The International Comparative Legal Guide to: Securitisation 2012

A practical cross-border insight into securitisation work

Published by Global Legal Group, with contributions from:

Accura Advokatpartnerselskab King & Spalding LLP Ashurst LLP Latham & Watkins LLP Attorneys at Law BORENIUS Lee and Li, Attorneys-at-Law Bingham McCutchen LLP Levy & Salomão Advogados Brodies LLP Loyens & Loeff N.V. CDP Studio Legale Associato Nishimura & Asahi Cervantes Sainz, S.C. Pestalozzi Attorneys at Law Ltd Chapman Tripp Rabobank International Cleary Gottlieb Steen & Hamilton LLP Roschier, Attorneys Ltd. Dave & Girish & Co. Schulte Roth & Zabel LLP Drew & Napier LLC SNR Denton Estudio Beccar Varela TGC Corporate Lawyers Fellner Wratzfeld & Partners Torys LLP FenXun Partners Uría Menéndez Abogados, S.L.P. Freshfields Bruckhaus Deringer LLP Vieira de Almeida & Associados Gárdos Füredi Mosonyi Tomori Weil, Gotshal & Manges KGDI Law Firm Werksmans Attorneys Kim & Chang The International Comparative Legal Guide to: Securitisation 2012 General Chapters: 1 Documenting Receivables Financings in Leveraged Finance and High-Yield Transactions – Dan Maze & Rupert Hall, Latham & Watkins LLP 1 2 The Evolution of a Global Asset Class: The Securitisation of Trade Receivables – Past, Present and Future – Mark D. O’Keefe, Rabobank International 8

Contributing Editor 3 New Structural Features for Collateralised Loan Obligations – Craig Stein & Paul N. Watterson, Jr., Schulte Roth & Zabel LLP 13 4 EU and US Securitisation Risk Retention and Disclosure Rules – A Comparison – Tom Parachini & Erik Klingenberg, SNR Denton 18 5 US Taxation of Non-US Investors in Securitisation Transactions – David Z. Nirenberg, Ashurst LLP 24 Mark Nicolaides, Latham & Watkins LLP Country Question and Answer Chapters: Account Managers 6 Argentina Estudio Beccar Varela: Damián F. Beccar Varela & Roberto A. Fortunati 35 Dror Levy, Maria Lopez, Florjan Osmani, Oliver 7 Australia Ashurst: Paul Jenkins & Jamie Ng 44 Smith, Rory Smith, Toni 8 Austria Fellner Wratzfeld & Partners: Markus Fellner 54 Wyatt 9 Brazil Levy & Salomão Advogados: Ana Cecília Giorgi Manente & Fernando de Azevedo Peraçoli 62 Sub Editor Fiona Canning 10 Canada Torys LLP: Michael Feldman & Jim Hong 72

Editor 11 China FenXun Partners: Fred Chang & Xusheng Yang 82 Suzie Kidd 12 Czech Republic TGC Corporate Lawyers: Jana Jesenská & Andrea Majerčíková 92 Senior Editor 13 Denmark Accura Advokatpartnerselskab: Kim Toftgaard & Christian Sahlertz 101 Penny Smale 14 England & Wales Weil, Gotshal & Manges: Jacky Kelly & Rupert Wall 110 Managing Editor Alan Falach 15 Estonia Attorneys at law Borenius: Indrek Minka & Aivar Taro 121

Group Publisher 16 Finland Roschier, Attorneys Ltd.: Helena Viita & Tatu Simula 130 Richard Firth 17 France Freshfields Bruckhaus Deringer LLP: Hervé Touraine & Laureen Gauriot 140 Published by 18 Germany Cleary Gottlieb Steen & Hamilton LLP: Werner Meier & Michael Kern 151 Global Legal Group Ltd. 59 Tanner Street 19 Greece KGDI Law Firm: Christina Papanikolopoulou & Athina Diamanti 164 London SE1 3PL, UK 20 Hong Kong Bingham McCutchen LLP: Vincent Sum & Laurence Isaacson 173 Tel: +44 20 7367 0720 Fax: +44 20 7407 5255 21 Hungary Gárdos Füredi Mosonyi Tomori: István Gárdos & Erika Tomori 185 Email: [email protected] 22 India Dave & Girish & Co.: Mona Bhide 194 URL: www.glgroup.co.uk 23 Italy CDP Studio Legale Associato: Giuseppe Schiavello & Stefano Agnoli 204 GLG Cover Design F&F Studio Design 24 Japan Nishimura & Asahi: Hajime Ueno 213

GLG Cover Image Source 25 Korea Kim & Chang: Yong-Ho Kim & Hoin Lee 226 iStock Photo 26 Mexico Cervantes Sainz, S.C.: Diego Martinez & Alejandro Sainz 238 Printed by 27 Netherlands Loyens & Loeff N.V.: Mariëtte van 't Westeinde & Jan Bart Schober 247 Ashford Colour Press Ltd. April 2012 28 New Zealand Chapman Tripp: Dermot Ross & John Sproat 260 Copyright © 2012 29 Poland TGC Corporate Lawyers: Marcin Gruszko & Grzegorz Witczak 269 Global Legal Group Ltd. All rights reserved 30 Portugal Vieira de Almeida & Associados: Paula Gomes Freire & Benedita Aires 278 No photocopying 31 Saudi Arabia King & Spalding LLP: Nabil A. Issa & Martin P. Forster-Jones 290 ISBN 978-1-908070-25-8 ISSN 1745-7661 32 Scotland Brodies LLP: Bruce Stephen & Marion MacInnes 298 33 Singapore Drew & Napier LLC: Petrus Huang & Ron Cheng 306 Strategic Partners 34 South Africa Werksmans Attorneys: Richard Roothman & Tracy-Lee Janse van Rensburg 317 35 Spain Uría Menéndez Abogados, S.L.P.: Ramiro Rivera Romero & Pedro Ravina Martín 330 36 Switzerland Pestalozzi Attorneys at Law Ltd: Oliver Widmer & Urs Kloeti 343 37 Taiwan Lee and Li, Attorneys-at-Law: Abe Sung & Hsin-Lan Hsu 354 38 UAE King & Spalding LLP: Rizwan H. Kanji & Martin P. Forster-Jones 364 39 USA Latham & Watkins LLP: Lawrence Safran & Kevin T. Fingeret 372

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Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations. www.ICLG.co.uk Chapter 20

