnamese law, but if there is a need to get
court orders to obtain possession of the property, it is likely
that in practice the Vietnamese court will apply Vietnamese
law regardless of any governing law provision.
Vietnamese law does not recognise trusts, subject to a very
few minor statutory exceptions. As a general proposition,
agency arrangements are recognised, and on occasions it is
possible to structure an arrangement akin to a trust through
use of agency, but it is a matter that always needs careful
consideration.
Foreign lenders are not permitted to take security over real
estate in Vietnam. Local banks are sometimes appointed
as local security agents to overcome this problem. In some
transactions the Ministry of Justice has given opinions
that such a structure is valid, but the legal basis for such
a conclusion is unclear. If the foreign lender cannot take
a mortgage, there is a risk that its local agent cannot have
greater powers than its appointor.
A foreign lender needs to establish an account with a
bank in Vietnam which is registered for foreign exchange
transactions. All transactions need to pass through that
account. The foreign exchange bank will need to have a
copy of the SBV registration which will set out details of the
payments of interest and principal which are to be made
under the loan. Remittances must be in accordance with the
terms of the registration.
Withholding tax
Current withholding tax on foreign loans is five per cent
of taxable interest and other payments in the nature of
interest under the credit agreement (including fees). Foreign
remittances of interest and other payments cannot be made
until the tax has been paid.
Contacts
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Banking security law - Norton Rose Fulbright

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