Hong Kong Vincent Sum

Bingham McCutchen LLP in association with Roome Puhar Laurence Isaacson

1 Receivables Contracts annum will, having regard to that fact alone, be presumed to be a transaction which is extortionate, as provided under section 25 of the MLO. A Hong Kong court may give directions to alter the terms 1.1 Formalities. In order to create an enforceable debt of an extortionate agreement. However, the presumption could be obligation of the obligor to the seller, (a) is it necessary rebutted if the court is satisfied that the rate of interest is not that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone unreasonable or unfair given the surrounding circumstances. The sufficient; and (c) can a receivable “contract” be deemed factors that the court would consider include, without limitation, the to exist as a result of the behaviour of the parties? debtor’s age, experience, business capacity, market rates for similar transactions and the degree of risks faced by the lender. The A debt obligation must arise through an agreement between a debtor regulations discussed above do not apply to loans made to a and a creditor, but the contract giving rise to the debt does not need company with a paid up share capital of HK$1,000,000 or more. to be in writing, evidenced by a writing or in any other particular As a general rule, a party is not permitted to impose a penalty on form under Hong Kong law, with the exception of certain limited another party, including a penalty for late payment. However, an types of contracts that are required by regulations to be in writing exception to the rule is that contracting parties are free to agree on a or evidenced by a writing (e.g. certain types of loans are required to default interest rate for late payment so long as it reflects a genuine be evidenced in writing under the Money Lenders Ordinance (Cap. estimate of the loss that would be suffered by the non-defaulting party. 163)). Under Hong Kong law, a contract, regardless of the form, is There are consumer protection regulations that impose “cooling-off” not enforceable unless certain key elements exist, namely: offer and periods for the benefit of consumers that would enable consumers to acceptance between the parties, an intention to create legal relations withdraw from their commitment to transactions that they have by the parties, sufficiently clear terms to demonstrate the intentions previously entered into. The regulations would, however, only apply of the parties, and valuable consideration. A contract may be under certain specified circumstances. For example, purchasers of a implied based on the conduct of the parties and the surrounding long-term insurance policy will be given a “cooling-off” period after circumstances so long as the elements of an enforceable contract purchase to cancel the policy and obtain a refund of the insurance exist. In practice, parties to a receivables contract commonly premium paid. With respect to unlisted structured investment document their transaction in writing, which could be in the form of products with a scheduled tenor of more than one year, the Securities an invoice. An invoice may, depending on its terms, be considered and Futures Commission has introduced the right to a minimum five- by a Hong Kong court to be a contract or as circumstantial evidence day “cooling-off” period for investors to unwind the purchase of an in determining the nature and terms of the contract between parties. investment product and receive a refund. In addition, the Hong Kong Monetary Authority has also imposed pre-investment “cooling-off” 1.2 Consumer Protections. Do Hong Kong laws (a) limit rates arrangements for the benefit of retail investors (but may be opted out of interest on consumer credit, loans or other kinds of by the more sophisticated retail investors) prior to a sale of unlisted receivables; (b) provide a statutory right to interest on late derivative products by authorised banking institutions. payments; (c) permit consumers to cancel receivables for a specified period of time; or (d) provide other noteworthy rights to consumers with respect to receivables owing by 1.3 Government Receivables. Where the receivables them? contract has been entered into with the government or a government agency, are there different requirements and laws that apply to the sale or collection of those There are regulations that are primarily aimed at protecting receivables? consumers from being subject to excessive rates of interest. Any person (other than an authorised banking institution regulated by The ordinary principles of contract law set out in question 1.1 above the Hong Kong Monetary Authority) who lends or offers to lend at will also apply to a contract entered into by a government or a a rate of interest exceeding 60% per annum commits a criminal government agency. Special attention should, however, be paid to offence under the Money Lenders Ordinance (Cap. 163) (“MLO”), the effectiveness of an agreement by a sovereign entity to waive its section 24, and could be subject to a substantial fine and right to state immunity. The agreement, while enforceable, will not imprisonment. Any such agreement and any security provided by on its own constitute a waiver without further action on the part of the borrower will not be enforceable. In addition, any agreement the sovereign entity. It will likely be regarded by a Hong Kong for the repayment of a loan or for the payment of interest on a loan court merely as an agreement by the sovereign entity to waive in respect of which the effective rate of interest exceeds 48% per immunity in the event a dispute is litigated in court. If the sovereign ICLG TO: SECURITISATION 2012 WWW.ICLG.CO.UK 173 © Published and reproduced with kind permission by Global Legal Group Ltd, London Bingham McCutchen LLP Hong Kong

entity subsequently refuses to give an unequivocal waiver for is legal and certain. Hong Kong courts will likely not apply a purposes of a court proceeding (by waiving “in the face” of the foreign law if its application is contrary to public policy. It is relevant court, i.e. by submitting to the jurisdiction of the relevant possible that a Hong Kong court will not give effect to the choice of court at the time the actions are pursued), it will remain immune law that is made with the intention of evading the law of the from suit; see the recent Court of Final Appeal (the “CFA”) case of jurisdiction which has the most real and substantial connection with FG Hemisphere Associates LLC v Democratic Republic of the the subject matter of the contract, which may be evidence that the Congo & Ors FACV 5, 6, & 7 of 2010. choice was not made in good faith. With respect to the Central People’s Government (the “CPG”) of Irrespective of the choice of law, Hong Kong mandatory rules and the People’s Republic of China (the “PRC”), under Hong Kong law legal principles will apply where applicable, such as rules and no claims can be maintained in Hong Kong courts against the CPG regulations relating to the transfer of an interest in land in Hong unless the CPG has waived its right to immunity. This stemmed Kong. Hong Kong from a common law rule that Hong Kong has no power to make any law binding on its own sovereign state, and Hong Kong courts have 2.4 CISG. Is the United Nations Convention on the confirmed that immunity transferred from the British Crown to the International Sale of Goods (CISG) in effect in Hong CPG was effective after the handover of sovereignty over Hong Kong? Kong in 1997. The immunity also extends from the CPG to a body corporate established by the executive arm of the CPG (see Hua There is no authoritative source as to whether the CISG applies in Tian Long (No 3) [2010] 3 HKC 557). Hong Kong, but the generally accepted view is that it does not. Government agencies in Hong Kong are required to act within the The Hong Kong Department of Justice has not listed the CISG as a limits of their statutory mandate and authority when dealing with foreign treaty which applies in Hong Kong. Furthermore, despite third parties. Contracts entered into by a government agency may the fact that the People’s Republic of China (the “PRC”) is a party not confine or have the effect of confining its statutory duties and to the CISG, the weight of the authorities points to the functions. Legal actions against the Hong Kong government or any inapplicability of the CISG in Hong Kong (see case no. (04-17726) government entity are subject to certain procedural rules under The decided by the Supreme Court of France (2008) and the case of Crown Proceedings Ordinance (Cap. 300). Innotex Precision Limited v Horei Image Products, Inc. (2009) (case no. 1:09-CV-547-TWT) decided by the US District Court, 2 Choice of Law – Receivables Contracts Northern District of Georgia, Atlanta Division but cf. Electrodraft Arkansas, Inc. v Super Electric Motors (2009) (case no. 4:09 CV 00318 SWW) by the US District Court, Eastern District of 2.1 No Law Specified. If the seller and the obligor do not Arkansas, West Division). Until the PRC takes further action or a specify a choice of law in their receivables contract, what Hong Kong court gives a decision directly on point to clarify the are the main principles in Hong Kong that will determine position, the position remains unclear. the governing law of the contract? Although it is generally accepted that the CISG does not apply in If there is no governing law clause in the receivables contract or the Hong Kong, under certain circumstances, Hong Kong parties could parties have not otherwise agreed on the governing law, a Hong nevertheless be exposed to the application of the CISG, for Kong court would designate and apply the law of the jurisdiction example, where the agreement is governed by a foreign law which where the subject matter of the dispute has the most real and expressly provides for the CISG to apply, or by the parties’ substantial connection as the governing law of the contract. agreement to be bound by the CISG.

2.2 Base Case. If the seller and the obligor are both resident 3 Choice of Law – Receivables Purchase in Hong Kong, and the transactions giving rise to the Agreement receivables and the payment of the receivables take place in Hong Kong, and the seller and the obligor choose the law of Hong Kong to govern the receivables 3.1 Base Case. Does Hong Kong law generally require the contract, is there any reason why a court in Hong Kong sale of receivables to be governed by the same law as would not give effect to their choice of law? the law governing the receivables themselves? If so, does that general rule apply irrespective of which law governs the receivables (i.e., Hong Kong laws or foreign laws)? There is no reason why a Hong Kong court would not give effect to the parties’ choice of law under such circumstances. Hong Kong law does not require the sale of receivables to be governed by the same law as the law governing the receivables 2.3 Freedom to Choose Foreign Law of Non-Resident Seller themselves. Parties to a contract are generally free to agree on the or Obligor. If the seller is resident in Hong Kong but the governing law of the contract, so long as the choice of law is made obligor is not, or if the obligor is resident in Hong Kong in good faith and is legal and certain. If a choice of foreign law is but the seller is not, and the seller and the obligor choose made with the intention of evading the law of the jurisdiction which the foreign law of the obligor/seller to govern their has the most real and substantial connection with the subject matter receivables contract, will a court in Hong Kong give effect to the choice of foreign law? Are there any limitations to of the contract, a Hong Kong court may consider it as evidence that the recognition of foreign law (such as public policy or the choice was not made in good faith (see question 2.3 above). mandatory principles of law) that would typically apply in If receivables are governed by Hong Kong law, irrespective of the commercial relationships such as that between the seller choice of law governing a sale contract, Hong Kong law and the obligor under the receivables contract? requirements relating to the perfection of the sale of receivables should be complied with (see question 4.1 below) in order for the Hong Kong courts will generally give effect to the contracting sale to be perfected. Furthermore, mandatory rules and parties’ choice of foreign law that is made in good faith, and which requirements under Hong Kong law must be complied with if, and

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to the extent that, they are applicable. The law of the jurisdiction in they are applicable. The law of the jurisdiction in which an obligor which an obligor or a seller is located will apply with respect to or a seller is located will apply with respect to enforcement actions enforcement actions against the obligor or the seller, as applicable. against the obligor or the seller, as applicable.

3.2 Example 1: If (a) the seller and the obligor are located in 3.5 Example 4: If (a) the obligor is located in Hong Kong but Hong Kong, (b) the receivable is governed by the law of the seller is located in another country, (b) the receivable Hong Kong, (c) the seller sells the receivable to a is governed by the law of the seller’s country, (c) the purchaser located in a third country, (d) the seller and the seller and the purchaser choose the law of the seller’s purchaser choose the law of Hong Kong to govern the country to govern the receivables purchase agreement, receivables purchase agreement, and (e) the sale and (d) the sale complies with the requirements of the complies with the requirements of Hong Kong, will a court seller’s country, will a court in Hong Kong recognise that in Hong Kong recognise that sale as being effective sale as being effective against the obligor and other third Hong Kong against the seller, the obligor and other third parties (such parties (such as creditors or insolvency administrators of as creditors or insolvency administrators of the seller and the obligor) without the need to comply with Hong Kong’s the obligor)? own sale requirements?

A Hong Kong court will recognise the sale as being effective See question 3.4 above. against the seller, the obligor and other third parties, provided that the perfection requirements under Hong Kong law for the sale have 3.6 Example 5: If (a) the seller is located in Hong Kong been complied with. The applicable perfection requirements (irrespective of the obligor’s location), (b) the receivable is depend on the nature of the receivables. For example, if a contract governed by the law of Hong Kong, (c) the seller sells the involves the sale or transfer of a mortgage loan and the underlying receivable to a purchaser located in a third country, (d) mortgaged land is situated in Hong Kong, in order for the transfer the seller and the purchaser choose the law of the to be perfected under Hong Kong law, the assignment transferring purchaser’s country to govern the receivables purchase the underlying mortgage must be made in writing, registered with agreement, and (e) the sale complies with the the Land Registry in Hong Kong (as discussed in question 4.3 requirements of the purchaser’s country, will a court in below), and an express written notice of the assignment of the Hong Kong recognise that sale as being effective against mortgage loan and the underlying mortgage must be given to the the seller and other third parties (such as creditors or insolvency administrators of the seller, any obligor located mortgagor. See question 4.1 below for further discussion regarding in Hong Kong and any third party creditor or insolvency perfection requirements. administrator of any such obligor)? The law of the jurisdiction in which an obligor or a seller is located will apply with respect to enforcement actions against the obligor or A Hong Kong court will recognise the sale as being effective the seller, as applicable. against the seller, the obligor and other third parties so long as the applicable Hong Kong law requirements relating to the perfection 3.3 Example 2: Assuming that the facts are the same as of the sale and the additional requirements, if any, required under Example 1, but either the obligor or the purchaser or both the law governing the sale contract have been complied with (see are located outside Hong Kong, will a court in Hong Kong question 4.1 below). Furthermore, mandatory rules and recognise that sale as being effective against the seller requirements under Hong Kong law must be complied with if, and and other third parties (such as creditors or insolvency to the extent that, they are applicable. The law of the jurisdiction in administrators of the seller), or must the requirements of which an obligor or a seller is located will apply with respect to the obligor’s country or the purchaser’s country (or both) enforcement actions against the obligor or the seller, as applicable. be taken into account?

See question 3.2 above. 4 Asset Sales

3.4 Example 3: If (a) the seller is located in Hong Kong but 4.1 Sale Methods Generally. In Hong Kong what are the the obligor is located in another country, (b) the customary methods for a seller to sell receivables to a receivable is governed by the law of the obligor’s country, purchaser? What is the customary terminology – is it (c) the seller sells the receivable to a purchaser located in called a sale, transfer, assignment or something else? a third country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables The most common method for the sale of receivables is by way of purchase agreement, and (e) the sale complies with the an assignment of the receivables by a seller to a purchaser. An requirements of the obligor’s country, will a court in Hong assignment may be a legal assignment or an equitable assignment. Kong recognise that sale as being effective against the A legal assignment is an assignment that complies with the seller and other third parties (such as creditors or requirements under section 9 of the Law Amendment and Reform insolvency administrators of the seller) without the need to comply with Hong Kong’s own sale requirements? (Consolidation) Ordinance (Cap. 23). An assignment will be an effective legal assignment if: The principles regarding the recognition of the choice of foreign i) it is an absolute assignment whereby the assignor’s entire law governing the sale of the receivables, as discussed in questions legal interests in the receivables are transferred to the 2.3 and 3.1, will apply. A Hong Kong court will recognise the sale assignee, rather than by way of a charge; as being effective against the seller, the obligor and other third ii) the assignment is in writing signed by the assignor, or by an parties, provided that the necessary actions required, if any, under agent authorised by it; the law governing the receivables and sale contracts have been iii) the subject matters to be assigned are legal debts; and complied with. However, mandatory rules and requirements under iv) express written notice of the assignment is given to the Hong Kong law must be complied with if, and to the extent that, obligor.

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An assignment which does not meet any of the above criteria will Marketable debt securities may be in bearer form or in registered be an equitable assignment. Equitable assignments are common as form. Bearer form debt securities are sold and the security interests assignors often prefer to avoid providing written notice to obligors, with respect thereto are perfected by delivery. For debt securities in especially where it is commercially impractical to do so (e.g., where registered form, a register will be maintained by a registrar, and the a large volume of receivables involving multiple obligors are records in the register must be updated to reflect the transfer of continuously created and assigned). In an equitable assignment: ownership in the debt securities in order for the transfer (or a) the obligor may continue to discharge its obligations by assignment by way of security) to become effective. If the debt making payment to the assignor as opposed to the assignee, securities are held in a clearing system, the name of the purchaser regardless of whether the assignor actually accounts to the (or assignee by way of security) of the debt securities has to be assignee for the amounts it has received; entered in the records of the clearing system (or the custodian of b) enforcement actions against the obligor will require the such securities) before the transfer or pledge of the debt securities Hong Kong involvement of the assignor as the assignee will not be able become effective. In the event that the marketable debt securities to directly take action against the obligor; and are held in bearer form, they are transferred or pledged by way of c) the obligor and the assignor will continue to have the ability delivery. to amend the underlying receivables contract. In relation to the sale of consumer loans, while no further perfection Whether an assignment is a legal assignment or an equitable requirement has to be complied with in addition to those stated in assignment may affect the priority of the assignee if there are question 4.2, the purchaser should be aware of the applicable competing claims from other assignees (see question 4.2 below). consumer protection rules as further discussed in question 8.4. In addition to a transfer by way of an assignment, receivables may also be sold by a declaration of trust by the seller, by novation of the 4.4 Obligor Notification or Consent. Must the seller or the underlying receivables contract or by sub-participation. purchaser notify obligors of the sale of receivables in order for the sale to be effective against the obligors and/or creditors of the seller? Must the seller or the 4.2 Perfection Generally. What formalities are required purchaser obtain the obligors’ consent to the sale of generally for perfecting a sale of receivables? Are there receivables in order for the sale to be an effective sale any additional or other formalities required for the sale of against the obligors? Does the answer to this question receivables to be perfected against any subsequent good vary if (a) the receivables contract does not prohibit faith purchasers for value of the same receivables from assignment but does not expressly permit assignment; or the seller? (b) the receivables contract expressly prohibits assignment? Whether or not notice is required to perfect An assignment is perfected once the requirements specified under a sale, are there any benefits to giving notice – such as section 9 of the Law Amendment and Reform (Consolidation) cutting off obligor set-off rights and other obligor Ordinance (Cap. 23) have been satisfied (see question 4.1 above). defences? Where competing claims to the same receivables exist among multiple assignees, the order in which notices of assignments are As mentioned in question 4.1 above, the assignment of receivables given to the obligor will determine priority. A perfected assignment without giving notice to the obligor is common and effective where notice of the assignment has been given to the obligor will between the seller and the purchaser under Hong Kong law (as an take priority over an earlier assignment with respect to which notice equitable assignment). Whether or not notice has been given to the either has not been given to the obligor or has been given to the obligor does not affect the effectiveness of the assignment against obligor subsequent to the perfection of the later assignment, except the creditors of the seller. Before a notice of the assignment of in the event where the assignee of the later assignment has receivables has been delivered to the obligor, the purchaser will not knowledge at the time of the assignment of the existence of the be entitled to enforce against the obligor its payment obligations earlier assignment. under the receivables contract between the seller and the obligor. If the receivables contract does not prohibit the assignment of the 4.3 Perfection for Promissory Notes, etc. What additional or receivables, the obligor’s consent is not required to effectuate the different requirements for sale and perfection apply to assignment against the obligor and the delivery of notice to the sales of promissory notes, mortgage loans, consumer obligor will be sufficient for purposes of perfecting the assignment. loans or marketable debt securities? Where the receivables contract expressly prohibits assignment, the obligor’s consent to the assignment must be obtained to give effect The sale of a promissory note is governed by the Bills of Exchange to the assignment against the obligor. Ordinance (Cap. 19). A note in bearer form is transferred by way Providing notice of an assignment to the obligor that completes the of delivery. A note which is payable to a specified payee is requirements for the creation of a legal assignment (as opposed to transferred by way of endorsement and delivery. an equitable assignment) would give rise to certain benefits, as Mortgage loans and the underlying mortgages may be transferred by follows: way of an assignment. Where the assignment involves a mortgage a) where competing claims to the same receivables exist among over an interest in land in Hong Kong, the assignment will be subject multiple assignees, the order in which notices of assignments to section 5 of the Conveyancing and Property Ordinance (Cap. 219), are given to the obligor to perfect the assignments as legal which provides that an equitable interest in land may only be created assignments will determine priority; hence, the giving of or disposed of by an instrument in writing, signed by the person notice would preserve the priority of a purchaser’s claim to creating or disposing of the interest. The mortgage assignment must the receivables (see question 4.2 for further details); be registered with the Land Registry under the Land Registration b) the obligor must make payments as directed by the purchaser Ordinance (Cap. 128) against the mortgaged land within one month and the obligor can no longer discharge its obligations by from the date of the mortgage assignment in order to preserve the making payment to the seller; priority of the mortgage assignment over any subsequent interests c) enforcement actions may be taken by the purchaser against created with respect to the mortgaged land. the obligor directly without involving the seller; and

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d) the obligor and the seller may no longer amend the assignment with full knowledge of the prohibition in the receivables underlying receivables contract. contract and with the intention to interfere with such prohibition.

4.5 Notice Mechanics. If notice is to be delivered to obligors, 4.7 Identification. Must the sale document specifically identify whether at the time of sale or later, are there any each of the receivables to be sold? If so, what specific requirements regarding the form the notice must take or information is required (e.g., obligor name, invoice how it must be delivered? Is there any time limit beyond number, invoice date, payment date, etc.)? Do the which notice is ineffective – for example, can a notice of receivables being sold have to share objective sale be delivered after the sale, and can notice be characteristics? Alternatively, if the seller sells all of its delivered after insolvency proceedings against the obligor receivables to the purchaser, is this sufficient have commenced? Does the notice apply only to specific identification of receivables?

receivables or can it apply to any and all (including future) Hong Kong receivables? Are there any other limitations or A sale document must provide sufficiently specific descriptions of considerations? the receivables being sold so that they are capable of being identified (and distinguished from the seller’s other assets) at the There are no requirements regarding the form a notice must take or time of the assignment or, in the case of future receivables, at the how the notice must be delivered in order for the notice to be legally time they come into existence. This does not necessarily mean, nor valid and effective under Hong Kong law. In practice, a notice of is it required under Hong Kong law, that each receivable has to be assignment will generally include a request for an acknowledgment separately identified. Hong Kong law does not require any of the assignment (or, where applicable, a consent to the particular type of information about the receivables to be assignment) by the obligor. specifically stated in the sale document. The receivables being sold There is no time limit beyond which the delivery of notice would do not necessarily need to share objective characteristics. The seller become ineffective. A notice may be delivered to the obligor may sell all of its receivables to the purchaser under a sale regardless of whether an insolvency proceeding has commenced agreement, so long as there is sufficient certainty as to what against the obligor. As noted in question 4.2 above, whether a constitutes all receivables at the moment of the assignment. notice has been given may affect the priority of the assignee if there are competing claims from other assignees. 4.8 Respect for Intent of Parties; Economic Effects on Sale. A notice may relate to all or only part of the existing receivables If the parties denominate their transaction as a sale and between the obligor and the seller. As regards notice relating to state their intent that it be a sale will this automatically be future receivables, given that an assignment of future receivables respected or will a court enquire into the economic takes effect when they come into existence, a notice that is given characteristics of the transaction? If the latter, what prior to the time the receivables come into existence will likely not economic characteristics of a sale, if any, might prevent be considered valid. Although this issue has not been considered in the sale from being perfected? Among other things, to a Hong Kong court, there are English cases indicating that an what extent may the seller retain (a) credit risk; (b) interest rate risk; and/or (c) control of collections of obligor is not obliged to recognise or act on a notice in respect of receivables without jeopardising perfection? future receivables that have not yet come into existence; see the two English cases Re Dallas (1904) 2 Ch 385 and Johnstone v Cox A Hong Kong court would consider the true intentions of the (1881) 19 Ch D 17. As these English cases were decided prior to contracting parties and the true substance of a transaction in 30 June 1997, they continue to apply in Hong Kong after the determining whether or not the economic characteristics of the transfer of sovereignty over Hong Kong from the United Kingdom transaction constitute a sale. The court would not treat a transaction to the People’s Republic of China on 1 July 1997, subject to the as a sale solely because the parties decide to characterise it as such. subsequent development of the law in Hong Kong. There does not The court may recharacterise a transaction as a security appear to be any inconsistent development of the law in Hong Kong arrangement where the economic characteristics of the transaction on this issue subsequent to 1 July 1997, and there is no indication resemble those of a security arrangement instead of a sale. that a Hong Kong court will take a position different from these English precedents. The following is a summary of the distinguishing factors between a sale and a security arrangement taken from the judgment of Romer J in the English case George Inglefield Ltd. [1933] Ch 1 (which have 4.6 Restrictions on Assignment; Liability to Obligor. Are also been applied by the Hong Kong court in Chase Manhattan (Asia) restrictions in receivables contracts prohibiting sale or Limited v First Bangkok City Finance Limited [1988] HKCU 431): assignment generally enforceable in Hong Kong? Are there exceptions to this rule (e.g., for contracts between 1. whether the transferor is entitled to return the “purchase commercial entities)? If Hong Kong recognises money” and re-acquire the subject matter of the transaction prohibitions on sale or assignment and the seller — a mortgagor may re-acquire the subject matter of the nevertheless sells receivables to the purchaser, will either transaction (until it has been foreclosed) but a seller may not; the seller or the purchaser be liable to the obligor for 2. whether the transferee is required to account to the transferor breach of contract or on any other basis? for the surplus obtained upon realisation of the subject matter — a mortgagee would have to account to the mortgagor for Restrictions on assignments of receivables are generally the surplus upon realisation of the subject matter, but a enforceable in Hong Kong. If the seller nevertheless sells purchaser would not have to do so; and receivables to the purchaser, the seller will be in breach of contract 3. whether the transferee is entitled to recover outstanding to the obligor and may be liable for damages to the extent amounts from the transferor if the subject matter is re-sold at applicable. a loss — a mortgagee may recover from the mortgagor the balance of the money insufficient to repay the mortgagor’s Although the purchaser is not a party to the receivables contract, it debt, but a purchaser cannot recover any losses from a seller. could be liable to the obligor for the tort of inducing (or procuring) A Hong Kong court would likely take into account the above factors the seller’s breach of contract if the purchaser proceeds with the

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as well as other relevant factors when considering the nature of a 4.11 Related Security. Must any additional formalities be transaction. There are, however, no absolute rules and criteria that fulfilled in order for the related security to be transferred could be applied to automatically determine whether or not a concurrently with the sale of receivables? If not all transaction would constitute a true sale. related security can be enforceably transferred, what methods are customarily adopted to provide the Certain characteristics of a transaction that generally would not purchaser the benefits of such related security? affect the true sale analysis include situations where (a) the seller enters into arrangements with the purchaser to provide credit The nature of the assets constituting the related security will enhancement, (b) the seller enters into interest rate hedging with the determine the additional formalities, if any, applicable to the purchaser, or (c) the seller retains some control over the collection transfer. Note in particular that an assignment of a mortgage over of receivables by remaining as the servicer or collection agent of the land in Hong Kong must be in writing pursuant to section 5 of the receivables after the sale has completed. Hong Kong Conveyancing and Property Ordinance (Cap. 219) and registered with the Land Registry, and an assignment of a mortgage over a 4.9 Continuous Sales of Receivables. Can the seller agree in ship registered under the flag of Hong Kong must be registered with an enforceable manner (at least prior to its insolvency) to the Marine Department and, where the mortgagor is a Hong Kong continuous sales of receivables (i.e., sales of receivables company or is otherwise registered to do business in Hong Kong, as and when they arise)? the Companies Registry.

An agreement to continuously sell receivables by way of an assignment as and when the receivables arise is enforceable under 5 Security Issues Hong Kong law. Future receivables will automatically be assigned to the purchaser as and when they come into existence and the 5.1 Back-up Security. Is it customary in Hong Kong to take a transfer of which will be perfected once notice of the assignment “back-up” security interest over the seller’s ownership has been given to the obligor after the receivables come into interest in the receivables and the related security, in the existence (but not before). The assignment of existing receivables event that the sale is deemed by a court not to have been may be perfected by providing notice of the assignment to the perfected? relevant obligor. The creation of a “back-up” security interest over a seller’s ownership interest in receivables and related security is not 4.10 Future Receivables. Can the seller commit in an common in Hong Kong, especially where the parties’ intention is enforceable manner to sell receivables to the purchaser for an outright sale to occur. The creation of the “back-up” security that come into existence after the date of the receivables purchase agreement (e.g., “future flow” securitisation)? If interest may affect the characterisation of the transaction. As noted so, how must the sale of future receivables be structured in question 4.8, in ascertaining the true nature of the transaction, to be valid and enforceable? Is there a distinction Hong Kong courts will take into account the substance and between future receivables that arise prior to or after the economic characteristics of the transaction and the conduct between seller’s insolvency? the parties. Taking “back-up” security over receivables and related security may result in the transaction being recharacterised as a The assignment of a receivable that has not yet come into existence security arrangement rather than a true sale. Sellers and purchasers but that has been clearly identified is treated as an agreement to sometimes agree to the creation of a trust over receivables for the assign the receivable as and when the receivable comes into benefit of the purchasers if and to the extent that the transaction is existence. The future receivable will automatically be assigned to recharacterised by a court or held to be void. the purchaser at the time it comes into existence. The assignment will be enforceable under Hong Kong law. 5.2 Seller Security. If so, what are the formalities for the Until express written notice of the assignment has been given to the seller granting a security interest in receivables and obligor after the receivable has come into existence and all of the related security under the laws of Hong Kong, and for other requirements under section 9 of the Law Amendment and such security interest to be perfected? Reform (Consolidation) Ordinance (Cap. 23) have been satisfied (see question 4.1 above), the assignment will remain as an equitable Security interests over receivables of a Hong Kong company are assignment. Once the notice has been given and all other required to be registered with the Companies Registry (Part III of requirements under section 9 have been satisfied, the assignment the Companies Ordinance (Cap. 32)). This registration requirement will take effect as a legal assignment. To maximise the protection is also applicable to security interests over Hong Kong law for the purchaser, there should be a mechanism incorporated in the governed receivables of a non-Hong Kong company (that maintains sale documentation to oblige the seller to (a) give notice to the a place of business in Hong Kong) registered with the Companies purchaser of any future receivables that arise, (b) give notice to the Registry under Part XI of the Companies Ordinance (see section 91 obligor of the assignment of the receivables as and when they arise, of the Companies Ordinance). The particulars of the security and (c) procure the obligor’s acknowledgment of the assignment of interest, together with the instrument which creates the security the receivables in (a) and (b). In practice, however, assignments interest, are required to be registered with the Companies Registry relating to future receivables commonly remain as equitable within five weeks following the date of the creation of the security assignments, as notices are often not given to obligors for various interest (Part III of the Companies Ordinance). The registration reasons. For example, where a large number of new receivables requirement does not extend to: (i) security interests created over relating to multiple obligors are continuously created on a daily properties in Hong Kong of a non-Hong Kong company not basis, it may be commercially impractical to constantly track and registered with the Companies Registry; or (ii) security interests, in provide notices to the relevant obligors. the case of a non-Hong Kong company registered with the See question 6.5 in relation to future receivables that arise after the Companies Registry, over properties which were not located in seller has entered into insolvency proceedings. Hong Kong (including foreign law governed receivables) at the

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time when the security interests were created (section 91 of the chargor, retains control over the charged receivables and has the Companies Ordinance). right to use and dispose of the receivables (including the right to Failure to comply with Part III of the Companies Ordinance may create subsequent charges over the receivables) in the ordinary result in the security being void against the liquidator and other course of business. Notwithstanding the label the parties may put creditors of the company in the company’s insolvency. upon the charge, whether a court will regard a charge as a floating or a fixed charge depends upon chargor’s right and freedom to deal with the charged property. 5.3 Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in A floating charge has various disadvantages compared to a fixed favour of the providers of its funding, what formalities charge. In the case of a liquidation of the chargor, a fixed charge must the purchaser comply with in Hong Kong to grant ranks above the liquidator’s expenses and certain statutorily and perfect a security interest in purchased receivables preferred claims, such as certain claims of employees. A floating Hong Kong governed by the laws of Hong Kong and the related charge ranks below such claims and expenses. security? In addition, a person who acquires an interest in the receivables that is subject to an uncrystallised floating charge will generally acquire The most common methods of granting security over receivables in the interest in the receivables free of the charge. The rights of a Hong Kong are through an assignment by way of security or a chargee under a fixed charge will only be defeated by a third-party charge. Receivables may be assigned by way of security to a buyer of the charged receivables who acquires them in good faith secured party together with a condition for reassignment of the without notice of the fixed charge. If the fixed charge has been receivables upon the full performance or redemption of the secured registered, the purchaser of the charged receivables will be deemed obligations (e.g. when the debt is discharged). The assignment may to have knowledge of the charge. be legal (when perfection requirements as discussed in questions In the event of a liquidation of the chargor, section 267 of the 4.1 and 4.2 are complied with) or equitable (when the assignment is Companies Ordinance (Cap. 32) provides that a floating charge not perfected). Whether an assignment is legal or equitable will created within the 12 months preceding the commencement of the affect its priority when there are competing assignments of the same winding-up may be void unless the debtor was solvent immediately receivables. The order in which notices of assignments are given to after the creation of the charge. the obligor will generally determine priority. A perfected assignment where notice of the assignment has been given to the The registration requirement under section 80 of the Companies obligor will take priority over an earlier assignment with respect to Ordinance (see question 5.2 above) is applicable when the which notice either has not been given to the obligor or has been purchaser grants security in favour of the providers of its funding given to the obligor subsequent to the perfection of the later over its purchased receivables that are governed by Hong Kong law. assignment, except in the event where the assignee of the later In addition, depending on the nature of the assets charged by the assignment has knowledge at the time of the assignment of the purchaser, further registration formalities may need to be complied earlier assignment’s existence. See question 4.1 for further details with for purposes of perfection if, for example, a security interest is regarding the differences between legal and equitable assignments. created over land in Hong Kong (registration with the Land Registry required), a ship registered under the flag of Hong Kong The purchaser may alternatively create a charge over receivables (registration with the Marine Department required) or a registered for the benefit of a secured party. A charge provides the secured trade mark (registration with the Intellectual Property Department). party (or chargee) the right to appropriate the charged properties to Failure to comply with registration formalities may result in a loss discharge the debt in the event of a default by the chargor (the of priority over the claims from subsequent purchasers of or secured collateral provider) of the secured obligation. Since a charge creditors with respect to the assets. merely creates an encumbrance on the charged property, no ownership right over the charged property is transferred at the time of the creation of the charge. Thus, the purchaser, as chargor, may 5.4 Recognition. If the purchaser grants a security interest in retain ownership over the receivables but the provider of the receivables governed by the laws of Hong Kong, and that purchaser’s funding, as the chargee, will have the right to take security interest is valid and perfected under the laws of enforcement actions to appropriate the receivables to discharge the the purchaser’s country, will it be treated as valid and debt should the purchaser default on its payment obligations. perfected in Hong Kong or must additional steps be taken in Hong Kong? Although ownership in the receivables does not pass to the chargee in a charge, a charge document will usually be drafted to grant the If receivables are governed by Hong Kong law, requirements as to chargee with a power of attorney to compel the transfer of the perfection of security interests over the receivables and rules ownership in the charged receivables in the event of a default by the relating to priority will be governed by Hong Kong law, regardless chargor. of the governing law of the contract creating the security interest. If Charges may be fixed or floating. Under a fixed charge, the the purchaser is a Hong Kong incorporated company or a non-Hong encumbrance is attached onto the specifically identified charged Kong company that maintains a registered place of business in receivables immediately upon the creation of the fixed charge (or, Hong Kong (registered with the Companies Registry under Part XI in the case of a fixed charge over future receivables, immediately of the Companies Ordinance (Cap. 32), particulars of the security upon the receivables coming into existence), and the chargor no interest must be registered with the Companies Registry within five longer has the right to deal with, or maintain control over, the weeks from the date of its creation (section 80 of the Companies receivables without the consent of the chargee. In contrast, a Ordinance) in order for the security interest to become perfected. If floating charge is a charge over undefined and unascertained the receivables themselves are secured by related security, then receivables that will crystallise into a fixed charge upon the depending on the nature of the collateral assets, additional occurrence of a specified event (whereby the charge will attach to perfection requirements may need to be complied with when the the specific receivables then constituting the charged properties). security interest is transferred, see question 5.3 above. Prior to crystallisation of a floating charge, the purchaser, as

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5.5 Additional Formalities. What additional or different Security may be taken over a bank account (including an escrow requirements apply to security interests in or connected to account) and the deposits held in the account in Hong Kong by way insurance policies, promissory notes, mortgage loans, of a fixed or floating charge. Hong Kong courts will generally consumer loans or marketable debt securities? recognise security governed by foreign-law over a Hong Kong bank account (see question 2.3 above regarding the freedom to choose No additional requirements apply to a transfer of security interests foreign governing law), but perfection requirements under Hong in connection with insurance policies, which commonly takes the Kong law will nevertheless have to be complied with (see question form of an assignment. As with any other assignment of 4.1 above). receivables, a notice of assignment must be given to the insurer to perfect the assignment. The notice should contain instructions to the insurers to take note of the assignee’s interest in the insurance 6 Insolvency Laws

Hong Kong policies as a result of the assignment. A security interest in negotiable instruments such as bearer 6.1 Stay of Action. If, after a sale of receivables that is promissory notes and bearer debt securities (not in registered form) otherwise perfected, the seller becomes subject to an may be created way of a pledge. A pledge is a possessory security insolvency proceeding, will Hong Kong insolvency laws whereby the creditor (pledgee) takes possession of the assets of the automatically prohibit the purchaser from collecting, debtor (pledgor) as security. The creditor has an inherent right of transferring or otherwise exercising ownership rights over sale if the repayment is not made by the due date. After the pledged the purchased receivables (a “stay of action”)? Does the insolvency official have the ability to stay collection and assets were sold, the creditor holds any surplus upon trust for the enforcement actions until he determines that the sale is debtor subsequent to discharging the debt. perfected? Would the answer be different if the Any instrument that gives effect to the creation or transfer of a purchaser is deemed to only be a secured party rather security interest in land in Hong Kong should be registered with the than the owner of the receivables? Land Registry within one month from the execution of the instrument as (see section 5 of the Land Registration Ordinance The rights of a purchaser after a perfected true sale of receivables (Cap. 128) (“LRO”)). An unregistered instrument will be void made in good faith will remain unaffected by subsequent against any subsequent purchaser in good faith or mortgagee for insolvency proceedings of a seller. The purchaser would not be valuable consideration (see section 3 of the LRO). prohibited from collecting, transferring or otherwise exercising A security interest in marketable debt securities in registered form ownership rights over the transferred receivables. However, the may be created by way of a legal mortgage or an equitable charge. purchaser should be aware that in the case of a sale of future With respect to debt securities that are not held in a clearing system, receivables, upon commencement of the insolvency of the seller, a legal mortgage can be created by effecting an assignment of the the purchaser would no longer be able to require the seller to take debt securities to the mortgagee recorded in the register of the debt any further actions to confer rights in those future receivables to the securities, or, alternatively, an equitable charge may be created by purchaser. In the event that a court recharacterises a transaction as the delivery of the relevant instruments to the chargee together with a security arrangement in favour of the purchaser, the security may the applicable blank transfer documents that are capable of be subordinated to other secured creditors of the seller if the transferring the securities to the chargee once the transfer security arrangement was not registered, where required, with the documents are executed by the chargee. As regards debt securities Companies Registry within five weeks following its creation held in a clearing system, a mortgage can be effected by a transfer (section 80 of the Companies Ordinance (Cap. 32)). between the stock accounts of the participants of the clearing Prior to the appointment of a provisional liquidator or the making system on behalf of the mortgagor and the mortgagee. In all of the of a winding-up order, there is no general moratorium under Hong above instances, a security agreement has to be entered into, setting Kong law. Upon the appointment of a provisional liquidator or the out, among other things, the terms and conditions of the grant of making of a winding-up order, actions against a company security and the undertaking from the mortgagee to re-transfer the (including enforcement actions) will automatically be stayed, debt securities back to the mortgagor or, in the case of a charge, for unless leave of the court is obtained for the actions to continue the release of the charge upon repayment of the loan. (section 186 of the Companies Ordinance). No additional requirements apply to security interests in or In the event that a seller of receivables has remained as the servicer connected to consumer loans. of the receivables, unless a valid and binding trust arrangement has been in place between the seller and the purchaser, upon the seller becoming subject to a winding-up order, the purchaser will be 5.6 Trusts. Does Hong Kong recognise trusts? If not, is prevented from taking any further action to enforce the servicing there a mechanism whereby collections received by the seller in respect of sold receivables can be held or be agreement without the leave of court, and any proceeds being held deemed to be held separate and apart from the seller’s by the servicer may be deemed the property of the servicer and not own assets until turned over to the purchaser? the purchaser. If the receivables were sold by way of an equitable assignment and The concept of trusts is recognised in Hong Kong. no notice of the assignment of the receivables had been provided to the obligor, the obligor may continue to pay the seller. The proceeds paid over to the seller would typically be subject to a trust 5.7 Bank Accounts. Does Hong Kong recognise escrow accounts? Can security be taken over a bank account in favour of the purchaser. If no trust arrangement has been in place located in Hong Kong? If so, what is the typical method? or imposed, the purchaser’s claim to the collections will be Would courts in Hong Kong recognise a foreign-law grant unsecured. of security (for example, an English law debenture) taken It should be noted that a Hong Kong corporate rescue bill was over a bank account located in Hong Kong? introduced in 2001. The proposed bill has been updated and had been the subject of a public consultation in 2009 and 2010. One of Escrow accounts are commonly established in Hong Kong. the key features of the proposed corporate rescue regime is, among

180 WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2012 © Published and reproduced with kind permission by Global Legal Group Ltd, London Bingham McCutchen LLP Hong Kong others, the introduction of a pre-liquidation “provisional defrauding its creditors, the disposition may be held to be void if supervision” procedure, whereby a provisional supervisor would be any person prejudiced by the disposition applies to the court to set appointed to take effective control over the company. When the it aside. The person seeking to set aside the disposition is appointment of a provisional supervisor takes effect, a moratorium responsible for proving the debtor’s fraudulent intention (see would also start simultaneously (unless exemptions apply), upon section 60 of the Conveyancing and Property Ordinance (Cap. 219) which civil proceedings against the company will be stayed for a (“CPO”)). No disposition would, however, be void against a period of 45 working days. Creditors may extend any such purchaser who has bought the property in good faith for valuable moratorium for a period up to six months. The Hong Kong court consideration without notice of the debtor’s intention to defraud its may also be empowered under the bill to extend such moratorium creditors. While there is no “suspect” or “preference” period within for a period as it sees fit. Although the original plan was to which a fraudulent disposition must occur, the cause of action of a introduce the bill into the Hong Kong Legislative Council for person seeking to set aside the disposition must not be statute-

discussions by early 2011, this plan has not yet materialised. Given barred. The statutory periods of limitation generally runs for six Hong Kong that the term of the current Legislative Council will expire in mid years to 12 years depending on the cause of action, and will start 2012, it is likely that the bill will not be introduced until after the from the moment the fraud has been discovered by the person term of the next Legislative Council begins. bringing the action. No disposition would be reopened or set aside solely on the ground of an undervalue disposition (section 59 of the CPO), without evidence of any fraudulent action involved. 6.2 Insolvency Official’s Powers. If there is no stay of action under what circumstances, if any, does the insolvency official have the power to prohibit the purchaser’s 6.4 Substantive Consolidation. Under what facts or exercise of rights (by means of injunction, stay order or circumstances, if any, could the insolvency official other action)? consolidate the assets and liabilities of the purchaser with those of the seller or its affiliates in the insolvency If receivables have been transferred to a good faith purchaser by proceeding? way of a legal assignment, the rights of the purchaser would be unaffected by the subsequent liquidation proceedings of the seller, The doctrine of substantive consolidation is not recognised by Hong and the insolvency official would generally not have the power to Kong courts. Hong Kong does not have general laws and rules that prohibit the purchaser from exercising such rights, unless there has give an insolvency official the power to consolidate the assets and been fraud or unless relevant situations under question 6.3 apply. liabilities of the purchaser with those of the seller or its affiliates in insolvency proceedings. Hong Kong courts will not disregard the separate legal personalities of the purchaser and the seller (or their 6.3 Suspect Period (Clawback). Under what facts or circumstances could the insolvency official rescind or respective affiliates), save in exceptional circumstances, for reverse transactions that took place during a “suspect” or example, where fraud is involved. “preference” period before the commencement of the insolvency proceeding? What are the lengths of the 6.5 Effect of Proceedings on Future Receivables. What is the “suspect” or “preference” periods in Hong Kong for (a) effect of the initiation of insolvency proceedings on (a) transactions between unrelated parties and (b) sales of receivables that have not yet occurred or (b) on transactions between related parties? sales of receivables that have not yet come into existence? Transactions may be rescinded or reversed under certain circumstances specified under Hong Kong law. The initiation of insolvency proceedings generally does not A Hong Kong court may set aside a transaction which has the effect automatically terminate a seller’s existing contracts. An agreement of putting a creditor of the debtor into a better position in the event to assign future receivables that has been entered into prior to the of the debtor’s bankruptcy than the position that creditor would initiation of insolvency proceedings will remain valid. Future have been in if the transaction had not occurred, if the transaction receivables will only be automatically and effectively transferred to occurs within (i) the six-month period immediately before the the purchaser once they come into existence after the insolvency winding-up proceeding commences, or (ii) in the case of any person proceedings if no further action is required to be performed by the connected with the company such as employees and directors of the seller under the sale agreement. Subsequent to the initiation of debtor, the two-year period immediately before the winding-up insolvency proceedings, the purchaser will no longer be able to proceeding commences (see section 266B of the Companies require the seller to take any further actions to confer rights in Ordinance and section 50 of the Bankruptcy Ordinance (Cap. 6) future receivables to the purchaser without the leave of court. (“Bankruptcy Ordinance”). A transaction would not be set aside if it was entered into in good faith by the debtor on an arm’s length basis and induced by proper commercial considerations, and not by 7 Special Rules a desire to improve a creditor’s position in the event of the debtor’s bankruptcy. 7.1 Securitisation Law. Is there a special securitisation law If the court recharacterises a transaction as a security arrangement (and/or special provisions in other laws) in Hong Kong rather than a true sale, the security arrangement over receivables establishing a legal framework for securitisation transactions? If so, what are the basics? may be classified as a floating charge over the receivables. One should be aware that a floating charge created within 12 months Hong Kong does not have laws specifically providing for immediately prior to the commencement of the winding-up may be securitisation transactions. However, securitisation transactions void unless the debtor was solvent immediately after the creation of may nevertheless be governed by Hong Kong law as the various the floating charge (see section 267 of the Companies Ordinance elements involved in a securitisation transaction are regulated or (Cap. 32)). provided for through different regulations, rules and case laws in Where a debtor disposes of its property with the intention of Hong Kong.

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7.2 Securitisation Entities. Does Hong Kong have laws 8 Regulatory Issues specifically providing for establishment of special purpose entities for securitisation? If so, what does the law provide as to: (a) requirements for establishment and 8.1 Required Authorisations, etc. Assuming that the management of such an entity; (b) legal attributes and purchaser does no other business in Hong Kong, will its benefits of the entity; and (c) any specific requirements as purchase and ownership or its collection and enforcement to the status of directors or shareholders? of receivables result in its being required to qualify to do business or to obtain any licence or its being subject to Hong Kong does not have laws specifically providing for the regulation as a financial institution in Hong Kong? Does the answer to the preceding question change if the establishment of special purpose entities for securitisation purchaser does business with other sellers in Hong transactions. Kong? Hong Kong

7.3 Non-Recourse Clause. Will a court in Hong Kong give Generally speaking, if a purchaser does not have a place of business effect to a contractual provision (even if the contract’s in Hong Kong (through maintaining an office or a branch, keeping governing law is the law of another country) limiting the employees or engaging agents in Hong Kong) or otherwise carry on recourse of parties to available funds? a business in Hong Kong, the act of purchasing receivables in Hong Kong by it should not constitute engaging in a regulated activity Hong Kong courts will likely uphold a contractual provision that would require it to obtain licences (for example, under the limiting the recourse of parties to available funds or specified Money Lenders Ordinance (Cap. 163) or Banking Ordinance (Cap. assets. 155)).

7.4 Non-Petition Clause. Will a court in Hong Kong give 8.2 Servicing. Does the seller require any licences, etc., in effect to a contractual provision (even if the contract’s order to continue to enforce and collect receivables governing law is the law of another country) prohibiting following their sale to the purchaser, including to appear the parties from: (a) taking legal action against the before a court? Does a third party replacement servicer purchaser or another person; or (b) commencing an require any licences, etc., in order to enforce and collect insolvency proceeding against the purchaser or another sold receivables? person? Licences or authorisations should not be required by a seller or a It is likely that a Hong Kong court will give effect to a non-petition third-party replacement servicer from the relevant Hong Kong clause in a contract, although there is very limited authority in Hong regulators to enforce and collect receivables after the sale of the Kong either way. receivables to a purchaser. If the servicer carries on its business in In determining the effectiveness of a non-petition clause, the court Hong Kong or maintains a place of business in Hong Kong, it will will consider whether the non-petition clause is contrary to public be required to register under the Business Registration Ordinance or policy and whether the parties have agreed to the non-petition under the Companies Ordinance, as applicable. clause with the intention of evading the jurisdiction of the Hong Kong court or Hong Kong insolvency laws. It is possible that a 8.3 Data Protection. Does Hong Kong have laws restricting Hong Kong court would deal with a winding-up petition despite the the use or dissemination of data about or provided by existence of a non-petition clause in a contract. obligors? If so, do these laws apply only to consumer obligors or also to enterprises? 7.5 Independent Director. Will a court in Hong Kong give effect to a contractual provision (even if the contract’s In Hong Kong, the Personal Data (Privacy) Ordinance (Cap. 486) governing law is the law of another country) or a provision (the “PDPO”) governs the collection, use and dissemination of in a party’s organisational documents prohibiting the personal data of living individuals (i.e. any data through which an directors from taking specified actions (including individual can be identified) but not data relating to corporations. commencing an insolvency proceeding) without the Given that the purchase of receivables from the seller may involve affirmative vote of an independent director? the collection of personal data for purposes of the PDPO, the purchaser must comply with the restrictions and principles under Restrictions prohibiting the directors of a company from the PDPO, which include, for example, the use of personal data of commencing insolvency proceedings, whether in the form of a an individual being limited to purposes for which the data were separate agreement or in the constitutional document of the collected initially by the seller, except with the consent of the company, may be viewed by a Hong Kong court as restrictions that individual. The data protection principles are contained in Schedule effectively prevent the proper management and administration of a 1 of the PDPO. company. These restrictions may be considered by a Hong Kong Banks are required to handle information of individual customers court to be contrary to public policy and may be held to be invalid. with a duty to maintain privacy pursuant to the Code of Banking Practice.

8.4 Consumer Protection. If the obligors are consumers, will the purchaser (including a bank acting as purchaser) be required to comply with any consumer protection law of Hong Kong? Briefly, what is required?

In Hong Kong, consumer protection is provided to consumers through a number of ordinances and regulations. Purchasers of

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consumer loans are subject to these ordinances and regulations. 9 Taxation Where a party to a contract for the sale of goods or supply of services deals as with a consumer, the contract or the part of the 9.1 Withholding Taxes. Will any part of payments on contract that is held by a court to be unconscionable will not be receivables by the obligors to the seller or the purchaser enforceable (Unconscionable Contracts Ordinance (Cap. 458) (the be subject to withholding taxes in Hong Kong? Does the “UCO”)). A consumer is one who neither makes the contract in the answer depend on the nature of the receivables, whether course of a business nor holds himself out as doing so (see section they bear interest, their term to maturity, or where the 3 of the UCO). It should be noted that in determining whether a seller or the purchaser is located? contract or a part of a contract is “unconscionable”, the Hong Kong court would consider the circumstances relating to the contract at There is no withholding tax regime in Hong Kong. the time the contract was made. For example, it has previously Hong Kong been decided by a Hong Kong court that the costs provisions in a 9.2 Seller Tax Accounting. Does Hong Kong require that a credit card agreement were unconscionable because of the relative specific accounting policy is adopted for tax purposes by strengths of the bargaining positions of the credit card company or the seller or purchaser in the context of a securitisation? bank. There are other ordinances and regulations which afford protection Hong Kong does not require any specific accounting policy to be to consumers. For example, the Consumer Council has been adopted for tax purposes in the context of securitisation. Hong established under the Consumer Council Ordinance (Cap. 216) to Kong companies are required under the Companies Ordinanc (Cap. handle consumers’ complaints against suppliers of goods and 32), section 121, to keep proper books of accounts. Books are services. In addition, the Supply of Services (Implied Terms) deemed not to be properly kept unless they provide a true and fair Ordinance (Cap. 457) has imposed certain implied terms into view of the state of the company’s affair. A Hong Kong company contracts between suppliers of services and consumers for the that follows the generally accepted accounting practices (“GAAP”) protection of consumers. in Hong Kong is generally regarded as having kept proper books of A party’s ability to exclude or restrict its liability to any other accounts. The sources of Hong Kong GAAP include (i) the Hong person (including contractual liability) is limited by the Control of Kong Financial Reporting Standards (“HKFRS”), the Hong Kong Exemption Clauses Ordinance (Cap. 71). The liability for death or Accounting Standards and the Interpretations issued by The Hong personal injury caused by the contracting party’s own negligence Kong Institute of Certified Public Accountants (“HKICPA”), (ii) cannot be excluded or restricted. Although the liability for other the Companies Ordinance (Cap. 32), and (iii) the Listing Rules of losses or damages in general could be contractually excluded or The Stock Exchange (applicable to listed companies in Hong restricted, where the other party is a consumer, such exclusion or Kong). HKICPA has also issued the Financial Reporting restriction of liability must be reasonable. Framework (“SME-FRF”) and Financial Reporting Standard (“SME-FRS”) for small and medium-sized entities in 2005. The Furthermore, where a purchaser is an authorised banking institution SME-FRF sets out the basis and criteria for the preparation of regulated by the Hong Kong Monetary Authority, the purchaser will financial statements in accordance with the SME-FRS. The SME- be subject to the Code of Banking Practice issued by The Hong FRS sets out the recognition, measurement, presentation and Kong Association of Banks, which governs, among other things, the disclosure requirements for an entity that prepares and presents the proper conduct of the authorised banking institutions in dealing financial statements accordingly. with individual customers. Where the purchaser is a corporation licensed by or registered with the Securities and Futures Commission, it will also be governed by the Codes, Guidelines and 9.3 Stamp Duty, etc. Does Hong Kong impose stamp duty or Circulars issued from time to time by the Securities and Futures other documentary taxes on sales of receivables? Commission. Stamp duty is generally not payable on the transfer of trade The Money Lenders Ordinance (Cap. 163) restricts excessive receivables, lease receivables and loans (to the extent they have no interest rates in Hong Kong, as discussed in question 1.2 above. characteristics of “equity” such as a right to convert into or exchange for shares) in Hong Kong. Stamp duty is chargeable in 8.5 Currency Restrictions. Does Hong Kong have laws Hong Kong under the Stamp Duty Ordinance (Cap. 117) for the restricting the exchange of Hong Kong currency for other transfer of interests in land, the creation of leases and the transfer of currencies or the making of payments in Hong Kong shares, among other assets. currency to persons outside the country?

Hong Kong does not generally exercise exchange control except 9.4 Value Added Taxes. Does Hong Kong impose value under certain limited circumstances where mandatory rules apply. added tax, sales tax or other similar taxes on sales of For example, it is an offence under the United Nations (Anti- goods or services, on sales of receivables or on fees for collection agent services? Terrorism Measures) Ordinance for a person to knowingly make funds available to another person who has been specified as a Hong Kong does not impose value added tax, sales tax or other “terrorist” or a “terrorist associate” by the Chief Executive of Hong similar taxes on sales of goods or services, on sales of receivables Kong. Obligations made in contravention of the rules will be held or on fees for collection agent services. The introduction of a sales to be unenforceable. tax was proposed by the government in 2006 but the proposal was unpopular among the public and was later abandoned.

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9.5 Purchaser Liability. If the seller is required to pay value 9.6 Doing Business. Assuming that the purchaser conducts added tax, stamp duty or other taxes upon the sale of no other business in Hong Kong, would the purchaser’s receivables (or on the sale of goods or services that give purchase of the receivables, its appointment of the seller rise to the receivables) and the seller does not pay, then as its servicer and collection agent, or its enforcement of will the taxing authority be able to make claims for the the receivables against the obligors, make it liable to tax unpaid tax against the purchaser or against the sold in Hong Kong? receivables or collections? Profit tax is payable on a person who carries on a trade, profession Hong Kong currently does not impose any of the abovementioned or business in Hong Kong in respect of the person’s assessable taxes upon the sale of receivables (or on the sale of goods or profits arisen in or derived from Hong Kong (see section 14 of the services that give rise to the receivables). Inland Revenue Ordinance (Cap. 112)). The location where the

Hong Kong purchaser is domiciled is irrelevant. Generally speaking, where the purchaser purchases receivables, appoints the seller as its servicer and collection agent or enforces against the obligors with respect to receivables owed but has no other businesses in Hong Kong, it should not be regarded as carrying on a trade, profession or business in Hong Kong and therefore should not be liable for profit tax in Hong Kong.

Vincent Sum Laurence Isaacson

Bingham McCutchen LLP Bingham McCutchen LLP in association with Roome Puhar in association with Roome Puhar Suites 4901-4904, One Exchange Square Suites 4901-4904, One Exchange Square 8 Connaught Place 8 Connaught Place Central Hong Kong Central Hong Kong Tel: +852 3182 1756 Tel: +852 3182 1781 Fax: +852 3182 1799 Fax: +852 3182 1799 Email: [email protected] Email: [email protected] URL: www.bingham.com URL: www.bingham.com

Vincent is a partner in the Hong Kong office with extensive Practice Areas: Larry is a highly respected figure in the field of experience in securitisations, structured products, derivatives structured finance, representing clients in a wide variety of (including equity, credit, corporate derivatives and commodity complex asset-based transactions. He has represented derivatives), debt capital markets and retail and non-retail commercial and investment banks, derivative counterparties, structured funds and structured notes. He advises underwriters, credit enhancers, liquidity providers, insurance providers, arrangers, portfolio managers, issuers, institutional investors and portfolio managers, and other market participants in creating: trustees. structured products backed by a variety of financial assets; Vincent has authored articles on structured finance matters collateralised swap, find, debt and loan transactions; credit-linked published in the Corporate Securities Law Series: Legal & notes; complex credit derivative transactions; future flow Regulatory Issues, Deutsche Bank Securitization and Structured transactions; and other structured vehicles. Larry is qualified to Finance Guide, and the ISR Legal Guide to Securitization. practice in New York and as a Registered Foreign Lawyer in Vincent is a regular speaker at International Swaps and Hong Kong. Derivatives Association (ISDA) conferences. He has also served as a law intern for the Hon. Leonard Sand, a senior US Federal Court judge of the United States District Court, Southern District of New York. Vincent is qualified to practice law in Hong Kong, England and Wales and New York.

Bingham’s market-leading practices are focused on global financial services firms and Fortune 100 companies. We have more than 1,000 lawyers in 14 offices in the U.S., Europe and Asia, including New York, London, Frankfurt, Beijing, Hong Kong and Tokyo. We also have a significant East Coast/West Coast presence in the United States. Through our offices in Beijing and Hong Kong, our lawyers and consultants advise on structured finance and derivatives, investment funds, private equity and M&A, corporate finance, financial restructuring and distressed debt, litigation and international arbitration, and government affairs and international regulatory matters.

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